Weiner Testimony

TESTIMONY BY
Alan E. Weiner, CPA
Partner Holtz Rubenstein & Co. LLP
And
President
New York State Society of Certified Public Accountants
Before the
Assembly Higher Education Committee
On Assembly Bill No. 8600
November 16,1999

My name is Alan E. Weiner. I am a partner of Holtz Rubenstein & Co., LLP, in Melville, Long Island. We are a twelve partner, 80-person CPA firm providing a full range of services to small and medium-sized businesses, not-for-profit organizations, and individuals, primarily on Long, Island. I am the senior tax partner of the firm and a vice president of an international association of accounting firms of which my firm is a member.

I speak to you today as president of the 32,000 member New York State Society of CPAs. We are the oldest and largest state CPA Society in the United States. We are not in any way affiliated with the American Institute of CPAs (AICPA), but we do participate with it on a voluntary basis in a number of significant self-regulatory areas-namely ethics enforcement and peer review administration. Approximately 25,000 of our members are also members of the AICPA. The CPA profession in New York is regulated based upon a 100-year-old statute, the first accountancy law in the United States, that was last revised in 1947. At the time of the last revision, the total membership in the AICPA was just over 10,000 (It is now 330,000) and our Society consisted of about 5,200 members. The body of knowledge the CPA was expected to know and was tested on in the CPA examination was a far cry from what it is today. The organizations that set the standards that CPAs follow in 1999 (e.g., the Financial Accounting Standards Board (FASB), Government Accounting, Standards Board (GASB), and the Auditing Standards Board) did not exist. It was before computers, before derivatives, before the Internet, before the Federal Trade Commission forced the profession to change its rules on advertising and non-traditional fees, and before numerous commissions, such as the Cohen commission, studied and made recommendations to improve the profession's self-regulatory practices such as peer review. In 1947 we were in the industrial age. We are now in the information age where the pace of change is more rapid than it has ever been. Bob Elliott, Chairman of the AICPA, has given you the vision of the CPA of tomorrow operating in this information age.

The New York State Society of CPAs supports Assembly Bill 8600 and what it attempts to do to modernize the practice of public accounting while at the same time introducing greater accountability that will bring additional protection to the public. Many of the changes have their roots in the third edition of the Uniform Accountancy Act jointly developed by the American Institute of CPAs and the National Association of State Boards of Accountancy. However, it is important to note that the bill as drafted introduces some of the concepts in the UAA but does so by modifying the language in the existing statutes. Let me briefly discuss the major provisions of the Bill that will bring the changes to which I refer.

Assembly Bill 8600 introduces the concept of "substantial equivalency," which will promote the free movement of CPAs among the states that set their accountancy requirements to a uniform, high standard. Substantial equivalency does not require precise conformity to the UAA. Rather it addresses the three basic elements for entry in the pro fession-education, experience, and examination. Substantially equivalent states will be those whose requirements for entry into the profession are substantially equivalent to those set forth in the UAA.

We want our CPAs to be free to attend to their clients' affairs in and out of other states. We have no desire to restrict the movement of CPAs into our state, provided that they meet the uniform standards. It also makes less important questions as to what constitutes practicing public accountancy in a particular state in this day of e-commerce and the Internet. For example, in what state is a CPA practicing if from her office in New York using the Internet she accesses the records of a client located in Virginia.

Assembly Bill 8600 modernizes and contemporizes the entrance requirements to be a CPA in two significant ways. First, by mandating the 150-credit hour requirement to enter the profession into law, it recognizes that in the information age the CPA needs a stronger educational foundation upon which to build a program of life-long learning. The introduction of the 150-hour requirement into law as set forth in A. 8600 accelerates what has already been done through changes in regulations that are effective for the year 2009. Second, it changes the experience requirement to eliminate barriers that discourage some of the brightest and most talented people from entering the CPA profession. The fundamental change is to no longer require experience doing audits while working for a CPA firm. The experience, to be verified by a CPA, can be obtained in any environment so long as it involves using accounting, attest, management advisory, tax or consulting skills. To illustrate, a person with an MBA in taxation who desires to pursue a career in the tax practice of a CPA firm now faces the hurdle of gaining audit experience. Such person has little opportunity to gain that experience, let's say, in a small CPA firin that has no audit clients.

An additional change in the Bill is an expression of intent on the part of the State Board for Public Accountancy to conform the examination process to those of other states. While not major, in the past there have been administrative differences between what New York has been doing and those suggested by the UAA.

It is important to note, that while the Bill would no longer require experience working in a CPA firm to obtain the CPA credential, CPAs who do audits and other services included in the scope of practice would be required to meet experience and competency requirements as set forth in professional standards. Those standards, as presently being drafted by the profession, protect the public to higher degree than the existing statute and rules do. For example the professional standards say, in effect, that a person supervising a complex financial institution should have competencies that are appropriate for such an engagement.

