NASBA plays offense; tackles peer review, ethics, empowering state boards.

Sarbanes-Oxley changed the land-scape for public companies and their advisers when it created the Public Company Accounting Oversight Board and expanded the Securities and Exchange Commission's role.

The PCAOB and SEC are not yet fully staffed and no one knows if SOX is working or if the new auditing standards that the PCAOB is developing will be better than the old, but regulators are rushing to impose similar standards on what they term "public-interest entities."

The National Association of State Boards of Accountancy, composed of current and former members of boards of accountancy, announced preliminary support of a requirement that CPAs disclose fees for services received by public interest entities.

It also supports enhancing the peer review process to include evaluation of a firm's compensation policies. This parallels the PCAOB's process of examining compensation policies for firms that perform public company audits.

Other changes are being contemplated to make the peer review process more transparent and provide greater board of accountancy oversight. NASBA would like the process renamed to something like "quality assessment" and is encouraging state boards of accountancy to rewrite their statutes to eliminate reference to peer review.

Also recommended is a method to empower boards of accountancy to take action against a firm that had one or more adverse peer review reports.

NASBA did not endorse audit partner rotation for public interest entities since it was felt that would discourage CPA firms from providing audits as a service and could decrease the afford-ability and availability of audit services.

NASBA is recommending mandatory continuing education on ethical reasoning and state laws to ensure all CPAs in the country are aware of their ethical obligations and the specific statutes that govern their practices.

California already has such a requirement and NASBA's push will mean other states will begin to catch up.

California Board of Accountancy

The California Board of Accountancy appointed a SOX Cascade Effects Task Force, which met Nov. 13 to examine issues related to auditors reporting to audit committees, non-audit services provided by auditors to private companies and audit partner rotation.

Members include chair Joseph Tseng, CPA, and public members Ron Blanc, Clifton Johnson and Sally Flowers.

The CBA also is planning to pursue legislation that would give it the ability to fine firms, including sole practitioners, up to $5 million if they are found guilty of unprofessional conduct.

This kind of authority would place the CBA in a unique position among boards of accountancy. The proposal would require the administrative law judge to consider the degree of consumer harm caused by the unprofessional conduct and licensee's ability to pay the fine.

The CBA currently has a fine and citation authority, but fines are issued administratively without going through the full disciplinary process and are used in lieu of other forms of discipline for relatively minor transgressions.

The CBA's first opportunity to discuss its proposal with the Legislature was Dec. 3 during its Sunset Review hearing held by the Joint Legislative Sunset Review Committee. The CBA was instructed to report to the JLSRC on its ability to take enforcement action when warranted against large accounting firms.

Legislature's Special Session

Gov. Arnold Schwarzenegger called for a two-week special session of the Legislature to deal with the state budget, workers' compensation and election reform (specifically reapportionment).

In advance of that session, a Schwarzenegger-appointed task force developed proposed changes to California's tax law to make the state more attractive to business. According to the task force, California ranked 49th as a place to do business.

The task force asked high-profile individuals and organizations to bring their proposals forward during two weeks of meetings on the issues. Assemblyman John Campbell--and CalCPA member--participated in that task force.

E-Filing

AB 1756 is the original bill that mandates individual tax returns be e-filed if they are prepared by tax practitioners who filed more than 100 individual returns in 2003. The requirement only applies if tax practitioners use tax preparation software and if the taxpayer does not refuse to e-file.

An analysis of AB 1756 is posted on the Franchise Tax Board's website at www.ftb.ca.gov. Under implementation considerations, the FTB staff raised issues with the way the bill is written. Those issues are reported below for clarification of the requirement.

"As written, this bill would give FTB the authority to assess a $50 penalty for each tax return that is prepared by a tax preparer, but is not e-filed as required by this bill. However, the bill provides that the tax preparer would not be subject to the penalty if the taxpayer elects not to e-file the tax return. As a result, FTB would have no basis to impose the penalty provided in this bill since the basis of the penalty is the receipt of a tax return that is filed using any method other than electronic filing.

"The receipt of a tax return filed using a method other than e-file would almost certainly be considered evidence of the taxpayer's election not to e-file their tax return. Hence, FTB could be unable to assess a penalty. As a result, the penalty in this bill would have no effect, and this would create an opt-out provision that changes the intent of this bill from a mandated program to a voluntary program."

The FTB has posted a form online that taxpayers can use to opt out. However, the form is not mandatory and you may use your own form, but written documentation of the taxpayer's decision to opt out must be retained.

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