Duncan-Poitier Testimony

TESTIMONY of
Johanna Duncan-Poitier
Deputy Commissioner
Office of the Professions
New York State Education Department
before the
Committee on Higher Education of the
New York State Assembly
concerning
Proposed Amendments to the State Accountancy Statute (A.8600)
November 16, 1999

Good morning Majority Leader Bragman, Chairman Sullivan and other distinguished members of the Assembly Higher Education Committee. It is an honor and a pleasure to have the opportunity to speak with you today. These are important times for the accounting profession in New York State. At no other time during its 103-year history as the fourth oldest licensed profession in New York has the accounting profession faced so many individual and highly significant issues. These issues may literally determine the future of the profession, as we know it. Some issues may even affect all 38 licensed professions and the nearly 640,000 professionals licensed and practicing in New York State.

The hallmarks of a CPA are: education, training, objectivity, independence and ethics. The public engages a CPA because they trust the services, because they know those services will meet the high standards of the profession and because they know that if the services are negligent or incompetent that the CPA will be held professionally accountable.

In my remarks I will comment on what the public expects of licensed accountants. The charge you have given to the State Board of Regents is to protect the public with respect to all the licensed professions. This charge is paramount in the Regents and the Department's actions. My comments about public expectations are based on the following:

• the existing law and ONLY those modifications deemed necessary to protect the public in the changing professional environment.

• the advice of the members of the State Board for Accountancy. (2 members of the general public, 5 licensed accountants and 15 licensed certified public accountants)

• the regular interactions the Department has with consumers and others who believe they have grounds for professional misconduct or illegal practice complaints involving licensed accountants

• a recent survey for the National Association of State Boards of Accountancy which explores the attitudes and perceptions of the public and business corporations with respect to public accountancy.

According to the survey licensure implies that high expectations will be met and that trust will be well placed. Primary services sought include: tax preparation, audits and financial statement preparation. Primary expectations include: competence, accuracy, objectivity, insight and advice.

The legislative proposals before you present a complex and serious challenge to the Legislature, the Regents, the practitioners, and the State Society, which represents many practitioners. There are a number of proposals before you at this time. My testimony today will only focus on the MAJOR concerns that are at the heart of the practice of the CPA profession, and the Regents proposal to ensure that the public interest is protected through meaningful accountability and regulation of all of the services that are provided by CPAs when they use their titles. We specifically:

• Request your support to update Education Law to include all of the functions CPA's currently provide as a part of their regulated practice.

• Request your support for a provision that clearly enables CPA's to provide non-attest services for business corporations.

• Express our strong concerns that the acceptance of commissions and referral fees will compromise the integrity, objectivity and independence of the CPA.

We thank you for introducing the Regents proposal for updating the laws governing the practice of public accountancy as bill A-8789/S-4133 this year. That proposal is designed to ensure accountability for professional services in a manner that conforms to recent Supreme Court decisions, protects the public and retains the integrity of the practice. This bill would do two things primarily:

• First, it would solidify the original purpose for regulating CPAs. As with their professional counterparts, Physicians, Dentists, etc., CPAs must-be held accountable to the public for all of the professional services that they provide while using their titles.

• Second, it would allow CPAs to provide the peripheral non-attest services, such as financial advice and tax preparation, while working for business corporations.

Both elements are necessary for effective regulation in today's marketplace. This represents a contemporary and visionary approach to regulation to reflect the evolution of accounting practice and the ethical dimensions so crucial to the profession and the public.

The first part of this bill reflects the regulation that the general public expects is now in place. This provision will clarify that a CPA who provides services other than audit and attest services (services such as tax accounting, financial management, estate planning, etc.) are professionally accountable for the quality of those services, when using their professional title. The CPA title is a distinguished and prestigious one. The value of the title comes with the responsibility that the CPA will be held to high ethical standards when providing professional services. The profession is based upon the trust and independence that CPAs have upheld over the many years that they have been a licensed profession. However, while the overwhelming majority of CPAs fully merit that trust, the public must have a clear way to raise allegations of professional misconduct should a CPA fail to meet professional standards of practice. Some examples include, if a client's retirement funds are embezzled, or if a client is advised to Invest in securities that are not in the client's best interest but for which the CPA will receive greater financial compensation for that particular investment. There are many examples of such activities, they are not fiction, but they are a reality. Just a few months ago, an attorney submitted a complaint to the State Board for Public Accountancy because a CPA operating as a licensed investment advisor, sold the holdings of the retiree and invested the proceeds in speculative securities. The result, a 79 year old retiree suffered a $130,000 loss.

