In a comment letter published on March 11, the NYSSCPA urged New York City’s Department of Housing Preservation and Development (HPD) to modify a form for its J-51 real estate program that is currently out of sync with generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS)—leaving CPAs who are asked to certify the paperwork in an awkward position.   

The city has been looking to tweak its J-51 rules, which date back to the 1950s, in recent months.

 J-51 was designed to help encourage the owners of multifamily buildings to undertake improvements for the health and safety of tenants, such as asbestos removal and boiler replacements, by providing them with incentives—namely, abatements or exemptions on real estate taxes. Qualifying for the program involves meeting a number of different requirements, one of which is to identify the costs of improving the building within the parameters specified by the HPD’s Form J-2 regarding itemized lead-based paint hazards. The form must then be certified by a CPA.

The problem, according to the Society, is that while program rules make reference to GAAP and GAAS, Form J-2, as provided by the HPD, is not in accordance with GAAS, and content that the CPA would base his or her opinion upon does not always conform to GAAP. This, according to the NYSSCPA, poses issues for CPAs.

“Rule 29.10(7)(i) of the NYS Rules of the Board of Regents … prohibits a reference to GAAS in a CPA’s report if the accompanying financial information is not in accordance with GAAS,” the Society wrote.

Form J-2 also asks the CPA to confirm the owner’s total cost for the rehabilitation and that this determination was made in accordance with GAAP. However, the Society said, within GAAP, the cost of rehabilitation generally falls under rules governing capital expenditures, which hold that the calculation of maximum allowable costs for improvements (e.g., $750 for ceramic bathroom tile) may not necessarily be consistent with GAAP standards. Instead, the basis of accounting is the financial reporting provisions of Chapter 5 of Title 28 (Housing Preservation and Development) of the Rules of the City of New York.

As a result, issuing an opinion on these costs and their conformity with GAAP can also be problematic. Under the Board of Regents rules, GAAP cannot be referenced in a CPA’s report unless the basis of accounting is promulgated by a standards-setting body recognized to do so, “which does not include the city of New York.”

Another issue that the NYSSCPA brought attention to is that the report includes the word “independent” in reference to the person who certifies Form J-2, but the Society felt that this was unnecessary, and that if the declaration is retained, it should be included as an addendum to the report, rather than as an actual part of the report itself. It also felt that the report should be signed by the firm—not the engagement partner—as GAAS requires that auditor’s reports be signed by the firm.

Abraham E. Haspel, a member of the NYSSCPA’s Real Estate Committee and one of the authors of the Society’s comment letter, said that because there is usually a deadline for obtaining the Form J-2 certification, CPAs face significant client pressure to complete the process, despite these concerns. What happens, he said, is that the attorney representing the client says, “Look, it’s the HPD’s way or the highway! You don’t get it! We can get someone else to do it!”

“The CPA is caught between a rock and a hard place, so to speak. He has to decide whether to lose the client … or conform to the demands of the attorney representing the client,” Haspel said. “The client is not interested in losing the opportunity to receive the abatement exemption.”

The NYSSCPA, in addition to noting its objections to the program as it currently stands, also submitted a sample form it drafted that would be in accordance with GAAP and GAAS standards. Haspel added that the HPD has already expressed an interest in the Society’s opinions on this matter.

Still, while the HPD contemplates the changes, how should CPAs proceed? It’s a question that Haspel, as a frequent volunteer for the NYSSCPA’s technical hotline, has encountered numerous times. The best that a CPA can do, he said, is to attach a correct report in accordance with all standards to the unmodified required certification, which is allowed under GAAS, according to the article, “When the Rules and the Law No Longer Agree: Proceed with Care When Regulator-Prescribed Forms Do Not Comply with GAAS,” by Ahava Z. Goldman, a senior technical manager with the AICPA Audit and Attest Standards Team, and Thomas A. Ratcliffe, technical director of the AICPA Center for Plain English Accounting. The piece was published in the November 2013 Journal of Accountancy.

However, Haspel noted that this is still an uncomfortable situation that “does not reflect on our credibility and is deleterious to our image, there is no question,” as the original HBD form must still be signed in addition to the corrected report.

“The ultimate goal is to try to get forms that … conform with professional standards,” he said.