Because trust matters: Sacramento CPA Ken Macias speaks out on California's reform proposals; Ken Macias understands the public trust.

After Orange County found itself mired in bankruptcy and scandal several years ago, it turned to Macias' firm, Macias, Gini & Company, to take over its annual external audit. Macias understands that his clients--and the public--need fair, accurate reporting of financial information.

In fact, his firm, one of the largest Latino-owned businesses in the state, is the leading auditor of counties and municipalities in California. When Ken Macias speaks about the public sector, he proceeds from a foundation of deep knowledge and experience in the financial and political machinery of government.

In late April, Macias joined almost 30 of his fellow CalCPA members at an Assembly Business and Professions Committee hearing. He and other CalCPA members voiced strong opposition to the accounting reform legislation package being considered by the committee, including AB 1995 (Correa) and AB 2873 (Frommer).

Their presence and actions profoundly influenced the proceedings. Members were able to raise legislators' awareness of the legislation's negative impact on business; expose flaws that would make the bills detrimental to the public interest; and call into question the bills' usefulness as proposed.

California CPA sought out Macias following the hearing to get his take on the impact of the proposed reforms. Here's what he has to say:

How did you come to oppose AB 1995 and the other bills in Assembly Member Lou Correa's reform package?

It wasn't even on my radar until recently, but what got my attention was an e-mail alert sent by Sacramento Chapter Coordinator Brenda Kaku in mid-April. The alert noted the new bill and other legislation coming down in Sacramento and pointed out very specific ways my business could be hurt.

So what did you do next?

Well, although I've never met Assemblyman Correa, I figured he'd know who I am by virtue of my connection as auditor of Orange County where his constituents are. So, I contacted his office for a meeting to discuss his bill, AB 1995. I figured he was well intentioned but just needed to understand more about accounting and auditing to draft good legislation that would actually protect people without harming the business community.

What happened?

He did not personally respond. I ended up meeting with his consultants, David Pacheco and Jay Greenwood, the night before the Business and Professions Committee hearing April 23.

What did they do?

They listened politely, but didn't offer anything, nor did they offer a meeting with Assemblyman Correa.

And how did that make you feel?

Not good. Although I do understand that our elected officials are busy people, I just figured the assemblyman would choose to spend at least a little time with me. We're both from the financial world, we're both Hispanic, and we're both concerned about our state, its economy and its people. That's a lot of common ground.

What would you have told Assemblyman Correa if he'd given you the chance to meet?

I would have told him what I told his consultants: that as it was drafted at the time, AB 1995 is detrimental to businesses, CPAs and their clients. I have primarily two issues with this legislation. First, the bill is misguided in its attempt to distinguish and separate auditing and consulting because it is too broad. Does the bill mean all types of audits, or only audits of public companies? Also, it doesn't explain or define non-audit services. It seems to me their issue would be only with international CPA firms and their publicly held corporate clients. Why pass laws that affect all audits? The implications of each of these questions are huge.

What would be the impact on your firm if AB 1995 passed in its current form?

Devastating. I would almost certainly lose the consulting practice which we've spent years developing and which conforms fully to the strict standards for auditor independence described in the GAO Yellow Book. Government standards for independence are even higher than those in the private sector so there is certainly no impairment or breech of independence if you practice according to the GAO guidelines. If AB 1995 were passed in its current form, I would lose a good deal of the value of my investment in the consulting practice. Even if I sold it, we would lose substantial value for the firm going forward.

What would your firm look like without its consulting practice? What would be the impact on your clients?

Our firm would then become mainly an auditing and tax preparation practice, which does not add the additional value we've been trained to give. It would take that knowledge and value away from our clients, the governments of California. It would cost our clients more money, which is in fact your tax dollars and mine, to get the services they need.

Have you discussed this with your clients?

Yes, I had conversations with a number of them before the hearings. When I described the bill to them, they were almost unanimous in their agreement that the bill made no sense and that the GAO standards were effective enough to keep auditors independent for government purposes. They also wondered out loud what that would mean for their own internal audit shops where many CPAs work in the counties. Auditor/controllers for counties are elected positions, which makes them much more independent and accountable to the people when dealing with their external auditors. Again, GAO covers all this quite well; there's no need for an additional state law.

What will happen to your own staff if you have to disengage from consulting?

I imagine I would have to reduce staff substantially to those who audit and prepare tax returns. In nominal terms, up to 16 of my 100 or so employees could lose their jobs here if AB 1995 became law.

What, in your opinion, would be the effect of AB 1995 on the CPA profession in California?

It would make us much less competitive. Our clients would migrate to other financial professionals who are not bound by these onerous laws such as non-CPA financial planners, non-CPA consultants, non-CPA business and tax advisers. We'd lose a ton of business. CPAS would have to choose whether to keep practicing as CPAs. That would be the choice we're faced with. We'd also lose business to CPAs in other states that have less burdensome laws and regulations.

What about the other bills in the Correa reform package? AB 2873 (Frommer), for example, contains language which expands the definition of work papers, the length at which they must be kept and the presumption that if something isn't documented among the work papers, it wasn't done and the burden of proof shifts to the CPA.

If we had to save literally everything, we'd have to develop a new internal control system that ensures compliance with the law or statute. The extra costs we would try to pass along to the client, if we could. If not, we'd have to absorb it and it would cut into our profits.