Indeed, the proposal supported by the Regents, the State Board for Public Accountancy and the Department clarifies the public assumption and current expectation of independence, and provides a vehicle for professional discipline.

That proposed clarification is necessary and timely. In 1896, certified public accountancy became the fourth licensed profession in New York. The regulation of Public Accountants began in 1959. Today, certified public accountants and public accountants licensed to practice in New York State agree to high standards of practice by obtaining their license and by participating in continuing education programs and in some instances, quality review. Independence, objectivity and are the core values of the professions. The public engages a CPA or a PA because they trust that the services provided will meet the high standards of the profession. That trust is based, in part, on the public's knowledge that the CPA or PA is accountable with his/her license for the services he or she provides.

The second major element of the State Education Department's proposal is intended to recognize existing practice and to conform to recent Supreme Court decisions against restrictions of CPAs using their titles and practicing non-attest services through business corporations. This legislation would allow certified public accountants and public accountants, in some circumstances, to provide certain services while employed by non-CPA firms; important public protection features of the current law and rules would remain. This is particularly important in an age where more CPAs are employed in private industry, government, and education than in public accounting firms. This proposal was prompted by the Regents recognition, in part, that information available from the American Institute of Certified Public Accountants indicates that only 40% of its members worked in public accounting as of July 31, 1997. This proposal exemplifies the Regents commitment to pursue relevant, contemporary regulation.

The two provisions that I've just described provide the essential flexibility for the CPA practitioner to compete in today's marketplace without undermining the integrity of the highly respected independence. We believe these changes are critical for both public protection and the integrity of the profession. In public accountancy, we are responding to the evolution of professional practice while remaining true to core values.

Our position is that these revisions are consonant with the national trend and that more extreme revisions contained in other bills should be approached with great caution and reflection because of the enormous impact they will have on CPA practice.

I would also like to share our concern over aspects of the bill the State Society is proposing (A8600/S4402). It suggests that CPA's scope of practice is limited to the audit and attest function while allowing commissions, non-licensee ownership and lower experience standards. We believe those aspects of the bill will seriously erode if not eliminate the accountability of CPA's, and will compromise their objectivity and independence. Some of the Society's legislative proposals raise serious questions that go to the heart of the value of the CPA credential, some of which have also been raised by the Securities and Exchange Commission. A copy of the Securities and Exchange Commission's correspondence regarding these two bills is attached to your copies of this testimony. We hope to have further dialogue on these issues with you and the State Society on these proposals in the near future.

One of the most controversial provisions of the State Society's legislative proposal is an amendment enabling non-licensee ownership of an accounting practice. The practice would still perform accounting related professional services and provide specialized expertise on complex audits.

The American Institute of Certified Public Accountants (AICPA) and the State Society claim that non-licensee ownership is essential to allow firms to expand into more lucrative professional service practice areas. What impact does the movement into consulting services, such as litigation support, by large accounting Finns have on the public? In a February 26, 1999 presentation at a Practicing Law Institute symposium, SEC Commissioner Norman S. Johnson stated "Of all the varied independence problems, there is one that I personally find particularly troubling: the efforts by accounting firms to expand into legal services." In his view, and that of the Commission, an accountant-attorney relationship with a client simply cannot be reconciled with the appearance of independence. It is impossible to reconcile this role as private advocate with the responsibility for independence that accountants and auditors owe to the investing public. Johnson concluded that the conflicts of interest, or at the least, the appearance of conflicts of interest anising from these developments are troubling. "It hardly seems accidental," he said, "that financial fraud has increased at the same time non-audit services performed by accounting firms have proliferated and become more profitable."

