Changes loom: new reporting requirements and discipline standards - Government Relations - Brief Article

California CPA, Sept, 2002 by Bruce C. Allen

Effective consumer protection has always been top on the California Board of Accountancy's agenda. AB 270 gives the CBA new tools it needs to ensure that the consumer will continue to come first.

An Unlicensed Majority

The bill, which we anticipate having been sent to Coy. Davis in late-August, changes California's oversight of the CPA profession by requiring a majority of public members on the CBA.

Currently, the CBA has six CPA representatives and five unlicensed representatives. AB 270 will require seven unlicensed representatives and six CPAs including at least two from small firms (firms with four or fewer licenses as partners or full-time employees).

AB 270 also redefines unlicensed members to clarify that the unlicensed members may not be in the business of accounting and tax preparation or receive income either directly from public accounting firms or through their spouse. The CBA was the Department of Consumer Affairs' last nonmedical licensing board to require an unlicensed majority.

A Few Clarifications

The legislation also clarifies the CBA's subpoena powers for disciplinary purposes--making it clear that the CBA may require the participation of witnesses and production of files for disciplinary purposes.

AB 270 also makes a technical amendment in law to clarify that the Administrative Committee is advisory to the CBA and its executive staff.

Reporting Requirements

Additionally, AB 270 amends Business and Professions Code Sec. 5063, Reportable Events, to require that CPAs-and if applicable courts and insurers--report, in writing, within 30 days the following events or activities:

* Any restatement of a financial statement audited by the CPA.

* Any civil settlement, arbitration award against a CPA relating to the practice of public accountancy of $30,000 or more. Note: Doctors already are required to report civil judgments and settlements of more than $30,000 to the medical board.

* Receipt of a notice to a CPA re the initiation of a formal SEC investigation.

* Any SEC notice to a licensee requesting a "Wells Submission."

* The initiation of an investigation by the Public Company Accounting Oversight Board (PCAOB).

* Any civil judgment entered on or after Jan. 1, 2003 alleging dishonesty, fraud, gross negligence, negligence, breach of fiduciary responsibility, preparation, publication or dissemination of false, fraudulent or materially misleading financial statements, embezzlement, theft, misappropriation of funds or property. Courts and CPAs will be required to report these judgments that are already matters of public information.

Regulations must be adopted to clarify and implement some of the reporting requirements. CalCPA will be actively involved in making sure that the reporting requirements are clear and reasonable.

The CBA likely will use the reported information to determine if there is a pattern of misconduct that requires further investigation. Or in the case of the initiation of an SEC or PCAOB investigation, the information would become an early indication that CBA disciplinary action may be necessary.

Disciplinary Action

AB 270 also lowers the threshold for taking disciplinary action from the current gross negligence to multiple acts of negligence that indicate a lack of competence to practice public accountancy or to operate a bookkeeping practice.

Commissions & Non-CPA Owners

Clarification was placed in the law to close what is perceived to be a potential loophole. That clarification consists of expanding the law to prohibit the sale of services or products for a commission from the existing audit and review clients to include the officers or directors of those clients or client-sponsored retirement plans.

The non-CPA ownership statute was amended to require that clients receive notice that non-CPA owners may perform services now or in the future for the client.

Audit Work Paper Retention

AB 2873 (Frommer) requires that audit documentation be retained for seven years. It also contains a rebuttable presumption clause placing the burden on the licensee to prove he or she did the work if there is no supporting audit documentation. This bill is on its way to Gov. Davis and would become effective Jan. 1, 2003.

Revolving Door

AB 2970 (Wayne) prohibits CPAs from going to work in a responsible position with an audit client for one year after the completion of the audit.

School Audits

AB 2834 (Mlgden) remains a concern at press time. The bill requires mandatory audit firm rotation every six years and requires that CPA firms be on a controller's approved list prior to contracting for any school district audit. CalCPA is continuing to seek resolution of these issues and remains strongly opposed to this proposal.

There is no evidence that audit firm rotation would improve school district accountability. Requiring rotation without cause could have substantial negative financial impacts on the school districts and the CPAs who audit them with no measurable benefits. The Senate Appropriations Committee amended the bill Aug. 5.