BILL ANALYSIS
AB 138
Page 1
Date of Hearing: April 28, 2009
ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS
Mary Hayashi, Chair
AB 138 (Hayashi) - As Amended: April 23, 2009
SUBJECT : Accounting firms: peer review.
SUMMARY : Requires California-licensed accounting firms to
undergo a peer review of their accounting and auditing services.
Specifically, this bill :
1)Imposes a peer review requirement for all accounting firms
relative to accounting and auditing practice, which would be
conducted by a peer review program recognized by the
California Board of Accountancy (CBA).
2)Requires the CBA to adopt emergency regulations as necessary
to implement the program, and to appoint a peer review
oversight committee, as specified.
3)Specifies that these provisions shall be operative only if
sufficient appropriations and hiring authority are provided to
support these activities.
4)Makes findings and declarations regarding the value of peer
review.
EXISTING LAW :
1)Provides for the licensing and regulation of accountants and
accounting firms by CBA, and prohibits a person from engaging
in the practice of public accountancy in this state unless he
or she holds either a license issued by CBA.
2)Subjects an accounting firm providing attest services, with
certain exceptions, to peer review as specified, if the Board,
prior to September 1, 2011, determines that a peer review
program should be implemented and identifies the resources
necessary for that implementation.
AB 138
Page 2
FISCAL EFFECT : Unknown
COMMENTS :
Purpose of this bill . According to the author's office, "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."
Background - 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 CBA 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).
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 determine if Board
action is necessary.
AB 138
Page 3
Peer reviews will be performed by Certified Public Accountants
(CPA) knowledgeable in generally accepted accounting principles
and generally accepted auditing standards. The Board will use
outside organizations, such as the American Institute of
Certified Public Accountants Peer Review Program, to assist in
the administration of peer reviews. 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.
Background - Development of Peer Review Program . The CBA 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
deferral Sarbanes-Oxley Act of 2002 and the creation of the
Public Company Accounting Oversight Board (PCAOB) to oversee and
inspect firms that perform audits of public companies.
In 2002, the CBA established the 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,
statutes, associated professional standards, and proposed
AB 138
Page 4
changes taking place as a result of audit failures at publicly
held companies. For example, 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. Accordingly, the CBA deferred further
action.
SB 503 (Figueroa) Chapter 447, Statutes of 2006, extended the
date upon which CBA 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 AICPA's Peer Review Program,
the CBA once again began deliberating the various policy and
programmatic issues associated with establishing peer review in
California.
In 2008, the CBA 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
CBA's Peer Review Report is available on its website.
Support . The CBA writes: "With a growing demand for increased
transparency in all areas of business, CBA 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."
The 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 are an important tool in ensuring that
California CPAs are encouraged to maintain competence and thus
avoid future disciplinary problems and/or consumer harm."
REGISTERED SUPPORT / OPPOSITION :
AB 138
Page 5
Support
California Board of Accountancy (sponsor)
California Society of Certified Public Accountants
Opposition
None on file.
Analysis Prepared by : Ross Warren / B. & P. / (916) 319-3301