THE STATE
EDUCATION DEPARTMENT / THE UNIVERSITY
OF THE STATE OF NEW YORK / ALBANY, NY 12234 | |||
TO: |
The Honorable the Members of the Board of Regents |
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FROM: |
Johanna Duncan-Poitier |
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SUBJECT: |
Proposed Amendment to the Rules of the Board of Regents Relating to the Definition of Unprofessional Conduct in the Practice of Public Accountancy |
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DATE: |
June 14, 2006 |
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STRATEGIC
GOAL: |
Goal 3 |
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AUTHORIZATION(S): |
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Should the
Regents amend section 29.10 of the Regents Rules to align the regulation of the
public accountancy profession in
Review of Policy.
Proposed
Handling
The proposed amendment is being submitted for approval at the June 2006 meeting of the Board of Regents.
Procedural
History
In June 2005, preliminary draft amendments, developed by the State Board for Public Accountancy and Department staff, were presented to the Regents for discussion. At that meeting, staff was asked to modify and further refine the preliminary draft amendments and return at a future date for additional discussion with the Regents.
In January 2006, the Regents HE/PP Committee held an Executive Session discussion with Department Counsel, to discuss issues pertaining to the legal authority of the Board of Regents to enact these amendments.
At the March 2006 meeting, the HE/PP Committee discussed the draft amendments and reached agreement on three key areas of the draft regulatory amendments which are now before the Committee for approval.
The Board of Regents asked that other provisions be deferred for more extensive discussion. These provisions would include the payment of a significant monetary penalty to the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board in settlement of Federal disciplinary charges in the definition of unprofessional conduct and conflict of interest standards for auditors of all publicly traded companies.
A Notice of Proposed Rule Making concerning these proposed amendments was published in the State Register on April 19, 2006. An Assessment of Public Comment will be presented at the June 2006 Regents meeting.
Background
Information
The Regents
and the Department have been discussing the need for legislative and regulatory
reforms in the public accountancy profession since 2002. The Department and members of the State
Board for Public Accountancy held a public meeting in
After Congress passed the Federal Sarbanes-Oxley Act, many State Legislatures and regulatory agencies began to revise their statutes and regulations consistent with the Federal Act. Based on the input received at the May 2002 public meeting, the New York State Board for Public Accountancy and Department staff began to develop amendments to the Regents Rules to increase public protection consistent with the Act
and reflective of contemporary practice. Preliminary draft amendments were discussed by the Regents in June 2005 and staff was asked to make some modifications and bring the draft amendments back to the Regents for further discussion. After discussion with Department Counsel in January 2006 to clarify the legal authority of the Regents to enact these amendments, in March of 2006, the Regents HE/PP Committee discussed the amendments and came to agreement on the three key provisions included in this item:
1. Updating the list of entities that promulgate generally accepted auditing standards and generally accepted accounting principles;
2. Establishing revised reporting requirements; and
3. Establishing definitions of unprofessional conduct based upon disciplinary actions of the United States Securities and Exchange Commission or the Public Company Accounting Oversight Board that result in either an admission or finding of guilt, or the loss of practice privileges before the Securities and Exchange Commission.
These proposals are an important first step in updating the oversight of the evolving public accountancy profession to increase public protection and enhance the integrity of the public accountancy profession.
Licensees and
firms, forbidden by Federal regulators from performing audits of publicly traded
companies because of Federal professional disciplinary actions taken against
them, currently remain free to perform similar work in
Each of the provisions in the proposed amendments responds to the nationwide recognition that the oversight of the public accountancy profession needs to be strengthened to align with the new Federal regulatory model and an ever increasing amount of interstate practice that requires timely reporting of disciplinary actions among the Federal and state regulators.
The proposed
amendments would strengthen the Regents oversight of the public accounting
profession by:
As in these other states, these provisions will strengthen the effectiveness of the regulatory structure in New York by providing a means for the Regents to leverage significant Federal disciplinary cases and the resources of the Federal government, which investigates violations of auditing standards and requirements in the auditing of publicly traded companies. The public accountant or public accountancy firm will have been afforded full due process opportunities at both the Federal and State level.