We are fully aware of the changing marketplace within which CPAs and other licensees must function. To be meaningful, regulation must be relevant and keep up with evolving practice patterns. That is why the Board of Regents addressed the need for CPA firms to hire and reward non-licensee consultant many years ago by adding section 29. 10(b) to the Rules of the Board of Regents. This section of the Rules provides a mechanism that permits a CPA firm to share up to 35% of its annual net income with non-licensees. Annual net income is computed without deduction for the total compensation paid to the owners of the firm. We ask why in an environment that must ensure independence and objectivity is more involvement by unregulated entities necessary or appropriate?

This is VERY serious business that requires careful study. Non-licensee ownership is one of those arrangements that can APPEAR to be very beneficial at the outset and one which can offer tempting quick immediate gains -- but in the-long run the gains will not balance the losses to the integrity of the profession. Non-licensee ownership would undermine current corporate practice and non-licensee practice prohibitions and fee-splitting prohibitions in the law. I would like to share with you an example the Chancellor of the Board of Regents recently cited concerning another profession: the one licensed in 1901 -five years after public accountancy. A few years ago a historic change in the Education Law allowed corporate ownership in the pharmacy profession. A recent survey found that 65% of the pharmacists would not choose to become pharmacists if they were beginning college today. Why? Because of corporate ownership. A common thread was the pharmacists' dismay with their lack of independence and frustration with non-professional influences on daily practice. These influences compromise professional judgement and diminish services for the public. More money? Maybe, but at what cost? When does a dedicated professional feel sufficiently compromised to leave a profession and when do aspiring professionals choose another career? These important provisions are there to protect the public by ensuring that professional decisions are INDEPENDENT, and not influenced by outside unregulated entities. Again, without this independence, why would you or I seek the services of a licensed professional?

Lastly, the Society's proposal would allow commissions and referral fees for non--attest services if disclosed to the client. Education Law and Regents Rules has prohibited licensees from accepting commissions and referral fees when practicing ANY OF THE professions. This prohibition has assured the public that the profession's integrity is above reproach. This is precisely what separates accounting professionals from financial sales staff. This is a crucial distinction, the difference between professionals and non-professionals.

The receipt of commissions and referral fees, even from non-attest clients, would at the very least create an appearance of conflict of interest. A recent article written nationally syndicated columnist, Jane Bryant Quinn, noted the pitfalls of obtaining financial advice. Ms. Quinn noted that fee-based planners charge fees or commissions for financial advice, however, the consumer must consider whether commissions are driving recommendations. When the public hires a CPA or PA they expect independent objective advice.

What does the Professional State Board of Public Accountancy have to say? -You will be hearing personally from the Chair and the Vice Chair of our Accountancy Board on these proposals. On April 2 1, the State Board for Public Accountancy voted unanimously to endorse the broadened definition of scope of practice contained in the Department's legislative proposal.

At this same meeting, the Board voted to recommend continued prohibition of commissions and referral fees and non-CPA ownership of accounting firms. I will let you hear, directly from them, why these positions are so important to them as practitioners and the public they serve.

Attached to my testimony are copies of letters from Regents Chancellor Carl Hayden and from the Chief Accountant and General today. I would like to close with the important message from the Securities and Exchange Commission,

"We encourage the New York Legislature to adopt a bill that makes clear YOUR ability to continue to play an important role in the consideration and resolution of these issues. Your ability to protect the public might be impaired significantly if you are deemed to be precluded by law from looking past the accounting and auditing division and into the larger, more profitable operations of an accounting firm or a corporate parent of an accounting firm. If the blinds are shut when you attempt to look into the marketing and performance of consulting, tax, and other activities, you will have neither the information you need nor the power to assure the protection of the public interest in receiving competent and credible accounting services provided by independent and skeptical accounting professionals" continue to frame the debate bearing upon the profession of accounting.

