To: Law
Revision Commission
From: Beth
Cook
Subject: Accountancy
Law Agenda for November 7, 2002 Meeting – LOB Room 1B
As a result of interviews with a wide range of resources
having an interest or expertise in the accounting field, we have developed an
agenda for further study of possible revisions or additions to the current
Connecticut accountancy statutes and regulations. These can be clustered into
two predominant areas of concern – enforcement powers and competency validation.
Independence requirements were also frequently cited as a source of concern and
we have included issues relating to that area as well.
Most resources we spoke to
focused on similar, broad concerns and those thoughts are reflected in the
issues noted by the LRC staff and provided herein. In addition to the LRC staff
issues, we should consider the recommendations we received when we met with
David Guay, the Executive Director and Michael Kozik, the Staff Attorney, for
the Board of Accountancy. While these recommendations also focus on enforcement
and competency, they are broader in scope, are quite specific, and are aimed at
strengthening the Board’s investigatory and oversight capabilities.
Please note that this agenda is not intended to exclude any
other issues. Moreover, the inclusion of an issue or recommendation reflects
our judgment that the matter deserves further serious consideration. It does
not necessarily reflect a consensus view of those we interviewed. Some of those
persons interviewed may well oppose action on some of these matters.
Also, for informational purposes, we have attached a summary
of the proposals made in this area by both gubernatorial candidates.
I. BOARD
COMPOSITION AND TERMS OF SERVICE
C.G.S. Sec. 20-280.
currently provides for a seven member Board of Accountancy which consists
of seven members, appointed by the governor, four of whom shall hold current,
valid licenses to practice public accountancy and three of whom shall be public
members. The terms of service of each member shall be coterminous with that of
the Governor. No person who has served two successive complete terms shall be
eligible for reappointment to the Board. Upon expiration of a member’s term of
office, such member shall continue to serve until his successor is appointed.
Whenever an appointment of a licensee is to be made, the Connecticut Society of
Certified Public Accountants shall submit to the Governor the names of five
candidates from whom the Governor shall select a replacement.
LRC Staff Issues:
·
Consider increasing number of public members by two to
create broader public oversight.
·
Review the lengths of service of current Board members.
Some members have exceeded the statutory term limits, but are continuing to
serve because successors have not been appointed. Consider revising the statute
to identify fixed lengths of term.
Board of Accountancy Staff Recommendation:
·
Repeal power of Society to recommend Board members.
II. ENFORCEMENT POWER
C.G.S Sec. 20-280c confers
power on the board to conduct any necessary review, inspection
or investigation regarding possible violations of statutes or regulations,
disciplinary matters, and the establishment of regulatory policy. The board may
conduct hearings on any matter within its statutory jurisdiction. It has the
power to issue subpoenas to compel the attendance of witnesses and the
production of documents; to administer oaths; to take testimony and to receive
evidence concerning all matters within its jurisdiction. In case of
disobedience of a subpoena, the board may invoke the aid of any court of this
state in requiring the attendance and testimony of witnesses and the production
of documentary evidence. After notice
and hearing, the board may revoke any certificate, license or permit issued
under section 20-281c, 20-281d or 20-281e; suspend any such certificate,
registration, license or permit or refuse to renew any such certificate,
license or permit; reprimand, censure, or limit the scope of practice of any
licensee; impose a civil penalty not exceeding $1000 upon licensees or others
violating provisions of section 20-281g or place any licensee on probation, all
with or without terms, conditions and limitations, for any one or more of the
following reasons in section 20-281a:
§
Fraud or
deceit in obtaining a certificate, registration, license or permit;
§
Cancellation,
revocation, suspension or refusal to renew authority to engage in the practice
of public accountancy in any other state for any cause;
§
Failure of
a licensee to maintain compliance with the requirements for issuance or renewal
of such license or permit or to report changes to the board;
§
Revocation
or suspension of the right to practice before any state or federal agency;
§
Dishonesty,
fraud or negligence in the practice of public accountancy or in the filing or
failure to file his own income tax returns;
§
Violation
of any provision of sections 20-279b to 20-281m, inclusive, or regulation
adopted by the board under said sections;
§
Violation
of any rule of professional conduct adopted by the board;
§
Conviction
of a felony, or of any crime an element of which is dishonesty or fraud, under
the laws of the United States, of this state, or of any other state if the acts
involved would have constituted a crime under the laws of this state, subject
to the provisions of section 46a-80;
§
Performance
of any fraudulent act while holding a registration, certificate, license or
permit issued under sections 20-279b to 20-281m, inclusive, or prior law;
§
Any conduct
reflecting adversely upon the licensee's fitness to engage in the practice of
public accountancy; and
§
Violation
by anyone of any provision of section 20-281g. (Issuance of report by person or
firm not holding valid license and permit prohibited. Exceptions. Use of titles
restricted.)
