Legislation and you: laws on E-filing, securities lawsuits, taxes affect CPAs, clients - Government Relations

California CPA, May, 2003 by Bruce C. Allen

Significant legislation has been introduced by members of the state Legislature that would impact CPAs and their clients.

CalCPA is in the process of evaluating the proposals and will be taking action on many of them.

The Legislature is attempting to grapple with the state's budget problems, but given the legislation that has been introduced requiring expanded state spending, there does not appear to be a consensus on the approach to take at this time.

Mandatory E-Filing

Part of the governor's budget includes a proposal stating tax practitioners who file 100 or more tax returns will be required to e-file or face a fine of $50 per return. The FTB estimates that the savings would be $1.4 million.

The legislative analyst is recommending that the threshold be reduced to apply to those tax practitioners who file 50 or more returns.

Last year CalCPA was able to apply pressure during the budget process with the assistance of John Campbell, a state assemblyman and CPA, who readily grasped the difficulty of enforcing this requirement and was instrumental in its removal from the budget then.

Tax on Services

SB 400 (Florez) was introduced to expand sales tax to professional services and is gaining popularity in the Capitol.

It is anticipated that a major effort will be required to oppose this concept, which could prove harmful to California businesses and cost the state jobs as these portable services move out of state.

SB 400 may not be the ultimate vehicle, however, as other authors have expressed interest in enacting the statute as part of the budget process.

Corporate Governance

As introduced, AB 664 (Correa), would impose stiff penalties on any person who, among other things, knowingly alters, destroys or falsifies any entry to any corporate record or document. The penalty would be a fine of not more than $10 million or 20 years in state prison or both.

Right now, the bill would apply to both private and public corporations.

The bill additionally requires any CPA performing "any audit required by any law" to report to the audit committee of the corporation the following: all critical accounting policies and practices to be used; all alternative disclosure and treatments of financial information within generally accepted accounting principles that have been discussed by management officials of the corporation; ramifications of the use of those alternative disclosures and treatments; and the treatment preferred by the CPA.

All other material written communications between the CPA and management also would have to be reported to the audit committee.

It should be noted that private corporations are not currently required to have an audit committee. But a companion measure, AB 665, would require all corporations to have an audit committee composed of independent directors.

The bill would also impose new requirements on attorneys providing services to corporations.

AB 665 (Correa) would revise the accountancy act to prohibit any nonlicensee member of the board from ever having represented a public accounting firm, bookkeeping firm or firm engaged in providing tax preparation as its primary business. "Represented" is undefined in the proposed law and it is unclear what that would mean. Currently, nonlicensee members are prohibited from ever having worked for a CPA firm.

AB 665 also would impose significant restrictions on California corporations. Included in the bill are the requirements that after Jan. 1, 2006, corporations have a majority of independent directors; a code of ethics; an audit committee; and a compensation committee. Both committees would be composed of independent directors who will review and approve incentive compensation plans, corporate goals and objectives and CEO performance.

The audit committee would have sole authority to hire and fire auditors. Annual reports of compliance would have to be filed. Non-California corporations doing business in California would be required to report the extent to which its corporate governance practices differ from California's laws.

Securities Lawsuits

SB 766 (Florez) introduced at the request of securities class action trial lawyers would overturn California Appellate Court decisions to circumvent the federal Private Securities Litigation Reform Act of 1995 that curtailed the filing of meritless class action suits in state courts.

Business Ethics and Discipline

SB 821 (Alarcon) would require that a commission be established to develop regulations for ethical business practices; propose disciplinary fines and actions for business executives and directors who violate ethical standards; make referrals to the Attorney General and other law enforcement agencies for criminal or civil actions for violations of ethical standards; and require that businesses be indexed and ranked for social responsibility.

It would also mandate that colleges require all business or business administration students complete a course in business ethics.

CBA Cost Recovery

Among other things, AB 1080 (Business and Professions Committee), would increase the authority of the California Board of Accountancy to recoup its costs of investigation of violations of the accountancy act related to audit documentation and retention.