The bill's experience requirement also gives the opportunity to those that are primarily interested in a career outside of public accounting (i.e., industry, education, or government) to become CPAs without working in a CPA firm. They may wish to gain the prestige associated with the designation, but without having to work in a client service environment. Over 36% (approximately 12,000) of our members work in industry and government, and their knowledge and skills continue to benefit the organizations that employ them.

The bill makes very clear which services CPAs perform that are subject to state regulation. The current scope of practice, a beautifully worded masterpiece in its day, can no longer be interpreted relative to what CPAs are presently doing and the professional standards that have been promulgated to both serve and protect the public. The scope of practice in A. 8600 refers specifically to services that CPAs perform that benefit third parties such as audits, reviews and compilations of financial statements and engagements that give opinions on internal controls and on forecast financial information. The intent of this new definition is consistent with the existing definition-the main difference is that Assembly Bill 8600 describes the services in terms of today's professional standards.

Limiting the scope of practice to reports for use by third parties is entirely consistent with state governments' licensing of certain classes of workers, labeled a "profession," in order to protect the health and welfare of the general public. It is appropriate in these instances to allow the State to impose certain minimum levels of education, experience and an examination. Since protection of the public welfare is the main rationale for virtually all legislation, the regulated "scope of practice" should involve only those services where there is a strong public interest such as services that are used by third parties.

Consistent with the 1947 act, the scope of services aspects of A. 8600 do not include services such as tax return preparation, financial planning and tax advice, nor any of the myriad business consulting services, that do not involve reports for third parties. These services are contracted for and are directly given to clients who are protected by contract law and other regulations, such as Federal tax preparer penalty provisions and investment advisory rules, that apply to others who offer the same services. For example, if a CPA, because of a lack of knowledge or inexperience makes a mistake in the preparation of a tax return, the taxpayer has legal recourse to the CPA under contract law. The CPA would also be subject to the preparer penalty rules of The Internal Revenue Service. On the other hand, a third party investor or creditor who relies on a financial statement has no contractual standing with the CPA and needs the protection of the regulatory system.

However, as under the existing legislation and supporting Regulations of the Commissioner of Education and the Rules of the Board of Regents, CPAs would continue to be subject to penalties for professional misconduct including "practicing the profession fraudulently, beyond its authorized scope, with gross incompetence on a particular occasion or negligence or incompetence on more than one occasion."

It is very important to note that this bill does not change the basic scope of services regulated by the state, it merely updates and clarifies the description of those services in terms of professional standards that CPAs follow.

Further, it does not prevent unlicensed accountants from providing financial statements and financial information as long as they do not issue reports thereon using language to suggest that they are issuing reports as CPAs. Because of the ambiguity under the existing law, it is not clear as to what reports on financial statements unlicensed accountants are presently permitted to issue.

An extremely important aspect of Assembly Bill 8600 is its requirement in law that all entities that engage in the practice of public accountancy as defined in the bill or that use the title "CPA firm" register with the State Education Department. While there are presently a number of registration requirements in the existing law and regulations, as part of this new registration process, the firms must agree to participate in a peer review program approved by the State Education Department. Presently in New York, participation in a peer review program is strictly voluntary. AICPA members as a condition of membership can only work in CPA firms that participate. But most of our 7,000 members that don't belong to the AICPA have no peer review requirement. There are also a number of practicing CPAs that do not belong to either organization and have no obligation to belong to a peer review program.

On occasion, New York State regulators refer cases to us or make public instances where the quality of work done by CPAs is in question. Specifically, the Consolidated Fiscal Report Interagency Committee has referred apparent substandard work to us and the State Comptroller's office a few years ago issued a report on the quality of audits of public schools. Upon investigation of the cases, we often find that the firm whose work is being questioned as being substandard does not participate in a peer review program.

For your information, the AICPA peer review program operates in the following way. Appropriately trained CPAs from one firm review the accounting and auditing engagements and quality control procedures of another firm and give an opinion as to whether the quality control system of the firm under review is appropriately designed and functioning. The report of the reviewing firm and its supporting workpapers are subject to review by a report acceptance body. In New York, the Society's Peer Review Committee acts as the report acceptance body under the supervision and oversight of the AICPA.

As a point of information, Holtz Rubenstein & Co. - my firm - was the first Long Island firm to undergo and pass a peer review when it was instituted in 1978.

Making participation in a peer review program a state regulatory issue with penalties is a major enhancement of the regulation of the profession in the State. It focuses on the CPA firms that do services upon which the public relies. It allows SED to regulate not only the licensee but also the firm itself.

