BILL ANALYSIS
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|Hearing Date:June 29, 2009 |Bill No:AB |
| |138 |
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SENATE COMMITTEE ON BUSINESS, PROFESSIONS
AND ECONOMIC DEVELOPMENT
Senator Gloria Negrete McLeod, Chair
Bill No: AB 138Author:Hayashi
As Amended:June 15, 2009 Fiscal: Yes
SUBJECT: Accounting firms: peer review.
SUMMARY: Requires California-licensed accounting firms to undergo a
peer review of their accounting and auditing services every 3 years.
Existing law:
1.Licenses and regulates some 40,000 certified public accountants
(CPAs) under the Accountancy Act by the California Board of
Accountancy (Board) within the Department of Consumer Affairs.
2.Requires, in order to renew its registration, that an accountancy
firm providing attest services, must complete a peer review every 3
years, if the Board establishes a peer review program.
a. Exempts from the requirement a sole proprietor or small firm
(defined as a firm with not more than 4 CPAs).
b. Defines "peer review" as study, appraisal, or review conducted
in accordance with professional standards of the professional
work of a licensee or registered firm by another licensee
unaffiliated with the licensee or registered firm being reviewed.
A peer review must include, a review of at least one attest
engagement representing the highest level of service performed by
the firm and may include evaluation of other factors required by
the Board in regulation.
c. Defines "attest services" to include an audit, a review of
financial statements, or an examination of prospective financial
information. However, "attest services" does not include the
issuance of compiled financial statements.
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3.Requires the Board to adopt regulations as necessary to implement,
interpret, and make specific the peer review requirements, including
requirements for the approval of peer review providers, and
establishing a peer review oversight committee.
4.Requires the Board to review and evaluate whether to implement a
peer review program, and report its findings and recommendations to
the Legislature and the DCA by September 1, 2011.
5.Provides that if the board determines that a peer review program
should be implemented, the Board must identify the resources
necessary for implementation and recommend a date to begin the peer
review program.
This bill:
1) Makes the peer review requirement apply to all accounting
firms, regardless of size, who perform accounting and auditing
practices, and requires that the peer review be conducted by a peer
review program recognized by the Board.
2) Requires the Board to adopt emergency regulations, by January
1, 2010, as necessary to implement the program,
3) Requires both the accounting firm that receives a substandard
peer review, and the peer review program, to file a copy of any
substandard peer review report with the Board within
60 days.
4) Requires the Board to define "substandard peer review report"
in regulation by January 1, 2010.
5) Provides that nothing shall prohibit the Board from initiating
an investigation and imposing discipline as the result of a
complaint from information contained in a peer review report
received by the Board.
6) Requires any report of a substandard peer review to be
collected by the Board for investigatory purposes.
7) Provides that nothing in the peer review provisions shall
affect the discovery or admissibility of evidence in a civil or
criminal action.
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8) Prohibits a peer reviewer from disclosing information
concerning licensees or clients obtained during a peer review,
unless specifically authorized under law.
9) Requires the Board to appoint a peer review oversight
committee, composed of California-licensed CPAs, to make
recommendations to the Board on any matter to ensure the
effectiveness of mandatory peer review.
a) Authorizes the committee to request any information from a
Board-recognized peer review program provider deemed necessary to
ensure the provider is administering peer reviews in keeping with
the standards in board regulations.
b) Provides that any information obtained in conjunction with
reviewing peer review program providers shall not be a public
record, and shall be exempt from public disclosure, but provides
that the information may be disclosed under any of the following
circumstances:
i) In connection with disciplinary proceedings of the board.
ii) In connection with legal proceedings in which the board is
a party.
iii) In response to an official inquiry by a federal or state
governmental regulatory agency.
iv) In compliance with a subpoena or summons enforceable by
court order.
v) Or as otherwise specifically required by law.
10)Specifies that these provisions shall become inoperative on June
10, 2010, if sufficient hiring authority is not granted to implement
the bill.
11)Makes findings and declarations regarding the value of peer
review.
FISCAL EFFECT: The Assembly Appropriations Committee analysis, dated
May 13, 2009, indicates special fund costs in excess of $400,000 per
year (Accountancy Fund) for the workload associated with creating and
maintaining a peer review program. Included in that funding is an
estimated $160,000 in enforcement costs related to the Attorney
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General's Office investigating an additional 16 cases each year as a
result of audit findings.