In lieu of or
in addition to any remedy specifically provided, the board may require a
licensee to submit to a quality review conducted in such fashion as the board
may specify; or complete such continuing professional education programs as the
board may specify, or both.
LRC Staff
Issues:
·
Consider
increased penalties. Current penalty levels are not severe enough to influence
behavior changes. Consider a multi-tier penalty structure such as follows based
on firm revenue value (these are separate and in addition to sanctions imposed
such as license suspension, revocation, scope limitation, etc.) Firms with
after annual tax revenue of $1 million or more are subject to level I
penalties; firms with annual after tax revenue of less than $1 million per year
are subject to level II penalties.
Per Violation Penalty
|
Penalty Categories
|
Level I
|
Level II
|
|
Dishonesty,
fraud or negligence in the practice of public accountancy or in the filing or
failure to file his own income tax returns
|
$100,000
|
$10,000.
|
|
Fraud
or deceit in obtaining certificate, registration, license, permit
|
$25,000.
|
$5000.
|
|
Failure
to maintain competency requirements
|
$25,000.
|
$2000.
|
Board of Accountancy Staff Recommendations:
·
Penalty Changes:
o
Increase penalties for violation of accounting act to
$100,000
o
Amend language to make clear that civil penalties apply
to both C.G.S. §§20-281a and 20-281g
·
Add as additional violations under §20-281a (see list
on previous page)
o
any discipline
imposed by the SEC, IRS, or Public Company Accounting Oversight Board
o
failure to cooperate with board investigation and
failure to comply with board order
·
Require licensees to report to the Board in writing
within 30 days of the date the licensee has knowledge of these events, the
occurrence of any of the following events:
o
Any discipline imposed by SEC, IRS, or Public Company
Accounting Oversight Board
o
Any restatement of a financial statement and related
disclosures by a client audited by the licensee
o
Any civil action settlement or arbitration award
against the licensee relating to the practice of public accountancy where the
amount or value of the settlement or arbitration award is thirty thousand
dollars ($30,000) or greater and where the licensee is not insured for the full
amount of the award
o
Any notice of the opening or initiation of a formal
investigation of the licensee by the SEC or its designee
o
Any notice from the SEC to a licensee requesting a
Wells Submission
o
Any notice of the opening or initiation of an
investigation by the Public Company Accounting Oversight Board or its designee
·
Require licensees to report to the Board in writing
within 30 days of the date the licensee has knowledge of these events, the
occurrence of any of the following events occurring on or after January 1,
1997:
o
The conviction of the licensee of any of the following:
·
A felony or any crime, an element of which is
dishonesty
·
As used in this section, a conviction includes the
initial plea, verdict, or finding of guilt, pleas of no contest, or
pronouncement of sentence by a trial court even though that conviction may not
be final or sentence actually imposed until appeals exhausted
·
The cancellation, revocation, or suspension of a
certificate, other authority to practice or refusal to renew a certificate or
other authority to practice, by any other state or foreign country
·
The cancellation, revocation, or suspension of the
right to practice before any governmental body or agency
·
Require licensees to report to the Board in writing
within 30 days of the entry of any judgment entered on or after January 1,
2003, against the licensee in any civil action alleging any of the following:
o
Dishonesty, fraud, gross negligence or negligence
o
Breach of fiduciary responsibility
o
Preparation, publication, or dissemination of false,
fraudulent, or materially misleading financial statements, reports, or
information
o
Embezzlement, theft, misappropriation of funds or
property, or obtaining money, property, or other valuable consideration by
fraudulent means or false pretenses, or other errors or omissions
o
Any actionable conduct by the licensee in the practice
of public accountancy, the performance of bookkeeping operations, or other
professional practice
·
Audit Documentation:
o
Require audit documentation, as defined in statutes, to
contain sufficient documentation to enable a reviewer with relevant knowledge
and experience, but having no previous connection with an auditing engagement,
to understand the nature, timing, extent, and results of auditing or other
procedures performed, evidence obtained, conclusions reached, and the identity
of the persons who performed and reviewed the work
o
Create a presumption where the requirements are not
met, which may be rebutted by a preponderance of the evidence, that the
procedures were not applied, tests were not performed, information was not
obtained, and relevant conclusions were not reached with regard to the portions
of the audit not documented as required.
o
Require audit documentation to be maintained for the
longer of a 7-year period or a period sufficient to satisfy professional standards
and comply with applicable laws and regulations. The bill would also require
licensees to maintain a written audit documentation retention and destruction
policy that sets forth the licensees’ practices and procedures.
III. INDEPENDENCE
Sarbanes-Oxley has established that it is unlawful for a
registered public accounting firm to provide any non-audit service to an issuer
contemporaneously with the audit, including: (1) bookkeeping or other services
related to the accounting records or financial statements of the audit client;
(2) financial information systems design and implementation; (3) appraisal or
valuation services, fairness opinions, or contribution-in-kind reports; (4)
actuarial services; (5) internal audit outsourcing services; (6) management
functions or human resources; (7) broker or dealer, investment adviser, or
investment banking services; (8) legal services and expert services unrelated
to the audit; (9) any other service that the Board determines, by regulation,
is impermissible.
