BILL ANALYSIS
AB 2970
Page A
ASSEMBLY THIRD READING
AB 2970 (Wayne)
As Amended April 29, 2002
Majority vote
BUSINESS AND PROFESSIONS 6-3
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|Ayes:|Correa, Cardenas, | | |
| |Goldberg, Corbett, | | |
| |Koretz, Thomson | | |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Bogh, Kelley, Leach | | |
| | | | |
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SUMMARY : Prohibits an accountant from accepting employment from
an audit client or its affiliate within 24 months of issuance of
a financial statement when the employment permits the accountant
to exercise authority over accounting or financial reporting.
Prohibits licensees (accountants) from accepting employment from
a publicly traded corporation or its affiliate within 24 months
of issuance of a financial statement if the following conditions
are met:
1)The licensee had significant participation in the
corporation's audit engagement process from the levels of the
person in charge of field work up through positions of being a
partner on the engagement; and,
2)The employment would permit the licensee to exercise
significant authority over accounting or financial reporting,
including authority over the controls related to those
functions.
EXISTING LAW establishes the California Board of Accountancy
(Board), in the Department of Consumer Affairs (DCA), for the
purposes of licensing and regulating public accountants. In
addition to other requirements, a licensee is required to issue
a report conforming to professional standards upon completion of
a compilation, review, or audit of financial statements.
FISCAL EFFECT : Unknown
AB 2970
Page B
COMMENTS :
1)According to the author, it is in the best interest of
consumers for an auditor's independence to be protected by
prohibiting employment by an audit client for a period of
24-months when the auditor has significantly participated in
an audit engagement. Under this bill, auditors would be
prohibited from becoming employees of the client for a
"cooling off" period of 24-months following the issuance of
the financial statement report.
Employment restrictions would apply only to those auditors who
are required to exercise significant judgment in the audit
process, and would include positions, however titled, where
the auditor was the person in charge of the fieldwork up
through partner on the audit engagement.
2)California Board of Accountancy: This bill mirrors the
findings and recommendation of the Board. In developing its
recommendations, the Board reviewed existing professional
standards and Securities and Exchange Commission (SEC) rules.
After careful consideration, the Board concluded that
additional restrictions would be appropriate. The Board
identified positions in the accounting firm and positions with
the audit client where the restrictions would increase public
protection without unduly restricting employment opportunities
for auditors.
3)Conflict of interest: In the words of the United States
Supreme Court, "by certifying the public reports that
collectively depict a corporation's financial status, the
independent auditor assumes a public responsibility
transcending any employment relationship with the client. The
independent public accountant performing this special function
owes ultimate allegiance to the corporation's creditors and
stockholders, as well as to the investing public. This
'public watchdog' function demands that the accountant
maintain total independence from the client at all times and
requires complete fidelity to the public trust ."<1>
It is common practice for large publicly traded corporations to
hire members of the team that has audited it into senior-level
financial or accounting positions, these audit team members
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<1> United States v. Arthur Young & Co., 465 U.S. 805, 817-18
(1984)
AB 2970
Page C
have experience with and knowledge of the corporation and its
inner workings. However, such employment can frequently come
at the expense of the independence of the auditor and at the
expense of the audit, the public trust function delegated by
Congress to certified public accountants in 1933.
4)Federal preemption: A legal analysis issued by the Office of
the Attorney General on May 1, 2002, concluded that federal
law would not preempt California from enacting legislation to
restrict accountants from obtaining employment with a company
while performing, or for a certain amount of time after
performing, an independent audit of the company.
5)Federal legislation: Because of the Big Five's opposition to
accounting reform, it is unlikely Congress will provide the
public with a remedy in an expeditious manner. According a
recent article in the Wall Street Journal, "Don't look for a
major overhaul of the accounting industry soon?It remains
uncertain if anything will pass this year." And on April 12,
2002, the Washington Post reported, "The accounting
industry?has a long history of successfully fighting off
efforts to regulate it in the aftermath of financial
disasters, such as the savings and loan crisis?. It is far
from clear that significant change will result."
As recently as the April 29, 2002, issue of Business Week
Magazine, an article, "Accounting: Congress Only Looks Like
It's Getting Tough" summarized the viability of any meaningful
accounting reform occurring, "But don't expect a White House
ceremony any time soon. House Republicans and Senate
Democratic leaders are poles apart on how best to curb
auditing abuses."
The SEC, the enforcement body for the accounting standards
already in place, requested additional funds for 2003 in an
attempt to increase its staff to accommodate the growing
demands placed on the agency since the Enron/Andersen debacle
and the plethora of corporate financial restatements impacting
the stock market. The White House rejected the SEC's request.
Analysis Prepared by : David Pacheco / B. & P. / (916)
319-3301
FN: 0004665