As for the additional burden of proof, I'm certainly not happy about the prospect of significant extra costs for both storage and organization of more paper and for insurance coverage to protect ourselves from what looks like substantial additional liability.

There is another bill coming from the Senate, SB 1527 (Burton), that includes lists of permitted and non-permitted services. What are your thoughts on that?

That doesn't appear to be a good idea. You're essentially asking for an endless list because it has to cover any and all transactions or anything that happens in business or government. Given the speed and complexity of business today, you cannot realistically come up with these types of lists.

Do you agree that reform should be national and uniform?

Yes. That's how it's always been and while there may be need for reform, our elected officials also need to bear in mind that business is conducted nationally and internationally. Investments are made across state and national boundaries. Laws that inhibit that process can only hurt our state and the national economy.

The auditor's role is so far reaching that you can't effectively deal with it state-by-state. If California accounting laws are not in harmony with those of other states, businesses here will vote with their feet and leave. Capital is attracted to the places where it is most efficiently utilized and if California isn't one of those places, then you will find less capital here.

In general, what are your thoughts about California's current efforts to enact reform?

Well, the whole thing bothers me a lot because these laws would essentially punish my firm for something that happened in Texas. The GAO, SEC and Congress are dealing with this and so it seems unnecessary for our legislators to move so aggressively in California. We have so many other issues of importance and immediate impact that this seems like a waste of time and resources to me.

What do you think motivates reform in California?

I'm an optimist and I think people are basically good. So, I think the authors of the reform legislation package are here to do the people's business and want to do right by them. They want to protect the public and to jump quickly to achieve that objective. But in this instance, they shouldn't. They need to spend more time considering the impact of their legislation. They need to consider the role that CPAs play in the economy and understand that there are no simple answers to taking on state-driven reform.

What should California legislators do?

First, I think they should insert themselves into the national reform effort and try to influence that as much as possible. They should wait and see what the federal government proposes before they act. I'm told there are signs this is happening pretty rapidly in Washington.

But, if they must enact reform in California, they should slow down and educate themselves more thoroughly. They also need to meet with a much broader base of constituents to understand the impact of their proposals and decisions.

I know they've met with consumer and investor interests, but I don't think they've met much at all with CalCPA, the business interests or other stakeholders in California. They need to build a broader base of understanding and support for their measures before moving them through the legislative process.

RELATED ARTICLE: PENDING "REFORM" LEGISLATION

Following are a number of the bills that were pending in Sacramento, as California CPA went to press. Each bill attempts to "reform" the accounting profession. As with any legislation, these bills are fluid and could be amended daily. For updated information, go to http://calcpa/iris1 .com.

CalCPA opposes each of these bills. CPAs provide essential services to business. As such, CalCPA is committed to restoration of faith in our financial markets and the CPA profession. We support national efforts that will accomplish these objectives, not local efforts that would cloud California's business climate. Additionally, CalCPA supports reform that is focused on public companies, not private.

* AB 1995 (Correa)

AB 1995 (Correa) would prohibit CPA firms from providing any publicly traded audit clients with any tax planning unrelated to tax preparation or other business advisory services. To be considered independent under AB 1995, a firm could provide only the following services:

* Audit work performed in the course of forming an opinion regarding financial statements;

* Preparation of tax returns and tax planning or advice related to preparation of tax returns;

* Communicating with the client regarding GAAP financial reporting issues;

* Review of documents filed with the SEC;

* Attending meetings of the audit committee, board of directors, or annual shareholders meetings;

* Re-issuing audit opinions from prior periods and preparation of consents relating to a client's filings with the SEC;

* Responding to regulatory inquiries related to the audit;

* Communicating with predecessor and successor accounting firms;

* Preparation of management recommendation letters integral to the audit process;

* Providing testimony (in court, the legislature or regulatory agency) related to the audit work done; and

* The CBA could approve additional services by regulation, but only within the same limited context.

* AB 2875 (Frommer)

* Would require audit work papers to contain sufficient documentation to enable a reviewer "with relevant knowledge and experience, but having no previous connection with the engagement," to completely understand the audit.

* Would establish a rebuttable presumption where the documentation standard is not met, the work was not performed, information was not obtained and pertinent conclusions were not reached.

* Would require audit work papers to be retained for seven or more years.

* Would require all firms to have written retention and destruction policies.

* Would authorize CRA to adopt documentation standards and retention requirements for other engagements.

* AB 2970 (Wayne)

* Prohibits auditors from working for publicly traded companies for two years after they performed audit.

* AB 1527 (Burton)

* Applies to publicly trade company audits--establishes a short list of permitted services, a list of prohibited services and leaves a large, gray area of services not on either list.

* SB 2023 (Figueroa)

* Will be amended to increase the CBA's enforcement ability either by reducing the proof level required for discipline from clear and convincing evidence to a preponderance of evidence (51 percent) reducing the cause of action from gross negligence to repeated (two or more) acts of simple negligence or both.

* May also include requirement that civil suits, insurance claims, settlements or restatements be reported to the CBA for possible disciplinary action.

* May require peer reviews for all firms providing attest services (audits and reviews).

* Currently moves up the date for mandatory peer review from 2006 to 2004.

* AB 2834 (Midgen)

* Requires CPAs to be on approved state controller list before performing audit of school district.