THE BOARD OF REGENTS
THE UNIVERSITY OF THE STATE OF NEW YORK
THE STATE EDUCATION DEPARTMENT
CARL T. HAYDEN, CHANCELLOR
303 WILLIAM STREET
ELMIRA, NEW YORK 14901

Hon. Michael J. Bragman
Majority Leader New York State Assembly
Legislative Office Building, Room 926
Albany, New York 12248

Hon. Edward C. Sullivan
Member of the Assembly
Chairman, Committee on Higher Education
New York State Assembly Legislative Office Building, Room 717
Albany, New York 12248

This is a pivotal moment for the accounting profession in New York State. At no other time during its 103-year history in New York has the accounting, profession been faced with as many significant issues at one time. These issues will set the course for the future of the profession: for consumers and professionals. They will affect New York's and the world's business community. For these reasons I am writing to you on behalf of the Regents and have asked Deputy Commissioner Johanna Duncan-Poitier to deliver testimony on our behalf.

The Regents believe changes in the laws governing accounting practice are needed. The public is right to expect and demand that (CPA's) certified public accountants and (PA's) public accountants be professionally accountable for the full range of services they provide when using the title. CPAs should be accountable when they perform an independent audit and they should also be professionally accountable when they advise a retiree about investment options. We believe these changes are critical for both public protection and the integrity of the profession, The choices that you face are huge. The State Society bill that has been proposed would not require that CPA's and PA's be accountable for the full range of services. That bill would also threaten the core values of independence in which that profession has been grounded by allowing up to 49% of a firm to be owned by non-CPA's. Those proposals raise serious questions that go to the heart of the value of the CPA or PA credential.

We join you in trying to be responsive to the evolution of professional practice while remaining true to core values - the core values that distinguish the public accountant from an un-licensed one.

On behalf of my colleagues, I urge you to support the updating of Education Law to cover all of the services CPA's provide. This is essential to ensure that the public can continue to rely on quality services and for upholding the 'standards associated with the title for which CPA's are responsible.

Global economies and electronic commerce are affecting all professions. Immediacy of financial reporting and its impact on the public is dramatically changing accounting practice. But regardless of the immediacy of financial reporting or the flexibility of electronic commerce, the profession must continue to engender the public's trust. This century old profession must build upon this history of public trust even as it moves to meet the challenges of new developments in the market.

The Department will continue to support high standards of practice. We must not compromise on standards. High standards are essential. We should accept nothing less. The Board of Regents, the State Board for Public Accountancy and the State Education Department's commitment to the highest professional standards and to the public remains stronly and steady. That commitment can only be meaningful through effective and, enlightened regulation as exemplified in the provisions of our bill.

Each CPA knows the value of independence. The profession is built upon it, and it is what ensures the integrity of the profession. For New Yorkers, independence ensures the integrity of professional services they use every day-across all professions-to maintain their health, safety and financial well being.

Working together, we can ensure that the distinction between the licensed professionals and other financial providers is clear and that the title provides unequivocal protection. Working together, New York will continue to be heralded not only as the world's financial capital and as the home of the most highly skilled, and ethical professionals in the world of finance.

Attached is the testimony given on behalf of the Board of Regents and the State Education Department by Deputy Commissioner Johanna Duncan-Poitier. It explains the Regents concerns with some of the proposals before you in greater detail. Commissioner Richard Mills, Deputy Commissioner Johanna Duncan-Poitier and I are available to discuss these points with you at any time.

Ms. Johanna Duncan-Poitier
Deputy Commissioner for the Professions
The State Education Department
The University of the State of New York
Office of the Professions
Albany, New York 12230

Thank you for the opportunity to comment on two competing bills pending in the New York legislature that would amend the State's accountancy laws. We appreciate the leadership that the State of New York has shown in addressing accounting and auditing issues, especially in this time of great change within the accounting profession. For this reason, we are very concerned about S4402. Should S4402 become law, the New York State Deparment of Education could lose its abilily to participate in the resolution of timely and vitally important public policy issues that will impact the provision of accounting services and the protection of investors in New York and throughout the country for many years to come.

