A Texas lawmaker who also operates a CPA practice has introduced a pair of bills in the Texas legislature that would exempt CPAs who prepare financial statements for small businesses from the state’s mandatory peer review program, and ensure at least two sole practitioners are represented on the Texas State Board of Accountancy.
Phil Stephenson
Texas Representative Phil Stephenson, CPA, recently filed the two bills with the legislature in an effort to assist small practitioners in his state. Stephenson, who owns an accounting practice in Wharton, Texas, believes the state over‐regulates the practice of public accounting, particularly for small, hometown CPA practices. “Loosening this requirement will not harm the public’s interest,” he said.
The first of the two bills he introduced, H.B. 1756, would reduce the burden of participating in Texas’s peer review inspection program by removing compilation reports prepared for micro or small businesses from the state’s mandatory inspection program.
“The vast majority of micro and small businesses are locally owned and operated,” Stephenson pointed out. “CPAs who prepare reports for small businesses with fewer than 100 employees and under $6 million in revenue do not present as great a risk for the public as those who prepare reports for large national businesses.”
Texas Association of CPAs president John Furge supports Stephenson’s bill. “The typical small business has stakeholders who are intimately involved in that business,” Furge said in a statement. “The owners manage their own business. They are on‐site every day. There are no remote investors or pensions to protect. The banker who lends money to these businesses almost certainly holds a security interest on the business assets. The risk of an accounting failure is insignificant. Even if there were to be an accounting failure, the consequences would affect very few people. The burden of inspection is simply not justified.”
The American Institute of CPAs’ peer review program inspects financial reports issued by CPA firms to promote quality in the accounting and auditing services provided by AICPA members and their CPA firms. The peer review program, however, has not always met its quality control goal, Stephenson’s office pointed out, as in the case of the now defunct audit firm Arthur Andersen. For public company auditors, peer review has largely been supplanted by the Public Company Accounting Oversight Board’s inspection program. In addition, the AICPA program was not intended to be uniformly applied to all CPAs who prepare financial reports. CPA firms that prepare only compilation reports, for example, may join the AICPA without being subject to a mandatory inspection program. The Texas State Board of Accountancy, however, interprets the AICPA program as being mandatory for any Texas CPA who performs any attest work, regardless of the size of the entity about which a financial report is prepared.
New York State, in contrast, exempts unincorporated sole practitioner firms and firms with two or fewer CPAs from its mandatory inspection program. Stephenson’s proposed bill would exempt reports prepared for micro businesses, defined as those with fewer than 20 employees, and small businesses, defined as those that have fewer than 100 employees or less than $6 million in annual gross receipts, from the mandatory peer review program.
The board’s insistence that these small reports be peer‐reviewed has harmed the accountancy industry in Texas, according to Furge. He pointed out that the Texas State Board of Accountancy’s own statistics indicate that “55 percent of Texas CPA practice units have signed an affidavit stating they will no longer issue compilation reports. This is not good for the public.”
“These small businesses deserve access to the services of their own local, hometown CPA without having to navigate rules intended for national or large regional operations,” said Stephenson. “My bills help the local CPA.”
Not only that, Furge argued, but removing such reports from the peer review regime would help control costs for small businesses. “If you have fewer CPAs performing these services, inevitably, the cost of obtaining these services must rise,” he said.
The second bill introduced by Stephenson, H.B. 1757, would ensure sole practitioners are represented on the Texas State Board of Public Accountancy. The bill would require that at least two sole practitioner CPAs be appointed to the Texas State Board of Public Accountancy.
Furge believes that having a CPA in the legislature who actually practices accounting is important.
“Representative Stephenson understands the issues affecting local CPAs,” he said. “What affects the local CPA also affects local businesses.”
11 Comments
marjorielott comment above is pretty much spot on. As is John Furge's point that the cost on these small businesses just are not justified. Mostly what we are doing are compiling the financial statements to balance the check book and file the tax return and most of these small business owners know more about their business then what's in the compiled financials.
The fact is that CPA's are trained and all peer review does is make us less likely to serve small business owners who can just as well get the work done by unregulated bookkeepers and enrolled agents. Weird isn't it? There is absolutely no attesting on these compilations and yet the most trained, licensed, tested professionals have to pay for peer review while others providing the same write up services do not. It's nonsense.
I also agree that there is something wrong when only the Texas Society can provide peer review and they use that to force membership. Stinks.
Posted by: wpcpa | April 26, 2013 3:58 PM
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One of my reactions is we actually get a CPA elected which is rare and then people start referring to single digit IQs. Classless and un-thinking to begin which defines the source apparently. I believe we should be pleased we have someone to represent the small firm rather than just lock step what the big firms want dictated.
The concept of peer review is certainly a very good concept. But the workings of the peer review in Texas aren't about maintaining competency. It is not even run by a government agency but the TSCPAs. If you are not a member of the TSCPA, you have to pay extra... essentially a forced tribute to their organization. An unbiased organization for peer review would have the same set of fees no matter their membership status.
Lack of competition in peer review is another problem. We should be able to hire peer reviewers from all over the country. But for a "right to work state", we don't seem to follow that for Texas Peer Review.
