April 2003

Society Responds to Spitzer Bill
Executive Committee Speaks Out on Attorney General’s Proposed Legislation

NEW YORK—The New York State Society of CPAs’ Executive Committee last month issued a response to New York State Attorney General Eliot Spitzer’s wide-ranging proposed accounting legislation.

The committee, following discussion at its March 11 meeting, agreed to send Spitzer a point-by-point, 18-page critique of his legislative proposals, with a memo authored by Society President Jo Ann Golden explaining the Society’s opposition.

“Changing times have outdated much of the current law, which was last comprehensively amended over 50 years ago,” the memo to Spitzer states. “The proposed legislation you have circulated is helpful in broadening the discussion, but….the Society does not support the proposed legislation at this time because it either does not adequately deal with existing problems in some cases or completely misses the mark in others.”

Spitzer’s proposal touches on everything from the composition and authority of the state board of accountancy to defining unlawful conflicts of interest and specific acts of professional misconduct subject to discipline. The attorney general in January also introduced a separate initiative that would reshape governance and accounting among not-for-profits.

Generally, the Society opposes Spitzer’s across-the-board application of the Sarbanes-Oxley Act in a
way that, the memo contends, would add an undue burden to CPAs with nonpublic clients. The legislation, the Society maintains, fails to recognize the inherent differences between such CPAs and those dealing with public companies, in a way that threatens their very livelihood.

Additionally, while the proposal increases the workload of the state accountancy board, it leaves the board bereft of resources to tackle their broadened responsibilities. The memo also states that the proposed legislation duplicates existing laws covering professional misconduct, while adding more instances of “reportable events” that would be better handled under the existing peer-review system.

The committee submitted the memo with a critique and analysis of Spitzer’s draft regulation, along with a copy of the NYSS-CPA’s proposed legislation for comparison.

The Society’s analysis of the proposed legislation (for a full copy, go to www.nysscpa.org and click on “Society Response” beneath “Att. Gen. Proposals—Account. Reform”) describes specific areas where the Society disagrees with the attorney general, along with alternatives the NYSSCPA supports through existing bills currently waiting in the wings of the state legislature.

The Closer We Are Defined: What Is a CPA?

The Society dissents on the proposal’s definition of accountancy, saying that “extending regulatory powers to the title CPA for functions that anyone can provide…is so unrealistically broad that its lack of connection with reality renders it practically meaningless.” The analysis states that Spitzer’s definition of accountancy includes a long list of services that fail to distinguish between those offered exclusively by CPAs and other services that attorneys and other professionals and nonprofessionals also can provide.

The critique adds that the Society’s proposal defines public accountancy “in terms of what the general public believes about it: non-exclusive providers of tax services (attorneys, CPAs and enrolled agents), the exclusive provision of audit, attest and compilation services, and the non-exclusive provider of numerous other services that anyone can provide.”

The critique contends that while the proposed legislation’s definition is title-defined, the NYSSCPA’s definition is more accurate, going by what the CPA does. The critique points to language in other parts of the proposed legislation as creating a similar problem, such as a section that allows unlicensed individuals to practice public accountancy so long as they do not use the title CPA, which the Society opposes.

Power House: Strengthening the Board Accountancy

The Society also criticized the proposed legislation for not going far enough to invest the state board of accountancy with broad powers, resources and representation. Sptizer’s proposal seeks to expand the number of public members on the board, but limits its power to assisting the Board of Regents and State Education Department on matters of professional licensing and conduct. The Society proposes to increase staffing and resources to handle the “long lists of conflicts of interest, misconduct and reportable events” that Spitzer’s legislation would create.

The Society’s proposal calls for a 25-member board—12 appointed by the governor with consent of the Senate, and 13 CPAs appointed by the Regents representing a broad geographic range and fairly representative of small-, medium- and large-sized firms.

The board would hire an appropriate-sized staff; investigate allegations against CPAs and firms of violating regulations; conduct disciplinary proceedings and enforce sanctions; advise the Regents on licensing matters; and make annual recommendations to the governor and legislature on recommended changes to accountancy law.

Misconduct

The critique points to new items introduced by the proposal into education law that would add provisions regarding misconduct that the Society believes are largely covered under existing law and would, if introduced, create conflicts. For example, the analysis states, general law for all professions puts a licensee at risk for licensure once convicted of a crime. In the proposed legislation, a CPA is at administrative risk for licensure for acts that haven’t been deemed a crime by a qualified court. The Society asked that if any of the law must be differentiated from other laws governing all professions, they be specifically accountancy misconduct, predicated on convictions of wrongdoing in the practice of public accountancy.

The Society also pointed out that the proposed legislation sets forth separate penalties for professional misconduct by CPAs that the NYSSCPA contends are out of proportion to penalties for other professions and should be changed to discipline CPAs on a level with other professions.

Nonattest Services

The analysis also points out that the proposed legislation intends to apply independence restrictions (along the lines of the Sarbanes-Oxley Act) on both SEC registrants and private companies of a certain size, but goes beyond federal legislation by barring all nonattest services for any attest client. The critique states that the broad application fails to distinguish between SEC registrants—where public interest is at stake—and private companies that rely on CPAs for many nonattest services yet do not pose a threat to public investors because of a wide-ranging relationship with their CPAs.

Because management and the stakeholders of private companies are so tightly bound, the analysis states, and because there are no federal requirements for disclosures by such small, privately held businesses, the proposal “undermines the trusted relationship between private business owners and their CPA, a relationship that no one has even hinted is broken.” The Society asked Spitzer to reconsider inclusion of this proposal.

Seeing Eye-to-Eye: The Importance of Peer Review

The proposed legislation includes a peer-review requirement which, the analysis states, the Society supports as an “important cornerstone for continuous improvement of CPA firm performance.”

The Society contends that firms should be able to satisfy peer-review requirements through a single process so that firms subject to Public Company Accounting Oversight Board inspection would not also have to undergo a state-level process as well.

The Sarbanes-Oxley command that results of inspections of SEC registrants be forwarded to state authorities will also place greater responsibilities on the shoulders of the accountancy board, which, the analysis states, substantiates the need for a bigger board staff and greater resources.

Items Not Addressed

The analysis also addresses a number of items that the proposed legislation does not include. The NYSSCPA suggested:

A proposal to address how an individual satisfies the education and experience needed to demonstrate competence for the proposed legislation’s expanded scope of services.
A provision to allow some form of temporary practice permit.
A measure outlining requirements for continuing professional education for all licensees, including those not working in firms that perform audits, attestations and compilations.
A proposal to define non-CPA services, with ethical guidelines for disciplinary action regarding those services.

The critique, finally, states that the most important unaddressed item is a mechanism for enforcing whatever law or regulations might be adopted. The Society emphasized that wherever the board of accountancy is located in the state bureaucracy, it must be independent, fully resourced, and able to act, especially on disciplinary items, as a body with power.