by John M. Covaleski
Portland, Ore. - A year after the passage of the Sarbanes-Oxley Act, accounting’s state regulators are determining how to collectively deal with the sweeping reform measure.
The National Association of State Boards of Accountancy is currently developing guidelines for the 54 boards that it represents, based on opinions it received in early June at its two regional membership meetings dedicated to how regulators should address the legislation.
The group’s actions could set the stage for significant change throughout the industry, ac-cording to some regulators.
“The things we do here will actually make a difference,” said Washington State Board of Accountancy president Kay Carnes, an opening-day speaker at the Western region show, here. “We have the potential to change the profession of the future.”
At the same time, regulators must deal with change foisted upon them.
While state boards remain the licensing agents for CPAs, Sarbanes-Oxley created the Public Company Accounting Oversight Board, a private non-profit entity, which oversees the financial reporting and auditing of public companies, and essentially reduces state boards’ role in attest services supervision to CPAs that handle privately held companies.
“Everything is thrown open with the PCAOB saying, ‘We do public companies, and the states should figure out what you do,’” said Thomas J. Sadler, a delegate and public practice CPA from Tacoma, Wash.
NASBA staff is consolidating the findings of both meetings to produce final guidelines to be released at a full membership meeting in October. In what may be a preview of those guidelines, Western region conference attendees expressed strong support for the following Sarbanes-Oxley-era goals:
● Increase the emphasis on professional ethics.
● Become more proactive in dealing with practitioners.
● Develop working relationships with the PCAOB.
● Protect against Sarbanes-Oxley-mandated auditor independence rules for public companies from being passed en masse in state laws governing private companies.
While the regional meetings focused on defending against negative aspects of Sarbanes-Oxley, NASBA chairman Mike Conaway said, “Working with the federal government doesn’t mean being subservient; it means working shoulder to shoulder.” In opening day comments, Conaway also expressed hope that the PCAOB could jumpstart increased unity among state boards.
“We are at a crossroads in the regulation of the profession and if we don’t attain uniformity as state boards, we risk losing our relevancy,” Conaway said, adding that the PCAOB was able, in “one fell swoop,” to recognize and provide a regulatory framework for CPAs in all 50 states. NASBA president David Costello noted that approximately 23 boards do not recognize CPAs’ licenses from other jurisdictions and, instead, require them to get licensed separately to work in their states.
“Enabling the interstate mobility of licensees is critical at this juncture,” Costello said in a report that also urged delegates to “embrace a grander view of regulation.” Carlos E. Johnson, a NASBA delegate from Oklahoma, said, “We have to step up and provide uniformity or someone else will.”
Separately, an American Institute of CPAs presentation on the electronic CPA exam - which is scheduled to debut next April - sparked concerns that candidates may be unable to properly prepare because many schools and universities do not have access to Internet-based databases that candidates must use in the new test format. Craig Mills, the AICPA’s executive director of examinations, said that the institute is aware of the issue and is working on a resolution.
The main focus of the regional meetings was dealing with Sarbanes-Oxley, and attendees at the Western show were particularly vocal about the broad application of the measure’s rules to state laws covering privately held companies - the so-called “cascade” effect.
A conference discussion group dedicated to reviewing “scope of services” overwhelmingly agreed that private company financial statement users, which are primarily banks, have different risks than the investment community users of public company reports, and that there is less market concern about private company audits.
“The layering of more rules won’t help,” said discussion moderator Robert A. Pearson, a NASBA delegate from Kansas City, Mo. “Instead, talk to your state legislatures to prevent what the cascade effect could become - a disaster.”
Pearson’s group also noted that the quality of both private and public company audits is enhanced when the audit firm provides additional services to the client. Sarbanes-Oxley bans practitioners from performing most other services for public company audit clients.
Laurie Tish, a delegate from Seattle, who led a discussion group covering ethics and firm rotation, added, “We don’t see a need for further rules for non-SEC auditors.” She also opposed rotation rules for private companies, noting that Sarbanes-Oxley’s requirement that firms rotate their auditors for individual clients after set periods of time would amount to “firm rotation” for small firms that only have one auditor.
Increased oversight by regulators emerged as a prominent sub-theme. “We need to do more than wait for complaints,” said conference speaker Gail Hillebrand, a lawyer for the Consumers Union advocacy group in San Francisco. “We need to get involved with prevention and not just play catch up.”
Delegates discussing future dealings with the PCAOB expressed hope that the board will alert state boards when it uncovers wrongdoing in its auditor reviews. Sadler said, “This give us the opportunity to identify firms that have problems, track them and be more effective regulators.”
Another delegate in that discussion session noted, “Some PCAOB firms also do private companies, so if there’s a breakdown we want to know sooner rather than later.”
Increased attention to ethics was repeatedly called for by delegates in speeches and participants in discussion groups.
Michael D. Weatherwax, of Boulder, Colo., said that the Enron accounting scandal that preceded the passage of Sarbanes-Oxley, “was not an audit failure or an independence failure - it was an ethics failure. No one stopped to ask, ‘Is what we are doing the right thing?’”
Patrick D. McCarthy, of Lafayette, La., said that today’s regulation crisis was a byproduct of a movement to under-price audits that began several years ago. “We were giving audits away to get the more lucrative consulting work, and what we did culminated in Enron.”
Delegates in panel discussions debated the merits of the profession-prominent “remedial” approach peer review versus punitive reviews, which penalize poor practices. However, no conclusions were reached and there’s no indication whether NASBA’s final guidelines will address this.
In another discussion that resulted in no formal conclusion, delegates debated the viability of audit firms also offering financial services. Leonard Sanchez, a partner in an Albuquerque, N.M., audit and tax practice that offers financial services through a separate entity, said, “We are good at audits and tax and are now debating why we should do the other.”
North Dakota delegate Harold Wilde, an associate professor of accounting at the University of North Dakota, said audit firms offering financial services are “asking for trouble,” particularly when they offer those services to the owners of their audit clients.
Iowa delegate Wes Stille countered that offering financial planning “protects the clients” from receiving the services from someone less qualified. He noted that his firm does not offer financial planning to its audit clients.
To be sure, the regional conferences only featured discussions and no formal binding rules were acted on, but officials on hand seemed hopeful that the uniform guideline-setting effort would give individual state boards leverage in dealing with their state legislatures. “We don’t write policy, but we can influence policies set by the state legislatures,” said Laura Fenstermacher, who handles government relations for the Minnesota board.
Costello said that the Texas legislature’s recent action regarding accounting could be a good harbinger for all state boards. During the NASBA Western conference, Texas lawmakers announced that they were giving the state’s board of public accountancy new information-gathering capabilities and subpoena power. It also mandated the board to submit a report detailing what it needs to address Sarbanes-Oxley.
Said Sadler, “Now is a good time for state boards to go to their legislators to get the support they need.”
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