COMMENTS:
1.Purpose. This bill is sponsored by the California Board of
Accountancy (Sponsor). According to the Author: "With the ongoing
changes to professional standards that are designed to ensure
accuracy and quality of accounting and auditing engagements, it is
imperative that products and services provided to consumers meet
specific standards. Accounting firms going through the educational
process of a peer review will be better equipped to deliver high
quality accounting and auditing services and products to consumers."
2.Background.
a) Peer Review. Peer review is a study, appraisal, or review of
the accounting and auditing work of a firm by a licensed CPA who
is unaffiliated with the firm being reviewed, and is done in
accordance with applicable professional standards. The goal of
peer review is to increase consumer protection through a systemic
review of accounting firms to ensure that work conforms to
professional standards. Peer review achieves this goal in two
ways:
1) by monitoring and promoting quality accounting and auditing
services provided by accounting firms, and 2) providing the Board
with an enhanced enforcement opportunity through reports of firms
receiving substandard peer reviews.
Forty-one state boards of accountancy currently require mandatory
peer review for licensure or license renewal, using the peer
review program developed and managed by the American Institute of
Certified Public Accountants (AICPA).
Under this measure, accountancy firms providing audit, attest, or
compilation (accounting and auditing) services will be required
to undergo a systematic review (peer review) to ensure that work
performed conforms to professional standards. Peer review will
be required for these firms every three years as a condition for
license renewal. The Board will require that firms report the
date they underwent peer review and the results of the peer
review at the time of license renewal. Firms receiving a
substandard peer review report (in essence a failed grade) will
be required to submit the report directly to the Board. These
reports will be reviewed by the Board's Enforcement Division, in
conjunction with the Board's Administrative Committee, to
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determine if Board action is necessary.
Peer reviews will be performed by CPAs knowledgeable in generally
accepted accounting principles and generally accepted auditing
standards. A peer review program, such as the American Institute
of Certified Public Accountants Peer Review Program, will
administer peer reviews for individual firms. The Board
indicates that firms will be required to enroll in a
Board-recognized peer review provider's program, which will work
with firms to ensure peer reviews are completed timely; firms
select peer reviewers with a currency of knowledge of the
professional standards related to the type of practice to be
reviewed; and review and accept peer review reports.
To ensure the effectiveness of mandatory peer review, the Board
will establish a Peer Review Oversight Committee (PROC), the
purpose of which is to engender confidence in the peer review
program from consumers and the profession. The PROC will be
authorized to request any information and materials deemed
necessary to ensure that peer reviews are administered in
accordance with the standards established by the Board in
regulation. The PROC will use these materials when performing
peer review program provider site visits and participating in
peer review program providers' peer review report acceptance
meetings, according to the Sponsor
b) Development of Peer Review Program. The Board first proposed
mandatory peer review as part of its 2000 Sunset Review Report.
AB 585 (Nation, Chapter 704, Statutes of 2001) and SB 133
(Figueroa, Chapter 718, Statutes of 2001) established
requirements for development of a peer review program. However,
shortly thereafter the highly publicized audit failures at
publicly-held companies focused national attention on weaknesses
in the regulation of the public accounting profession, and called
into question the effectiveness of peer review and the self
regulation of the profession in preventing significant audit
failures. These events led to the enactment of the federal
Sarbanes-Oxley Act of 2002 and the creation of the Public Company
Accounting Oversight Board (PCAOB) at the federal level to
oversee and inspect firms that perform audits of public
companies.
In 2002, the Board established a Peer Review Task Force to
reevaluate mandatory peer review in California and received
extensive input from the profession, public, and consumer
advocates on the historical experience of peer review programs,
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statutes, associated professional standards, and proposed changes
taking place as a result of audit failures at publicly held
companies. One of the changes which the Task Force considered
was that at the federal level, the PCAOB's inspection program was
under development and not expected to be completed until 2004,
and the AICPA's revisions to its mandatory peer review standards
had not been finalized at that time. Accordingly, through the
input of the Task Force, the Board determined to defer further
action at that time.
SB 503 (Figueroa, Chapter 447, Statutes of 2006) extended the date
upon which the Board was required to submit its peer review
report to the Legislature from September 1, 2005, to September 1,
2011. In 2007, and with the benefit of the implementation of the
PCAOB's inspection program and the development of the AICPA's
Peer Review Program, the Board once again began deliberating the
various policy and programmatic issues associated with
establishing peer review in California.