Based on feedback received from an extensive series of discussions with representatives of the Big 4 accounting firms and the New York State Society of CPAs, and feedback submitted during the comment period, these entities continue to express some concerns related to the reporting requirements and the definition of unprofessional conduct. The Department believes that the proposals provide significant safeguards that respond to their concerns. These issues will be addressed in the Summary of Public Comment, which is being finalized. The New York State Board for Public Accountancy, appointed by the Board of Regents, and which includes 4 public members and 17 members of the profession who practice in private industry, government and public accounting firms that include the largest international firms, supports the draft amendments. Attorney General Eliot Spitzer has also expressed his strong support for the amendments, in particular the provisions related to reportable events and the definition of unprofessional conduct.
Recommendation
I recommend that the Board of Regents take the following action:
VOTED: That paragraph (7) of subdivision (a) of section 29.10 of the Rules of the Board of Regents be amended; that paragraph (13) of subdivision (a) of section 29.10 of the Rules of the Board of Regents by repealed; and that subdivisions (d), (e), (f), and (g) of section 29.10 of the Rules of the Board of Regents be added, as submitted, effective July 13, 2006.
Timetable for
Implementation
The effective date of the proposed amendment
is July 13, 2006.
Attachment
AMENDMENT
TO THE RULES OF THE BOARD OF REGENTS
Pursuant to sections 207, 6502, 6504, 6506, 6509, 6510, and 7401 of the
Education Law.
1. Paragraph (7) of
subdivision (a) of section 29.10 of the Rules of the Board of Regents is
amended, effective July 13, 2006, as follows:
(7) permitting the public accountant's name to be associated with
statements purporting to show financial position or results of operations in
such a manner as to imply that he or she is acting as an independent certified
public accountant or public accountant, unless:
(i) the licensee has complied with generally accepted auditing standards.
The State Board for Public Accountancy may consider statements on auditing
standards promulgated by [an organization whose standards are generally accepted
by other licensing jurisdictions] the United States Securities and Exchange
Commission or the Public Company Accounting Oversight Board for licensees
subject to such requirements, or a recognized national accountancy organization
whose standards are generally accepted by other regulatory authorities in
the United States, including but not limited to[:] the American Institute of
Certified Public Accountants, to be interpretations of generally accepted
auditing standards. Departures from such standards, or other standards
considered by the State Board to be applicable in the circumstances, must be
justified by a licensee who does not follow them; and
(ii) the licensee expresses an opinion on financial statements or
financial data presented in conformity with generally accepted accounting
principles. The State Board for Public Accountancy may consider those principles
promulgated by [an organization whose principles are generally accepted by other
licensing jurisdictions] a recognized national accountancy organization whose
standards are generally accepted by other regulatory authorities in the
United States, including but not limited to: [the American Institute of
Certified Public Accountants and] the Financial Accounting Standards
Board, the Government Accounting Standards Board, and the
International Accounting Standards Board, to be generally accepted
accounting principles. If financial
statements or data contain departures from generally accepted accounting
principles but the licensee can demonstrate that the financial statements or
data would have been misleading had generally accepted accounting principles
been followed, the licensee's opinion should describe the departure, its
approximate effect if practicable, and the reasons why compliance with generally
accepted accounting principles would have otherwise been misleading;
2. Paragraph (13) of subdivision (a) of section 29.10 of the Rules of the
Board of Regents is repealed, effective July 13, 2006.
3. Subdivision (d) of
section 29.10 of the Rules of the Board of Regents is added, effective July 13,
2006, as follows:
(d) The definitions of unprofessional conduct prescribed in sections
29.1 and 29.10 of this Part that apply to licensees shall also apply to public
accountancy firms, meaning any form of business organization that is authorized
to engage in the practice of public accountancy and is subject by law to Regents
disciplinary proceedings and penalties in the same manner and to the same extent
as licensees, unless public accountancy firms are specifically exempted from the
definitions of unprofessional conduct in such sections of this Part.
