by Ken Rankin

Washington — Accountants scrambling to comply with the latest regulatory interpretations of the Sarbanes-Oxley Act may soon be facing even bigger headaches as state legislatures across the country begin hammering out stringent new audit rules of their own.

In many cases, the proposed accounting reforms under consideration at the state level go well beyond the federal SOX requirements — a fact that has raised concerns among leaders of the accounting profession here in Washington.

Legislators and regulators in a number of states “are seeking to duplicate or extend provisions of the Sarbanes-Oxley Act to private companies and their auditors at the state level,” officials at the American Institute of CPAs said. “While some measures may have merit and could possibly be supported, some of what is being discussed is overreaching and simply should not apply to CPAs and CPA firms that do not provide audits to publicly traded companies.”

A key concern at AICPA: the risk that a hodge-podge of harsh and inconsistent new state audit requirements may have “an adverse impact on small businesses and the CPA firms which serve them.”

Much of the legislation being talked up at state capitals these days appears to reflect a distrust of the accounting profession.

In California, for example, the Senate is debating legislation already passed by the Assembly that would disqualify representatives from public accounting firms from serving on the state’s board of accountancy.

A separate bill approved by the Assembly in Sacramento increases the criminal penalties for securities violations to 20 years in prison plus a $10 million fine, and sets strict new disclosure requirements for outside auditors. Under that legislation, California CPAs performing an audit for any corporation (public, private or nonprofit) would be required to report to the audit committee all accounting policies used during the audit, as well as all alternative treatments discussed with management.

New Mexico’s House and Senate have already approved a measure urging the state auditor to study the need for stricter conflict-of-interest rules for CPAs, and legislatures east of the Mississippi are eyeing even tighter controls over audit activities in their states.

In New Jersey, for example, state lawmakers are considering a proposal calling on the U.S. Congress to enact a federal law subjecting public companies to annual audits conducted by accounting firms randomly selected from a list of Securities and Exchange Commission-approved auditors.

Meanwhile, the Massachusetts Senate is debating legislation that would require state retirement investment boards to divest their holdings in those corporations that fail to implement policies prohibiting their audit firms from having consulting contracts with the companies being audited.

But nowhere is the drive for tighter controls over the accounting profession more pervasive than in New York. State lawmakers in Albany are considering a legislative witches’ brew that includes proposals to mandate auditor rotation, require that every partner in a CPA firm be a licensed CPA, and create a new “Public Accountancy Task Force” to investigate and prosecute professional misconduct by practitioners.

The assembly is also considering several proposals to prohibit auditors from providing non-audit services to their audit clients, including a broadly worded “Integrity in Auditing Act” that would stretch the definition of prohibited non-audit services to include bookkeeping, appraisal, assurance, investment planning and tax services.

Officials at the AICPA’s Special Committee on State Regulation are working with state CPA groups country-wide to defuse legislative support for onerous new auditing requirements.

A series of white papers issued by that committee conclude that “uniformity of state laws is essential to protecting the public interest,” and urge the profession to “advocate for a reasoned approach to reform at the state level.”

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