They're back ��: audit rotation and other issues re-emerge

SB 393 (Ortiz), as proposed, would impose additional requirements on CPAs who perform audits of special districts and would expand controller oversight of those firms that perform audits of special districts including:

* Auditor or audit firm rotation every six years.

* Testing of transactions considered high risk for abuse.

* Quality reviews by the state controller's office.

* Authority for the controller to unilaterally suspend firms from auditing special districts for up to three years in addition to any disciplinary proceedings imposed by the California Board of Accountancy.

Ambiguous Provisions

CalCPA has reviewed the bill and found that several provisions are ambiguous and carry the risk of increasing audit costs and decreasing CPA interest in providing audit services to special districts. Additionally, other provisions are in direct conflict with the Government Accountability Office's standards and recommendations regarding peer review.

For example, SB 383 contains provisions for mandatory auditor or audit firm rotation every six years. The GAO does not require or recommend rotating audit firms or audit partners of government entities.

The bill also contains language that requires the testing of "transactions considered high risk for abuse" every two years. These transactions are not clearly defined, which could lead to confusion and unintended consequences during the regulatory process. Further, there is no mention of materiality with regard to these transactions.

Under SB 393, a CPA firm would not be allowed to audit a special district unless, within the last three years, it has had a quality control review conducted by the state controller. Firms already are required under GAO standards to have a peer review performed. If, for any reason, the controller's staff is unable to perform a timely review, they could unilaterally bar an otherwise qualified firm from performing a special district audit.

Too Much Concentrated Power?

The controller also is given authority to unilaterally suspend firms from auditing special districts for a period of three years in addition to whatever sanction, if any, the CBA may apply. The CBA has regulatory authority over the CPA profession in California and is in a position to apply a full spectrum of discipline for unprofessional conduct through its adjudicatory process. This process allows for a full impartial investigation and due process for the accused. No such provisions apply to the authority granted the state controller in SB 393.

Finally, SB 393 requires the auditor to notify the controller promptly of any compliance violations. Again, this provision lacks the technical clarity that is necessary to ensure that the regulatory process which follows a bill's passage addresses the intent of the bill and can be complied with by practitioners.

Wielding a Wide Securities Net

Often in Sacramento, a bill that is defeated in one session is reintroduced in the next under a new identify. So it is with AB 310 (Umberg), which resembles SB 766 (Florez) that was defeated in 2004.

As amended in March, AB 310 would overturn appellate court rulings that interpret two provisions of the California Securities Act of 1968.

Existing law provides that any person who willfully participates in certain unlawful acts or transactions relative to securities transactions shall be liable to any other person who purchases or sells any security at a price that was affected by the act or transaction for damages sustained as a result of the act or transaction.

AB 310 would define the terms "willfully" and "participates" for purposes of these provisions, and, according to California's legislative analyst, would state the Legislature's intent to abrogate certain appellate court holdings in that regard. This would include the specific provision in the appellate court ruling in Kamen v. Lindly, where the Court held that no suit could be sustained against an outside professional adviser under Sec. 25500 because such an adviser is not a market participant--a purchaser or seller of securities--and therefore could not be said to have "participated" in the alleged fraud.

According to the legislative analyst, AB 310 also would impose various qualifications and requirements on individuals performing investment or management services in connection with a defined contribution plan or other retirement plan, including a requirement to be registered with the state. Such requirements run the risk of creating further instances of California not conforming to federal law and creating confusion in the marketplace--making California a less desirable place to do business.

Finally, AB 310 stands to increase liability exposure for CPAs by lowering the standard of liability for third parties, such as CPAs, who participate in a transaction, but do not "knowingly and intentionally" make false and misleading statements.

Capitol Track

For up-to-the-moment information on these and other bills pending in the California Legislature, access Capitol Track at www.calcpa.org/members/GR. The page is secure, so you'll need your username and password.

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

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