4. Subdivision (e) of
section 29.10 of the Rules of the Board of Regents is added, effective July 13,
2006, as follows:
(e) Reportable events.
(1) For purposes of this subdivision, public accountancy firm shall
have the meaning defined in subdivision (d) of this
section.
(2) Unprofessional conduct in the practice of public accountancy shall
include failure of a licensee or public accountancy firm to submit a written
report, as prescribed in paragraph (3) of this subdivision, to the department
within 45 days of the occurrence of any of the following events, even though all
available appeals have not yet been exhausted, unless exempted from disclosure
pursuant to paragraph (5) of this subdivision or excused for good cause as
determined by the department, such as a circumstance beyond the licensee's or
public accountancy firm's control that prevented timely
compliance:
(i) conviction of a licensee, a registered partnership, or public
accountancy firm in
(ii) receipt of a court decision awarding a monetary judgment in
excess of twenty-five thousand dollars in a civil action brought in a court of
competent jurisdiction or an award in excess of twenty-five thousand dollars in
an arbitration proceeding in which the licensee, the registered partnership, or
public accountancy firm is found to be liable for:
(a) negligence, gross negligence, recklessness, or intentional
wrongdoing relating to the practice of public accountancy in
(b) fraud or misappropriation of funds relating to the practice of
public accountancy in
(c) breach of fiduciary responsibility relating to the practice of
public accountancy in
(d) preparation, publication, and/or dissemination of false,
fraudulent, and/or materially incomplete or misleading financial statements,
reports, or information relating to the practice of public accountancy in New
York State;
(iii) receipt of written notice of imposition of a disciplinary
penalty upon the licensee, the registered partnership, or public accountancy
firm, including but not limited to, censure, reprimand, sanction, probation,
monetary penalty, suspension, revocation, or other limitation on practice,
relating to the practice of public accountancy, issued
by:
(a) the
(b) another agency of the
(c) an agency of the government of another state or territory of the
(d) an agency of the government of another country that regulates the
practice of public accountancy;
(3) The report to the department shall consist of the
following:
(i) for a conviction as prescribed in subparagraph (i) of paragraph
(2) of this subdivision, the report shall consist of a copy of the certificate
of conviction, or comparable document of the court;
(ii) for a court decision or arbitration award as prescribed in
subparagraph (ii) of paragraph (2) of this subdivision, the report shall consist
of a copy of the court decision or arbitration award and any findings of facts
or special verdict form;
(iii) for a written notice of imposition of a disciplinary penalty
upon the licensee, as prescribed in subparagraph (iii) of paragraph (2) of this
subdivision, the report shall consist of a copy of the notice;
or
(iv) in lieu of the documentation described in subparagraphs (i),
(ii), or (iii) of this paragraph, a narrative statement on a form prescribed by
the department setting forth information specified by the department, including
but not limited to the date and jurisdiction of the court decision and/or
judgment, conviction, arbitration award, or notice of imposition of disciplinary
penalty, as applicable.
(4) A public accountancy firm shall be responsible for reporting
reportable events relating to the public accountancy firm, and shall designate
an individual to make such reports.
An individual licensee shall be responsible for reporting those
reportable events specifically relating to the licensee. Licensees who are partners in a
registered partnership may designate an individual to report reportable events
relating to the registered partnership, but each such licensee shall be
responsible for ensuring the reporting of the reportable
events.