And having experienced them first hand, the level of repetitive paperwork with no purpose on even a Cart Review just boggles the mind. it is worse than going to the Doctor and filling out 20 pages listing the same drugs and medical history only to have the Doctor ask the same questions in person. That part of it is maddening.
Then you can get into the entire politics of the Peer Review mess. And for those not wanting the competition, I certainly understand that but setting up barriers is not good for the public or business - those we are supposed to be working for and "protecting."
Posted by: Steven M | March 10, 2013 9:08 PM
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When I first read of Texas state representative Stephenson's bill I was thinking it would be good. Reflection on the action makes me think it will have bad results for practitioners and the profession. Peer Review for all its faults has improved the profession by making practitioners choose between service areas subject to review or not subject to review. To be truly competent in their area of endeavor and not a so-so generalist. Stephenson's bill creates two classes of CPAs, those subject to review and those who are not. Those CPAs not subject to Peer Review will become a commodity, an interchangeable part to be plugged in after being selected solely for lowest price for service.
Posted by: AMHCPA | March 10, 2013 1:32 PM
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I am a right-of-center guy whose instincts are for smaller government and for fewer regulations. However, if there's ANYBODY that needs peer review, it is CPAs who work with small businesses.
Now, if Rep. Stephenson's definition of 'small business' were $500,000 in revenues, rather than $6 million, I could probably support this idea. A micro business--a.k.a. 'Mom and Pop--is often not a business, per se, but a job. I have no problem with exempting from peer review the compiled statements for such businesses.
But substantive businesses that have employees whose livelihoods depend on the viability of their employers' finances for their pay checks to clear are ill-served by this idea. I'd wager that those employees, if they had a say in this thing, would strongly oppose this ill-considered idea. Anyone who has ever had a paycheck bounce will attest to the terror it strikes in the heart of the depositor. Back-when, it happened to me, and I still shudder when I remember how I felt.
I have a better idea for Rep. Stephenson and his supporters: QUIT COMPILING FINANCIAL STATEMENTS. If then can't stand the heat, they should get out of the kitchen.
I hasten to add that I'm self-employed now. We don't offer any 'traditional CPA-firm services,' so I don't worry about the effect on our practice of this or any similar legislation in Virginia, where I now live. But I grew up in Austin and spent many hours around the Texas Legislature because my mother worked for a governor there in the late 1950s. The average I.Q. in that body was and remains in single digits, and Rep. Stephenson is an exemplar of that intellectual profile. Unless he changes the definition of 'small business' in his bill, it is a really bad idea, esp. for employees. I'd wager he never thought of that.
Warren D. Miller, CFA, CPA Beckmill Research, LLC Lexington, Virginia
Posted by: Warren M | March 10, 2013 9:51 AM
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Most of the comments complain about the amount of work the writers have to do. If you don't like the work, don't do it. Review of the work in any field do must be done. Don't complain if your work will not pass.
Posted by: Hugh | March 9, 2013 4:11 PM
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In my view; arguments against peer review, based on cost or inconvenience, miss the point. The cost is not onerous. And the effort devoted to compliance is an opportunity to do a introspective analysis of firm operations. Often, as is in this case; It's not the effectiveness of the regulation that is in question, rather it is the intent of the regulated.
Posted by: Richard F | March 9, 2013 8:53 AM
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Although I thought Peer Reviews would be a good idea when they were first legislated 10 year ago, in practicality it has not accomplished what they were ment to do. The were sold to the small firm that it would help them know what to do. and to get rid of the bad apples. It does make me more aware of the way I title my financial statements, but it has only made fewer and fewer people do compilations. It takes so much time with all of the engagement letters just to put the numbers in a simple form, that I try to talk all of my clients out of doing them. I think peer review is bad for the small business, and does not serve the purpose of having quality accounting services for businesses that need it. Marjoie Lott, CPA
Posted by: marjorielott | March 8, 2013 4:23 PM
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My small firm does several audits and at first I thought this was an awesome idea. Then I thought about it and realized it would allow other small firms in my area that do not do audits, because of the peer review requirement, to enter the market. I hate regulations as much as the next guy but have been through burdensome peer reviews for years and am now thinking I'm not in favor of allowing others to now waltz in and undercut my fees.
Posted by: MCS1957 | March 8, 2013 10:58 AM
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I have been a sole practitioner CPA owning a small firm for over thirty years. I stop doing audits years ago because of the ridicules amount of regulations on unimportant items such as the wording on financials. Later I stop doing reviews for the same reason, and finally compilations. I have no problems with regulations and guide lines but to have academies writing hundreds of pages on the meaning of this word or that word were ridicules. I finally reduced my practice to tax and investment serives. I am a register financial advisor. Both of these services have strict regulations but at least they are more practical in nature
Posted by: hicks.j@tx.rr.com | March 8, 2013 10:22 AM
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I think this is a wonderful initiative!! Onerous, expensive and ineffective is exactly my feelings on the peer review process. I'm in the middle of one now and find the whole process as preposterous!! My small firm should not be put through the riggors of a system that is clearly geared to large company financials.
Posted by: JanisP | March 8, 2013 10:03 AM
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California CPA's!!! Write your California Assemblyman and state Senator and request that a similar bill be introduced to get rid of the onerous, expensive and ineffective peer review requirements for small CPA firms!
Posted by: randallsmithcfo | March 8, 2013 9:31 AM
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