In 2008, the Board submitted its Peer Review Report to the
Legislature and concluded: "The Board believes that requiring
mandatory peer review is beneficial to consumers by ensuring only
qualified firms are practicing, and is advantageous to firms by
ensuring their personnel maintain a currency of knowledge related
to the services provided to clients." (The Board's Peer Review
Report is available on the Board's Website.)
3.Related Legislation. AB 797 (Ma) requires the California Board of
Accountancy to publish disciplinary decisions on its Website for a
period of at least 10 years. This bill is also before the Committee
at today's hearing.
AB 1005 (Block) requires the California Board of Accountancy to
publish on its Website a notice of formal disciplinary accusations,
documents related to disciplinary decisions, a live audio or video
broadcast of public meetings, and the meeting minutes, as specified.
This bill has also been referred to this Committee.
AB 117 (Niello) requires the holder of an inactive certified public
accountant license to disclose the inactive license status on all
materials that display the CPA designation. This bill was heard in
this Committee on June 8, and passed 7-0.
SB 691 (Yee) as heard by this Committee would have, effective January
1, 2014, deleted the current 120-hour pathway education requirement,
thereby requiring, after January 1, 2014, an applicant for a CPA
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license to meet the criteria of the150-hour pathway requirement for
education. This bill was heard in this Committee on April 27 and
passed 7-0. This bill was substantially amended to, instead,
require, beginning January 1, 2014, applicants for CPA licensure who
have a BA degree and two years of experience to acknowledge when
they sit for the exam that licensure under that pathway may not be
considered substantially equivalent for purposes of practice
privileges in other states that require 150 semester units or hours
for licensure. This bill is currently in the Assembly Business and
Professions Committee.
4.Prior Legislation. AB 585 (Nation, Chapter 704, Statutes of 2001) ,
and SB 133 (Figueroa, Chapter 718, Statutes of 2001) established
the initial requirement for firms other than sole proprietor or
small firms who provide attest services to undergo peer review every
three years.
AB 270 (Correa, Chapter 231, Statutes of 2002) required the Board to
study whether to implement a peer review program, and report to the
Legislature by September 1, 2003.
SB 1543 (Figueroa, Chapter 921, Statutes of 2004) extended the date of
the reporting requirement to 2005.
SB 503 (Figueroa, Chapter 447, Statutes of 2006) extended the date of
that reporting requirement to September 1, 2011.
5.Arguments in Support. In sponsoring the bill, the California Board
of Accountancy writes: "With a growing demand for increased
transparency in all areas of business, the Board believes that a
mandatory peer review program, built on a platform of both education
and enforcement, is necessary and advantageous to both California
consumers and the accounting profession. Forty-one other accounting
jurisdictions presently require mandatory peer review for licensure
or license renewal, and for California to remain a leader in the
regulation of the accounting profession and enhance the protection
of consumers, California must adopt mandatory peer review."
California Society of Certified Public Accountants writes: "It is
essential that California implement a peer review requirement at the
earliest opportunity to provide the highest level of consumer
protection. Peer review, along with continuing education
requirements and other report quality monitoring programs, is an
important tool in ensuring that California CPAs are encouraged to
maintain competence and thus avoid future disciplinary problems
and/or consumer harm."
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6.Arguments in Opposition. The Society of California Accountants
(SCA) has an "oppose unless amended" position on this measure. SCA
writes that although peer review is valuable and beneficial for
firms offering a number of accounting and auditing services, such as
complex full disclosure compilations, audits and reviews, the bill
would also require peer review for non-disclosure of other
comprehensive basis of accounting (OCBOA) financial statements. SCA
states: "Non-disclosure OCBOA financial statements are generally
requested by small business and issued by small CPA firms or sole
practitioners. Instituting peer review for CPAs providing these
types of services will adversely affect small businesses and the
public. The resulting increase in the cost to provide these
services will affect those least able to afford them - small
businesses. . . In these economic times, increased costs may drive
small businesses to engage the services of unlicensed and
unregulated bookkeeping services. This will not only be detrimental
to the practice of accountancy but more importantly, will not be in
the best interest of the general public." SCA requests the bill be
amended to exclude CPAs issuing non-disclosure OCBOA financial
statements from the mandatory peer review requirement.
SUPPORT AND OPPOSITION:
Support:
California Board of Accountancy (Sponsor)
California Senior Legislature
California Society of Certified Public Accountants
Oppose Unless Amended:
Society of California Accountants
Opposition:
Several individuals
Consultant:G. V. Ayers
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