(5) Failure to submit a report which is subject to a confidentiality
order, clause or provision in a court decision or arbitration award under
subparagraphs (i) or (ii) of paragraph (2) of this subdivision shall not be
deemed to constitute unprofessional conduct under the following
conditions:
(i) the court or arbitrator has included language in such decision
that specifically provides that the decision shall not be reported to the
department pursuant to this subdivision; or
(ii) the licensee or firm demonstrates to the satisfaction of the
department that the licensee or firm explicitly informed the court or arbitrator
in writing prior to execution of any confidentiality order, clause or provision
of the duty to report such decision to the department and the effect of any
confidentiality order, clause or provision on such duty of disclosure, and the
confidentiality order, clause or provision does not expressly provide for
disclosure to the department.
(6) Reports submitted to the department in accordance with this
subdivision shall be files of the department relating to the investigation of
possible instances of professional misconduct and shall be confidential in
accordance with the provisions of subdivision (8) of section 6510 of the
Education Law.
(7) Nothing in this subdivision shall have any effect upon the duty of
the licensee or firm to respond fully to all questions on any re-registration
application which shall become due, or to respond to written communications from
the department pursuant to section 29.1(b)(13) of this
Part.
5. Subdivision (f) of
section 29.10 of the Rules of the Board of Regents is added, effective July 13,
2006, as follows:
(f) Unprofessional conduct in the practice of public accountancy shall
include:
(1) having admitted guilt to or having been found guilty of improper
professional practice or professional misconduct in a disciplinary proceeding
brought by the United States Securities and Exchange Commission or the Public
Company Accounting Oversight Board, where the conduct upon which the finding or
admission of guilt was based would, if committed in New York State, constitute
professional misconduct under the laws of New York State, provided that in any
adversary proceeding conducted pursuant to subdivision (3) of section 6510 of
the Education Law, the individual licensee or public accountancy firm shall have
the rights set forth in that subdivision; or
(2) having voluntarily consented to a revocation or temporary or
permanent suspension of the authority to appear or practice as an accountant
before the United States Securities and Exchange Commission or the Public
Company Accounting Oversight Board, or having voluntarily surrendered such
authority; or having voluntarily consented to a revocation or temporary or
permanent suspension from further association with any public accounting firm
registered pursuant to Chapter 98 of Title 15 of the United States Code, or
having voluntarily surrendered such authority; or having voluntarily consented
to a revocation or temporary or permanent suspension of registration under
Chapter 98 of Title 15 of the United States Code, or a voluntary surrender of
such registration; all after a disciplinary action was commenced by the United
States Securities and Exchange Commission or the Public Company Accounting
Oversight Board where any conduct charged resulting in the consent to such
revocation or temporary or permanent suspension or surrender would, if committed
in New York State, constitute professional misconduct under the laws of New York
State; and where the date of such consent or surrender is on or after January 1,
2007. In any adversary
proceeding conducted pursuant to subdivision (3) of section 6510 of the
Education Law, the individual licensee or public accountancy firm shall have the
rights set forth in that subdivision.
6. Subdivision (g) of
section 29.10 of the Rules of the Board of Regents is added, effective July 13,
2006, as follows:
(g) Unprofessional conduct in the practice of public accountancy, as
such practice relates to the audit in the practice of public accountancy of an
issuer of publicly traded securities that is subject to the Federal
Sarbanes-Oxley Act of 2002, shall include, for purposes of subdivision (f) of
this section, a failure of a licensee or public accountancy firm, as
appropriate, to meet the standards prescribed in the following provisions of
Federal law: subdivisions (a), (b), (g), (h), (i), (j), (k), and/or (l) of
section 78j-1 of Title 15 of the United States Code (United States Code, 2000
edition, Volume 7, and
Supplement II , Volume 1 to
the 2000 edition; Superintendent of Documents, U.S. Government Printing Office,
Stop SSOP, Washington, DC 20402-0001; available at the NYS Education Department,
Office of the Professions, 2M West Wing, Education Building, 89 Washington
Avenue, Albany, NY 12234). To the extent that the United States Securities and
Exchange Commission or the Public Company Accounting Oversight Board have
exempted or excepted licensees or public accountancy firms from these standards,
such exemptions or exceptions shall also apply to the requirements of this
subdivision.