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Underfunding Public Protection

Louis Grumet

Last year, I had the privilege of being one of 24 people asked to testify before the U.S. Treasury Department's Advisory Committee on the Auditing Profession. The committee, led by cochairs Arthur Levitt, Jr., and Donald T. Nicolaisen, recently issued its final report containing more than 30 recommendations to improve the sustainability of the public company auditing profession.

The committee urged that states create greater financial and operational independence for their boards of accountancy, as many are underfunded and lack the resources to cover the cost of investigations that would lead to greater enforcement.

Unfortunately, this is not going to be possible in New York State. New York's State Board for Public Accountancy has no financial independence from the New York State Education Department's Office of the Professions, which also regulates 47 other professions. The recent budget cuts in New York State have stripped resources from the Office of the Professions, thereby doing the exact opposite of what the advisory committee recommended.

To say that the New M State Board for Public Accountancy and the Office of the Professions are too understaffed and underfunded to regulate the accounting profession in New York is an understatement.

To say that the New York State Board for Public Accountancy and the Office of the Professions are too understaffed and underfunded to regulate the accounting profession in New York is an understatement. There's only one CPA currently on the entire staff. The recent budget cuts only exacerbate a lack of public protection.

Due to the state budget cuts, enforcement of CPA disciplinary cases through hearings will be radically reduced, forcing the Office of the Professions to compromise public protection by settling a greater number of cases. Case summaries published for the period from May 2006 to May 2008 show an alarming settlement rate in CPA cases of 83%. Rigorous enforcement of accountancy laws, rules, and regulations through fact-finding hearings will be further compromised by even more settlements as a result of the budget cuts. New York State is now asking the already-shorthanded New York State Board for Public Accountancy and the Office of the Professions to do more with much less. How can the state maintain public trust if the means to do so are crippled?

The committee also recommended mandating regular formal roundtables of the Public Company Accounting Oversight Board (PCAOB), the SEC, the Department of Justice, state boards of accountancy, and state attorneys general. These roundtables would focus on regulatory coordination and improvement, as well as developing consistent enforcement approaches to minimize duplicative efforts. Under the committee's recommendation, the National Association of State Boards of Accountancy (NASBA) would take a leadership role in coordinating the responsibilities and interests of all regulatory bodies involved with the roundtables. This is an interesting idea, but considering the current financial climate, roundtables simply are not sufficient. We need to find a more concrete answer.

What is glaringly lacking in current accounting regulation is any real mechanism that balances the needs of the public with the needs of the profession. An interstate compact—acting as a contract between states that would allow them to solve multistate, regional, and national issues—would take us closer to needed regulation. Compacts carry the force of law, and participating states are bound to observe their terms even if they are inconsistent with other state laws.

Currently, there is no coordination among the existing governing bodies. The SEC and the PCAOB set standards for audits of public companies, while the AICPA and the Government Accountability Office (GAO) set standards for private companies, nonprofits, and governments.

The U.S. Treasury Department's final report recognizes these issues. Now is the time to finally implement real solutions, instead of taking away the resources to do so. The current state of the financial world is the best argument for regulation.

CPAs spend millions of dollars in fees for licensing and registration, replenishing state treasuries. It is imperative that most, if not all, of those fees be dedicated to regulating the profession. Through stronger regulation, the profession would be better equipped to limit the risk of financial collapse while continuing to maintain the public trust.

Louis Grumet. Publisher. The CPA Journal, Executive Director, NYSSCPA, lgrumet@nysscpa.org.

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