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What's your safeguard? FTC Safeguards Rule applies to most CPAs. (Government Relations).

The Federal Trade Commission's Safeguards Rule, which implements the security provisions of the Gramm-Leach-Bliley Act, went into effect in May. The rule requires most CPA firms and others who perform significant financial services, including tax preparation or financial planning, to have a policy in place to safeguard client information. At a minimum firms are required to:

* Designate an employee or employees to coordinate the information security program;

* Identify reasonably foreseeable internal and external risks to the security, confidentiality and integrity of customer information and assess the sufficiency of any safeguards in place to control the risks;

* Design and implement safeguards to address the risks and monitor the effectiveness of those safeguards;

* Select and retain service providers who are capable of maintaining appropriate safeguards for the information and require them, by contract, to implement and maintain such safeguards; and

* Adjust their information security program in light of developments that may materially affect the program.

The FTC reports that each information security program must include these basic elements, but companies are allowed to select specified safeguards that are appropriate to their size and complexity, the nature or scope of their activities, and the sensitivity of the client information they maintain.

Under the original act, businesses providing financial, investment or economic advisory services such as credit counseling, financial planning, tax preparation and investment advice were included in the definition of financial institutions and are subject to the act's requirements, including annual notifications to clients regarding the privacy policies.

The privacy notice provision was reported in the March/April 2001 California CPA. More information can be found at the FTC website:

CBA Enforcement Increase?

The California Board of Accountancy, at a June 5 meeting of the Enforcement Program Oversight Committee, considered several proposals designed to increase its budget for additional enforcement activities.

Proposals included a $50 per CPA license fee increase; a special California partner surcharge for large firms (50 and above); expanded cost recovery requirements; and the ability to fine firms up to $3 million.

After extensive debate, the proposal to increase license renewal fees was postponed. It had been pointed out that the CBA had adequate statutory authority to increase the annual renewal fee to $250 and that it had a healthy financial reserve of $6 million until it was borrowed by the state's general fund to help address the budget deficit. The control language imposed by the Legislature on that loan was that money would be made available to the CBA to perform essential services and fees could not be raised due to the loan.

The large firm surcharge was rejected after large firm representatives pointed out that they already pay the licensing fees for all partners and all CPAs employed by the firms along with examination fees for candidates.

CPAs who are found guilty of criminal or other egregious wrongdoing may be ordered to reimburse the CBA for the cost of investigating and prosecuting a complaint. The cost recovery is set by the administrative law judge that hears the complaint. The CBA wants the ability to revise cost recovery upward and would like authority to collect for any violation of the Accountancy Act.

The sanctions available to the CBA include license revocation, suspension, continuing education and probation. For lower level violations, CBA staff may impose fines and citations of up to $2,500. These fines may be appealed by the CPA upon whom a citation and fine is imposed.

The Enforcement Program Oversight Committee is recommending that the CBA pursue statutory changes that would allow it to also impose a penalty of up to $3 million dollars on firms convicted of license violations in California. The proposal is to be considered by the full board in July.

California S Corp. Legislation

SB 516 (Speier) would require California S corporations with gross revenues exceeding $20 million to be treated as C corporations for California tax purposes.

At press time, the bills is in the Senate Revenue and Taxation Committee and opposed by CalCPA.

Speier is pursuing the bill because it is her impression that the advantages available to S corps were designed to benefit small business and an S corp that has revenue above $20 million a year does not constitute a small business.

This bill could have substantial impact on California businesses.

The $20 million gross receipts from all sources is arbitrary and does not represent taxable income. Some companies, especially those that deal in high market value items with only a modest profit margin, may actually be losing money.

The bill would unnecessarily increase confusion and uncertainty, and could be interpreted by businesses as documentation that the California Legislature has an anti-business bias. If passed, this bill could actually result in a long-term loss of revenue to the state if jobs are moved out of California.

For more information on SB 516, visit

Bruce C. Allen is Ca/CPA's director of government relations.
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Title Annotation:Federal Trade Commission
Author:Allen, Bruce C.
Publication:California CPA
Geographic Code:1U9CA
Date:Jul 1, 2003
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