Assembly Bill 8600 would require that only a simple majority of owners of CPA firms be licensed CPAs. The remainder must be actively engaged in the firm or an affiliated organization as their principal occupation. This change gives recognition of the need for CPA firms to attract and retain professionals from other disciplines to provide needed services to clients. It will also give the opportunity for firms to give ownership interests to accounting professionals active in the firm who for a variety of reasons have not be able to obtain the CPA designation. Examples of non-licensed persons for whom an ownership stake makes sense are information technology specialists, accounting professionals who do not qualify for the CPA certificate, and employee benefit experts. Some firms have created related companies and subsidiaries in order to provide equity participation for these very valuable employees. Permitting nonlicensed professionals to be owners of CPA firms will eliminate the need for some of these arrangements and make the ownership of firms more transparent to clients and others, which will benefit users of the firms' services.

The integrity of services included in the scope of practice is protected because of the peer review requirements and the professional standards under which those services are provided. It also brings greater accountability for the firms that provide those kinds of services.

Provided that the client is informed, Assembly Bill 8600 would permit CPAs to accept commissions and referral and contingent fees as payment for services provided to clients for whom no services included in the scope of practice section are performed. There would, however, be an exception (allowing commissions and referral fees to be paid) for compilations that disclose that the CPA is not independent of the client. This provision allows the CPA to be compensated for services performed on behalf of clients in the same manner as nonlicensed providers of those same services. For example, if a CPA works with a client and an insurance broker leading to the purchase of an insurance policy, the insurance broker may offer to share a portion of his commission with the CPA. It is important to note, however, that fee and commission sharing is subject to other regulatory aspects. To share in a commission involving insurance or brokerage transactions requires that the CPA be appropriately registered and/or licensed. Permitting CPAs to be compensated through commissions and referral fees will pen-nit and encourage open and fair competition among CPAs and other providers. The integrity of the practice of public accounting is preserved because these types of fee arrangements cannot be entered into on behalf of clients for whom the CPA provides audit and other scope of practice services, such as reviews and compilations.

Clients and the market place should be free to decide how CPAs are to be compensated when providing services for which commissions and contingent fees are often a form of payment.

Assembly Bill 8600 also makes a conforming change to the continuing professional education requirements for licensed New York CPAs. It would require CPAs seeking to renew their registration to complete 120 hours of acceptable continuing education in a three-year period with a minimum of twenty in each year. New York now requires 40 hours each year, except that those wishing, to concentrate their continuing education in the subjects of taxation, auditing, or accounting need only complete 24 hours in one of those subjects. A. 8600 makes this change to conform to the UAA and to simplify the requirements that firms (especially those with multi-state practices) have to monitor and document the CPE credits for each of their licensed staff.

The Bill also removes the exemption from taking CPE for those CPAs wishing to keep an active license who work in industry and government. They would be required to complete the same amount of CPE as do CPAs in public practice.

For your information here is the status of the enactment of important aspects of the bill by other states.

Of the 54 licensing jurisdictions, seven (7) (LA, MD, ND, OH, TN, UT, VA) have adopted the UAA experience provisions. 19 other States (e.g., IL, NJ, PA and TX) have experience requirements that allow for one year's experience to qualify.

Of the 54 licensing jurisdictions (including Guam, DC, Virgin Island and Puerto Rico), 42 jurisdictions, including all of the largest States, allow CPAs to receive commissions and fees.

The 12 States that have not granted this authority are among the smallest States: Alaska, Idaho, Montana, New Mexico, DC, Hawaii, etc.

Of the 54 jurisdictions, 16 allow for 49% non-CPA ownership (CA, OH, NJ, AZ, ARK, LA, ME, etc.). 6 other States allow for some form of non-CPA ownership (60% to 66%) (FL, MI, NE, NM, PA, WV)

Of the 54 jurisdictions, only six have not approved a 150 hours curriculum. (CA, DE, MN, NH, VT, VI)

I hope this overview of the changes to the accountancy regulation statutes is of assistance to you in demonstrating why the New York State Society of CPAs supports the legislation. Most importantly it clarifies the services that are subject to regulation and introduces quality control measures that have proven effective as part of the profession's self-regulatory efforts. Specifically the bill would require that all CPA firms that perform scope of practice services have those services subject to peer review. It also requires that CPAs supervising those engagements meet experience and competency standards that are far more demanding than the one or two years of experience now needed for a person to be able to issue reports covered by the scope of services.

Second, it creates a level playing field for CPAs and their competitors in those areas where unregulated services are offered. In this way the market and the informed consumer is free to seek out and evaluate services and the compensation for those services in a fully open and competitive environment. The CPA still would have at risk the possibility of penalties and loss of license if he or she acted in a fraudulent manner or with gross negligence.

Third, it permits CPA firms the opportunity to attract and maintain the necessary talent to serve clients in this very fast-paced and complex world.

And fourth, it creates mobility for New York State CPAs to serve clients throughout the United States.

My remarks represent an overview of the New York State Society of CPAs' reasons for supporting Assembly Bill 8600. As the day proceeds, others will be speaking at greater length on individual aspects of the Bill.

Thank you for giving me the opportunity to testify. I will be pleased to respond to questions.