The battle continues: an update on California legislation impacting CPAs - Brief Article

California's Legislature is due to recess its two-year session Aug. 31. Between press time and that final recess, legislators will act on legislation of critical importance to the CPA profession.

Even though AB 1995 (Correa), which would have allowed California-based CPA firms performing audits of public companies to provide a limited set of services to those clients, died on the Assembly floor, several other bills are making their way through.

SB 1527: causing Confusion

SB 1527 (Burton) is a bill that broadly defines audit and severely restricts the services that may be provided to public companies for which an audit is done. The bill is awaiting a hearing in the Assembly Business and Professions Committee and will be heard in August.

This bill contains a very limited set of services that may be provided to public company audit clients. SB 1527 is severely flawed. It contains an overly broad definition of audit and both a list of permitted services and a list of prohibited services.

If the Legislature passes SB 1527 as it currently stands, its impact is unclear, both because it is confusing and because it would only apply to California CPA firms.

A California-only standard would cause confusion for California CPAs, public companies and investors and would not create results that would improve investor confidence statewide, nationally or internationally.

AB 2970: The Revolving Door

AB 2970 (Wayne), which would prohibit a California-licensed CPA from going to work for a publicly traded audit client for one year, has passed the Senate Business and Professions Committee and is awaiting a hearing with the Senate Appropriations Committee.

This bill, as originally introduced, would have required public companies to change audit firms every four years. It was then amended to require a two-year cooling-off period before CPAs could go to work for public company audit clients.

AB 2970's prohibition is now one year and although the bill is moving along, most legislators haven't expressed certainty that this bill would instill investor confidence in the financial markets.

AB 2873: Documentation

AB 2873 (Frommer) will make some changes to work paper documentation standards by codifying General Accounting Office standards for work paper documentation in California statutes. It will require auditor workpapers to be retained for seven years.

Additionally, the bill will create a rebuttable presumption: If procedures are not physically documented in the audit documentation, the procedures were not performed. The licensee may overcome the presumption by establishing through a preponderance of the evidence that the procedures in fact were performed.

Professional standards already require that procedures be documented in a way that would allow a member of the audit team to understand what was done and by whom.

AB 2873 would require that the documentation be sufficient to allow an experienced auditor with no connection to the engagement to understand it. This mirrors the GAO's new standard.

Substantial questions remain about how the standard will be interpreted. The GAO is expected to provide answers to many questions about the standard in the future.

AB 2873 is awaiting a hearing with the Senate Appropriations Committee.

SB 2023: A Placeholder

SB 2023 (Figueroa) is essentially a technical bill. At this time, it mandates peer reviews beginning in 2003 for firms with four or more professionals if they perform any audits or reviews. Current law requires peer reviews beginning in 2006 for these firms.

SB 2023 is being used as a placeholder, or spot bill, and CalCPA anticipates that changes to the California Board of Accountancy's enforcement powers will be amended into the bill at the last minute.

A Stealth Return of AB 1995?

AB 270 (Correa) recently was activated from the Senate floor where it had been languishing for a year.

Correa stored the bill in the Senate when it became obvious that it was unnecessary and duplicative of other legislation dealing with CPAs. CalCPA will watch that bill closely to determine the author's intentions.

Correa's staff reported earlier that he was considering amending provisions of AB 1995 into another bill. AB 270 may be that vehicle.

AB 2834: School District Audits

The content of AB 2834 (Migden), which deals with school district audit firms, is being negotiated. Early reports indicated that it would be amended to mandate regular audit firm rotation and ban any consulting services for school district audit firms.

The bill currently requires that the state controller maintain a list of approved CPA firms eligible to perform school district audits.

The Senate Appropriations Committee could hear AB 2834 by Aug. 5.

The majority of the measures being considered in California will do little to correct the situations that led to the Enron and WorldCom bankruptcies. Restoring faith in America's financial markets requires national reforms.

CalCPA remains committed to ensuring that reforms are enacted which restore faith in the profession and our financial markets.

Bruce C. Allen is Ca/CPA's director of government relations.

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