LRC Staff Issues:
·
While it seems appropriate to institute this policy for
publicly held companies, it does not seem financially reasonable in the general
case to prohibit smaller companies from using their accounting firms for
multiple services. Consider applying the two tier system offered for use in
levying penalties; firms
with after annual tax revenue of $1 million or more may not receive non-audit
services contemporaneously with the audit from the same firm; firms with annual
after tax revenue of less that $1 million per year may use the same accounting
firm to provide non-audit services. In the latter case, disclosure must be
provided. Consider whether there are other specific contexts such as fiduciary,
investor or public interest, where independence rules should apply.
Board of
Accountancy Staff Recommendations:
·
When
non-audit work above a de minimus amount is done for audit, review or
compilation client (except compilation where lack of independence is
disclosed), disclose in either a footnote to the report, or in the report
itself the nature and amount of the non-audit services provided.
·
Prohibit a
licensee from accepting employment with a publicly traded corporation or its
affiliate within 12 months of the date of issuance of a financial statement where
the licensee had a specified level of participation in the audit engagement and
the employment would permit the licensee to exercise significant authority over
accounting or financial reporting.
·
Existing
law prohibits a person engaged in the practice of public accountancy from
performing services for a client for a commission or from receiving a
commission from a client when that person also performs specified services for
that client. Include in that prohibition services for a commission for, or receiving
a commission from, an officer or director of a client or client sponsored
retirement plan.
IV. QUALITY REVIEW
Currently the Board is unable to look behind any quality
review report without subpoena; bad reviews cannot be used to level
disciplinary or corrective action but only can be used to trigger an
investigation by the Board.
Board of Accountancy Staff Recommendations:
·
Require that qualified oversight panel be established
and appointed by the Board; make committee report to forensic accountant on
Board staff
·
Strengthen Board’s ability to require remedial action
and discipline based on review
·
Let Board set report due date by regulation
·
Make report public
·
Prohibit reviewer from excusing from sample engagements
that are subject of litigation, regulatory investigation, or other dispute or
else require all such engagements be reviewed as part of the quality review
V. MISCELLANEOUS
Board of accountancy Staff recommendations:
·
Fees and Licensing
o
Need statutory authority to collect back license fees
for those found to have been practicing without license, permit or certificate
o
Require everyone in public practice to get a license,
not just the partners or owners
o
Require all firms, including solo practitioners, to pay
the $75 license fee
o
§20-281d(d)(2) – delete reference to out of state
experience; permit experience gained either in or out of state
o
Delete requirement to print directory of licensees
(this is an expense that is unnecessary but is mandated by statute §20-280(d);
directory will soon be available online)
·
Note: these enhancements are estimated to generate
approximately $500,000 per year in additional revenue
·
Add staff resources
o
Forensic accountant
o
Money for outside expert
o
Investigator
o
Paralegal
CORPORATE ACCOUNTABILITY MEASURES
There are additional steps that can be considered to go
beyond revising accountancy laws that
enhance corporate accountability.
This would entail replicating and extending some of the Sarbanes-Oxley
requirements and prohibitions, established by the Corporate and Criminal Fraud Accountability Act of 2002, for non-publicly
held corporations. These are:
·
Make it a felony to "knowingly" destroy or create
documents to "impede, obstruct or influence" any existing or
contemplated official investigation
·
Make it a felony
for tampering with a record or otherwise impeding any official
proceeding.
·
Makes it a felony for any person to corruptly alter,
destroy, mutilate, or conceal any document with the intent to impair the
object's integrity or availability for use in an official proceeding or to
otherwise obstruct, influence or impede any official proceeding.
·
Require accountants and auditors to report to state
authorities any client violations of state accounting laws or regulations
·
Extend whistleblower protection to accountants and auditors
who report client violations.
If you have any questions, or require additional
information, please advise. We look forward to discussing these items with you
on November 7, 2002 at 3:00 p.m. in LOB Room 1B.
- Require directors and
officers of CT banks to take an oath of office.
- Amend the CT Unfair Trade
Practices Act (CUTPA) to clarify the Commissioner’s authority to enforce
civil penalties against those who engage in acts of corporate fraud.
Specifically:
- Prohibit any
individual or corporate entity from altering, falsifying, or concealing
any record, document or tangible object for the purposes of impeding,
obstructing, or influencing an investigation by the State pertaining to
publicly held securities or for the purpose of concealing the financial
status of the corporation.
- Provide
Whistleblower-like protections to those who assist in investigations
concerning alleged corporate misconduct.
Curry Proposals