We understand that one of the pending bills, S4133 (March 26, 1999), was drafted by the New York Department of Education, which, through its Office of the Professions, oversees the New York Board of Accountancy. This bill would make clear that the definition of accounting services includes, among other things, tax services, financial advisory services, and management advisory services when those services are provided by Certified Public Accountants licensed to practice in New York. The revised definition would allow the Board of Accountancy to investigate and evaluate these services when reviewing the integrity of accounting and auditing work and the independence of auditors.

On the other hand, the second bill, S4402 (April 5, 1999), proposes a very narrow definition of accounting services that includes only audit, compilation, review, and certain other attestation engagements. This narrow definition could be viewed as limiting the ability of the Board of Accountancy to consider the impact of pressures on auditors to sell consulting and other services to a client on the responsibility of the CPA to protect the public when providing accounting and auditing services to that client.

The world in which accountants operate clearly is changing. In 198 1, management consulting services generated approximately 15% of revenues for traditional accounting firms. Today, consulting represents about 40% of total revenues, and in some firms even more. Meanwhile, revenues from accounting and auditing 'services have dropped to about a third of total revenues. The audit engagement partner often is seen by the corporate CFO not as a highly skilled accounting professional, but as a salesman or gateway for the variety of nonaudit, nonaccounting services being offered by his or her firm.

Under both state and federal securities laws, however, accounting firms are viewed as much more than just another company selling just another service to the public. Accountants, both in management and in auditing firms, perform one of the most vital functions in our capitalist society -- they protect and assure the truth of the reported financial information that fuels our nation's securities markets. Because of the importance of this function, independent accountants are the only professionals under the law that a company must engage before it can issue securities to the public and the only professionals charged by law to act independently from management. Over the years, investors have come to trust and rely on the work of accountants. But along with that trust came a very strong public expectation that accountants not only be, but appear at all times objective and independent from their audit and attest clients.

At both the federal and state levels, we are examining whether the current sales-driven environment in which accounting and auditing services are provided can be reconciled with the fundamental role of auditors under the securities laws. This examination must include not only a review of accounting and auditing services, but also the context and environment in which those services are provided. The pressures created by working within an alternative firm or corporate structure, the potential ability of investors in an affiliate of the accounting firm or in a publicly traded corporate parent of the accounting firm to influence the accountant's judgment, the persistent motivation within the accounting firm to cross-sell lucrative consulting and high technology services, the link between selling services and accountants' compensation, the growing number of business relationships between clients and accounting firms, and many other modem day factors must be weighed against the public perception of the accountant as an independent professional discharging an absolute duty to serve the public.

We encourage the New York legislature to adopt a bill that makes clear your ability to continue to play an important role in the consideration and resolution of these issues. Your ability to protect the public might be impaired significantly if you are deemed to be precluded by law from looking past the accounting and auditing division and into the larger, more profitable operations of an accounting firm or a corporate parent of an accounting firm. If the blinds are shut when you attempt to look into the marketing and performance of consulting, tax and other activities, you will have neither the information you need nor the power to assure the protection of the public interest in receiving competent and credible accounting services provided by independent and skeptical accounting professionals.

As noted above, this letter discusses only the issue of the definition of accounting services, and does not venture into mandatory peer review, the receipt of referral fees and commissions, and the many other issues presented in S4402. We do believe, however, that for the Education Department to be able successfully and efficiently to monitor the implementation of such laws, the definition of accounting services should encompass the activities that will generate fees, commissions, and the types of conflicts that should be examined in the peer review process.

Thank you again for this opportunity to provide you with our thoughts. Under your leadership, New York has become a valued and highly respected participant in protecting the public through the provision of high quality accounting services, and we hope that it will be possible for you to continue in this role.

Due to time constraints, the views in this letter are those of the staff, the Commission has neither reviewed nor approved this letter. We have enclosed several speeches, however, that express individual Commissioner's views and concerns in this area. Other Commission and staff documents that further explain the Commission's positions and concerns also are enclosed.

If you, or anyone receiving a copy of this letter, would like to discuss our views, you may contact Lynn Turner at (202) 942-4400 or Harvey Goldschmid at (202) 942- 0900.

cc: Barry Melancon, President, American Institute of Certified Public Accountants
David Costello, President, National Association of State Boards of Accountancy