NYSSCPA Testifies Before State Senate Committee in Post-Enron Era
The testimony addressed CPA independence and regulation in light of the recent bankruptcy of the Enron Corporation. Senator LaValle leads the nation in setting up such hearings at the state level to look at the regulation of CPAs.
In its testimony, NYSSCPA called for "raising the quality bar" and made specific recommendations for changes in New York State regulation, disciplinary systems, enforcement and peer review. The NYSSCPA also pointed out the need for a state initiative to assist citizens with retirement planning.
In addition, the testimony addressed the interplay between auditing and consulting services, specifically in the non SEC registrant sector of the economy. The NYSSCPA advised that any consideration to constrain consulting services in the non-SEC sector could have an unintended negative impact on small and medium sized businesses that rely on CPA firms for business advice. Removing such services would disrupt businesses unnecessarily and force them to seek similar services from lesser qualified providers. These businesses
tend to not have staff in the areas where expertise is required, and rely more heavily on their external auditor for specified consulting services.
Following are the recommendations outlined in the testimony:
- Reconstitute the State Board for Public Accountancy. The New York State Board does not function as an independent regulatory and enforcement body, as it does in all other states. Instead, it functions in an advisory capacity only to the Board of Regents, which regulates the profession. The NYSSCPA recommends that this Board be reconstituted with more power, independence, stature and resources to protect the public. Consistent with other initiatives at the federal level, the Board should include additional public members with stature and backgrounds that would ensure strong public oversight.
- Enhance the State Education Department's capacity and resources. The New York State Education Department's Office of Professional Discipline (OPD) needs additional qualified staff and resources to be able to investigate and discipline effectively. The disciplinary process must reinforce the profession's ethics code and New York State laws.
- Ensure public and private cooperation in disciplinary proceedings. The Society recommends creating an effective, cooperative joint investigation and disciplinary action process between OPD and the NYSSCPA Ethics Committee to enforce the code of professional ethics and the public accountancy laws and regulations. Currently these two bodies proceed independently. Cooperation will coordinate efforts and expedite timely completion of investigations.
- Extend and intensify the peer review process. Improve peer view (a process in which one CPA firm analyzes the quality control systems and professional work product of another) of CPAs with certified peer reviewers selected with an independent body. Currently firms can select their own reviewers. Make mandatory peer reviews for all registered CPA firms that provide audit and attest services. Currently, only CPA firms who audit SEC registrants are required to be peer reviewed.
- Register and regulate all CPAs. Currently, New York State does not register or regulate CPAs who work as financial statement preparers or internal auditors. Like CPAs in public practice they are a part of the system of checks and balances that provides integrity to financial statements. These CPAs should also be subject to discipline for professional conduct breaches and to continue professional education.
- Raise the quality bar. The NYSSCPA has developed educational programs and professional guidance on quality control processes for CPA firms. It is currently developing more extensive guidance on issues such as the analysis of independence threats and safeguards and document retention and recovery guidelines.
- Elevate public confidence in financial reporting. Strengthen the current regulatory environment to prohibit unregulated individuals from preparing financial statements.
- Require ethics education. Integrate business ethics into high school and college curricula to highlight that technical competence is constrained by a demanding code of ethical conduct that stresses independence and protection of the public.
Directing attention to losses experienced by Enron employees in their retirement accounts, NYSSCPA called for the support of state initiatives to assist individuals in their retirement investment planning with proper advice about diversification in a retirement investment portfolio made available to all citizens of New York State.
Testifying for the NYSSCPA were three ethics specialists:
Marilyn A. Pendergast, CPA of Urbach Kahn & Werlin LLP, former NYSSCPA President and current chair of the Ethics Committee of the International Federation of Accountants;
Vincent J. Love, CPA of Kramer & Love, a member of the NYSSCPA Board of Directors and Financial Accounting Standards Committee and;
Allen L. Fetterman, CPA of Loeb & Troper, Chairman of the NYSSCPA Audit Committee.
"The events of the debacle at Enron deeply concern the members of the New York State Society of CPAs," Pendergast said. "The CPA's primary responsibility is to protect the public. The issues raised by the apparent failure of Enron management and external auditors cause us to want us to find out what was known and done, by whom and when.
We want to know to what extent inadequate accounting and auditing standards played a role in this case, so we can change them. If inadequate standards were not the cause, but lax enforcement was, then we should address their enforcement."