Sarbanes-Oxley Act Tops NASBA Meeting Agenda


Congress’s landmark accounting reform legislation—and its potential impact on how states will regulate CPAs—was the leading discussion topic at the annual meeting of the National Association of State Boards of Accountancy (NASBA) in October. Attendees deliberated over what measures contained in the Sarbanes-Oxley Act of 2002—which covers CPAs providing attest services to SEC registrants—should apply to licensees at the state level. Board representatives also discussed implementing the computer-based uniform CPA examination in 2004.

In his address, William F. Ezzell, AICPA chairman, acknowledged the delicate task facing state boards of accountancy, which will have to, he said, “take the measured look—the hard look—and say that in one case discipline is not warranted, but in another it must be hard and swift.”

Barton W. Baldwin, outgoing NASBA chairman, spoke of the boards’ responsibility to protect the public and to treat fairly those in the profession and those seeking to enter it. He recounted how NASBA and the state boards had explained to Congress what that responsibility consisted of and had accelerated the flow of information to the SEC. While NASBA submitted comments on proposed rules and bills, board representatives worked to ensure Congress understood state licensing and enforcement requirements. And through its media outreach efforts, NASBA also testified to the high quality of the overwhelming majority of board licensees.

More than one speaker proposed changes in accounting education to strengthen the profession. W. Steve Albrecht, associate dean of Brigham Young University’s Marriott School of Management, said educators share in the blame for Enron. “We haven’t taught ethics, we haven’t taught fraud, we haven’t taught students how to think,” he said. According to Dr. Albrecht, the majority of students learn merely to memorize standards and to reflexively use prior years’ financial reports as a template in future years, rather than examining the current period’s figures and determining whether they require a fresh analysis.

And Lee J. Seidler, CPA, a former New York University accounting professor and legislative adviser to Senator Paul S. Sarbanes (D-Md.), said the profession would attract better candidates if state boards incorporated graduate-level work into the accounting curriculum as in the medical and legal professions. He called on the boards, which control entry to the profession, to take such steps as a means of recruiting higher quality professionals who could help prevent future audit failures.

While educators ponder long-term approaches to the issues Enron’s failure raised, several states have been working on more immediate responses.

The Texas state board enacted a rule effective September 1, 2003, that will require licensees to undergo an enriched ethics training program covering the board’s rules pertaining to professional conduct and other matters, as well as instruction on ethical reasoning for licensees in both public and private practice.

To make its enforcement efforts more timely, Arizona’s state board was preparing a rule that would require licensees to indicate on their biennial registration forms whether a regulatory body is investigating them.

And Florida came close to passing a stringent peer review requirement. When Enron’s stock plummeted, the state pension fund lost approximately $300 million, prompting Florida’s senate to approve legislation requiring peer review for all firms providing attest services. The peer review reports could have been the basis for the board’s taking disciplinary action against firms doing “substandard” work. The bill was defeated in Florida’s house of representatives when its lone CPA pointed out that Andersen had received a clean peer review report just before Enron’s collapse.

P. Robert Fox, a member of the New York state board, reported that both the board and the state society supported mandatory peer review and firm inspection but had not yet agreed on how to implement them. He also said the New York board was drafting record-retention regulations based on a California law, the Sarbanes-Oxley Act, SAS no. 96, Audit Documentation, “single audit” requirements and other authoritative sources.

When the California Public Employees Retirement System lost approximately $700 million on its investments in WorldCom and Enron, affected investors demanded help from their legislators. In response California lawmakers passed several pieces of legislation ( ) governing state CPAs, which took effect January 1.

One law requires documentation for all audits (not just those of publicly traded companies) performed by California licensees to be complete enough for a knowledgeable reviewer with no prior involvement in the audit to examine it and understand the procedures that were performed—essentially the GAO’s yellow book standard.

Another establishes a 12-month waiting period before auditors can accept a position of significant accounting authority with a publicly traded client they audited within the previous year.

Yet another law strengthens the accountancy board’s enforcement program by making repeated negligent acts cause for discipline and giving the board authority to take enforcement action against licensees based on findings by the Public Company Accounting Oversight Board, which the SEC created in accordance with the Sarbanes-Oxley Act. This law also gives the board power related to potential violations of the state accountancy act, including the right to subpoena nonlicensee witnesses and documents from third parties.

Wendy S. Perez, president of the California state board, said the board wanted to take the lead in reform, actively communicate ideas to state and federal regulators and support the passage of legislation at the national level. The board believed, she said, that “creating a California-only solution could result in a patchwork of scope and service rules among the states that was not in the best interest of California consumers.”

Many meeting attendees said their state boards, before developing additional rules or supporting new legislation, were waiting to see how the new federal regulations would be implemented. To facilitate communication between the boards and the commission in the months ahead, SEC Associate Chief Accountant Samuel L. Burke offered to be a liaison. The Sarbanes-Oxley Act directed the commission to ensure the Public Company Accounting Oversight Board began registering auditing firms by the end of April 2003.

The commission proposed, and exposed for comment in November, rules based on the Sarbanes-Oxley Act’s Title II laws, which address auditor independence. The rules were to be released as final by January 26. In analyzing independence issues, Burke said, the SEC considers whether an auditor

Has a mutual or conflicting interest with the audit client.
Audits the firm’s own work.
Acts as management or an employee of the audit client.
Acts as an advocate of the audit client.

In his inaugural remarks K. Michael Conaway, NASBA’s new chairman, said state boards should be given the opportunity to actively participate, from the earliest stages, when the AICPA, the SEC, the GAO and other standard setters develop rules. This would eliminate unnecessary differences between their regulations and those of the states, he said, reducing potential barriers to competition and diminishing the number of nonessential provisions. Conaway added that failure to make progress in this respect would help the cause of those advocating national licensing of CPAs.

Rule making for the implementation of the computer-based uniform CPA examination is under way. The boards were urged to adopt the Board of Examiners’ recommended rules—as contained in the November 2002 revision of the Uniform Accountancy Act ( )—for making the transition to the computer-based examination.

Ken L. Bishop, executive director of the Missouri state board, said that in October NASBA will begin testing a national database containing information on candidates applying to take the computerized uniform CPA examination. In March 2004 the boards will transmit to NASBA information on eligible candidates. Computer-based testing is expected to begin in April 2004.

With the inauguration of the computer-based examination, it is likely all states will permit candidates to take one part of the four-section test at a time and will allow credit for each passed section to remain valid for 18 months. Details about the new examination are available at .

The NASBA CPA examination review board is writing new protocols for overseeing the computer-based examination process on behalf of the state boards. As Carol Sigmann, executive director of the California board, said, “The responsibility never leaves the boards. The more eyes we have overseeing the process, the better.”

Louise Dratler Haberman, NASBA director of information and research and editor of the State Board Report.


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