by John M. Covaleski

Nashville, Tenn. -- The National Association of State Boards of Accountancy hopes that it can keep the "cascade" created by last year's passage of the landmark Sarbanes-Oxley Act from becoming a flood of unmanageable over-regulation at the state level.

In what the Nashville-based forum for state boards across the country rates as one of its most significant efforts ever, NASBA's upcoming regional meetings will be dedicated to developing guidelines for individual states to follow in setting new laws and regulations governing accountants' work. States' movement to accounting reform in the wake of the passage of Sarbanes-Oxley has been referred to as the "cascade" since shortly before that law regulating the audit profession was enacted last July.

Sarbanes-Oxley was introduced as a result of the spate of massive corporate accounting scandals at such companies as Enron, Adelphia and WorldCom. The bill, which sailed through the House and Senate before being signed into law by President George W. Bush, mandates sweeping reform measures over the profession and created the Public Company Accounting Oversight Board.

"This is about as significant as anything we have done because Sarbanes-Oxley is setting the tone for the future of the profession," said NASBA president David Costello. "Things will not be the same, so we must do what we can to help direct states in what they do."

At the regional meetings -- one scheduled for June 4-6 in Louisville, Ky., and one the following week in Portland, Ore. -- NASBA will pull together individual state boards' key executives, representatives from the American Institute of CPAs, state societies and academia to establish guidelines that state legislatures and various state regulatory bodies should follow in developing accounting rules.

The goal is to ward off the individual enactment of a patchwork of different rules from state to state that unintentionally create more problems than they solve for practitioners, their clients and the general public. "If we continue to see states react as they have, we will have 25 to 30 different sets of rules across the country," Costello said.

States' movement toward accounting industry reform has indeed been a cascade. Since Sarbanes-Oxley was enacted last summer, 12 state legislatures have had new accounting reform bills proposed, including three bills that propose extending the federal law's prohibition against auditors offering non-audit services to publicly traded companies to include the services that can be provided to much smaller privately held audit clients.

To be sure, only one state -- California -- has enacted reform laws, and bills in several states have failed to make it to a committee hearing, a necessary second step toward becoming law. But state CPA society executives who have fought to fend off new rules in their states concur that seemingly stalled bills can resurface in future legislative sessions.

Reform laws enacted in California include a requirement that CPAs retain client work papers for at least seven years, and a measure that increases the state's board of accountancy membership and requires that a majority be from outside the accounting profession.

While the vast majority of states have not taken any action, observers of this situation note that there's no way to predict when more states may join in or how long accounting reform will be a hot political topic. They also say that stalled bills can always resurface.

"Just because a bill dies, doesn't mean it can't be introduced again," said William R. Lazor, president-elect of the Pennsylvania Institute of CPAs, whose lobbying and public awareness efforts helped to keep that state's six accounting reform measures from ever making it to the committee stage.

Other states, where reform measures have failed to make it to committee in the most recent legislative session, include New Mexico.

There's also a fear that state regulatory agencies with oversight powers may establish their own accounting reforms. For example, Indiana's Family and Social Services Administration recently adopted a rule requiring all of the mostly small, nonprofit groups receiving its funding to change their auditors every five years.

"I don't think we can say this is a two- or six-month deal. It's an ongoing situation that will have to be monitored for a long time to come," said Kathy Eddy, head of an AICPA committee that has been studying the implications of Sarbanes-Oxley and assisting state societies in working with their state legislators on reform matters.

The committee, which posts its information on its Web site at www.aicpa.org/Sarbanes/ index.asp, has written a series of position papers designed for state societies and practitioners to use in educating the public about how the federal law and cascading versions of state regulations could impact practitioners and their clients.

The committee position papers cover the same areas where NASBA plans to develop its guidelines for states to follow in enacting their reform measures. The guidelines will be for areas that Sarbanes-Oxley addresses in its national and public company focus, and are subject to widely different interpretations by legislators dealing with state matters that affect both public and privately held companies.

The areas where NASBA plans to establish guidelines are:

• Audit partner rotation: Sarbanes-Oxley requires that the lead audit partner and audit review partner be rotated every five years on public company engagements.

•  Scope of services: The federal law severely restricts the non-audit services practitioners can provide publicly traded audit clients.

•  Board of Accountancy makeup: Sarbanes-Oxley created a Public Company Accounting Oversight Board, a majority of members of which must be from outside the accounting profession.

• Peer review: The PCAOB has usurped from the AICPA the responsibility for peer review of the auditors of public companies, which raises questions about peer review for the overall profession.

• Compensation and ethics: Sarbanes-Oxley addresses these two issues in great detail.

• Corporate governance: Sarbanes-Oxley sets several new requirements for pubic company audit committees, and most privately held companies do not have audit committees.

• Authority and hierarchy: Relationships between state boards and regulatory bodies, including the PCAOB.

These are areas that NASBA has identified as most potentially problematic for state boards in dealing with Sarbanes-Oxley and its cascade effect. However, they are just a few of the many industry issues that have been raised by the federal law.

A position paper by the AICPA's Sarbanes-Oxley committee noted that state legislators trying to adopt the federal law to their venues "risk enacting provisions that are both unworkable from a practical standpoint and unnecessary from a risk standpoint." Their papers specify the negative implications on accountants and on their clients in the form of increased costs.

Areas of the most immediate concern for practitioners include Sarbanes-Oxley's scope-of-services limitation and its auditor-rotation requirement.

Lazor noted that limiting the scope of services accountants provide their clients could mean that finding services would be extremely difficult for businesses or nonprofits in very rural Pennsylvania areas, "such as Potter or Venango counties where you have only one CPA within 60 miles of town."

Orville "Earl" Elliott, a partner with Sackrider & Co., a 25-person CPA firm in Terre Haute, Ind., said that adoption of auditor-rotation rules by the state's Family and Social Services Administration would cost his firm a small nonprofit client, as well as putting that client to the expense of securing another auditor. "This is just not the time to be forcing extra costs on organizations like that," he said.

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