California's proposals: Flurry of legislation to "reform" the CPA profession - Government Relations - Brief Article

California legislators and regulators have introduced a flurry of proposals focused on "reforming" the CPA profession in light of the Enron bankruptcy.

While not all of the proposals have been fleshed out, at least five new pieces of legislation dealing with accountancy are currently in the Legislature and others have the potential to be amended at any time.

At press time, many of the proposals paralleled the approaches being considered by Congress and the SEC for public companies, but would apply to all companies public and private in California. Other proposals that would only impact California CPAs are also being forwarded.

CalCPA's Position

CalCPA is committed to restoring faith in our financial markets and in the accounting profession and is supporting proposals that will further these goals. On the other hand we are strongly opposing proposals that would unnecessarily hinder California business and small CPA firms without providing any real consumer protection.

CalCPA members have presented testimony consistent with this view and have tried to educate decision makers about the profession's role and responsibility, as well as the need to focus on public companies and the need for national uniformity.

Punitive in Nature

Many of the proposals being advanced by California regulators and the state Legislature will not help prevent future Enrons, but rather are punitive in nature and may handicap small business through a wide range of unintended consequences.

Issues currently being considered include prohibiting all non-audit services to any audit clients, public or private; creation of a California-specific statutory documentation standard for audit workpapers and requiring that audit workpapers be retained for a minimum of five to seven years.

The Burden of Proof Is Yours?

Additionally, the California Board of Accountancy is pursuing creation of what is called a "rebuttable presumption" that would apply to any missing workpapers. That is, if the documentation for an audit test or procedure is not in the work papers, the presumption will be that the procedure or work was not done.

This is a far-reaching shift of the burden of proof that would require any CPA charged with a violation of the Accountancy Act to prove their innocence rather than requiring the state to prove guilt in any matters related to workpaper documentation.

Professional standards already require that audits be sufficiently documented to support the auditor's opinion and that the workpapers be retained long enough to meet the client needs or longer in the event of litigation or regulatory investigations. The CBA also is proposing to require that every firm have a written policy regarding the retention and destruction of workpapers.

Peer Review

Recent legislation would require peer reviews of all firms that provide attest services by 2004. Current law requires peer reviews for all but small firms, four or fewer professionals, by 2006.

Additionally, while the focus of peer review would continue to be constructive, the CBA is considering a requirement that would give its staff access to peer reviews results to enable them to pursue licensee discipline if the reviews uncovered negligence or other actionable conduct by the licensee.

Lowering the Discipline Standard

The CBA is considering proposals that would lower the standard for discipline of licensees so that a repeated simple mistake could result in CBA action against the individual's license.

Currently the standard for taking disciplinary action against a CPA is gross negligence or an extreme departure from professional standards.

The CBA also is proposing a statute that would require CPAs to report to them any civil judgment or settlement related to the practice of accountancy so that a determination can be made as to whether discipline should also be taken against the license. Proponents of this approach are recommending that it be expanded to require that the CBA be notified of any insurance claim or civil suit filing.

And There's More

One of the less onerous proposals would create a two-year cooling-off period for CPAs who exercise significant judgment in their firm from going to work for audit clients.

At its May meeting, the CBA will take up the issues of firm structure (non-CPA owners) and commissions.

While these are not the issues surrounding Enron, opponents have determined that this is an appropriate time to revisit these issues as well.

Bruce C. Allen is CalCPA's director of government relations.

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