| Representative Arthur J. O'Neill, Chairman
Representative James Abrams
Honorable Julia L. Aurigemma
Representative Robert Farr
Jon P. Fitzgerald
Robert W. Grant
Representative Michael P. Lawlor
Brenden P. Leydon
Honorable John Maloney
Mary Anne O'Neill
Senator Andrew Roraback
Joel I. Rudikoff
Edmund F. Schmidt
Joseph J. Selinger, Jr.
Professor Colin C. Tait
Jo A. Roberts
Law Revision Commission
Date:October 31, 2002
To:Law Revision Commission
Subject:Accountancy Law Agenda for November 7, 2002 Meeting – LOB Room 1B
As a result of interviews with a wide range of resources having an interest or expertise in the accounting field, we have developed an agenda for further study of possible revisions or additions to the current Connecticut accountancy statutes and regulations. These can be clustered into two predominant areas of concern – enforcement powers and competency validation. Independence requirements were also frequently cited as a source of concern and we have included issues relating to that area as well.
Most resources we spoke to focused on similar, broad concerns and those thoughts are reflected in the issues noted by the LRC staff and provided herein. In addition to the LRC staff issues, we should consider the recommendations we received when we met with David Guay, the Executive Director and Michael Kozik, the Staff Attorney, for the Board of Accountancy. While these recommendations also focus on enforcement and competency, they are broader in scope, are quite specific, and are aimed at strengthening the Board’s investigatory and oversight capabilities.
Please note that this agenda is not intended to exclude any other issues. Moreover, the inclusion of an issue or recommendation reflects our judgment that the matter deserves further serious consideration. It does not necessarily reflect a consensus view of those we interviewed. Some of those persons interviewed may well oppose action on some of these matters.
Also, for informational purposes, we have attached a summary of the proposals made in this area by both gubernatorial candidates.
C.G.S. Sec. 20-280. currently provides for a seven member Board of Accountancy which consists of seven members, appointed by the governor, four of whom shall hold current, valid licenses to practice public accountancy and three of whom shall be public members. The terms of service of each member shall be coterminous with that of the Governor. No person who has served two successive complete terms shall be eligible for reappointment to the Board. Upon expiration of a member’s term of office, such member shall continue to serve until his successor is appointed. Whenever an appointment of a licensee is to be made, the Connecticut Society of Certified Public Accountants shall submit to the Governor the names of five candidates from whom the Governor shall select a replacement.
LRC Staff Issues:
· Consider increasing number of public members by two to create broader public oversight.
· Review the lengths of service of current Board members. Some members have exceeded the statutory term limits, but are continuing to serve because successors have not been appointed. Consider revising the statute to identify fixed lengths of term.
Board of Accountancy Staff Recommendation:
· Repeal power of Society to recommend Board members.
C.G.S Sec. 20-280c confers power on the board to conduct any necessary review, inspection or investigation regarding possible violations of statutes or regulations, disciplinary matters, and the establishment of regulatory policy. The board may conduct hearings on any matter within its statutory jurisdiction. It has the power to issue subpoenas to compel the attendance of witnesses and the production of documents; to administer oaths; to take testimony and to receive evidence concerning all matters within its jurisdiction. In case of disobedience of a subpoena, the board may invoke the aid of any court of this state in requiring the attendance and testimony of witnesses and the production of documentary evidence. After notice and hearing, the board may revoke any certificate, license or permit issued under section 20-281c, 20-281d or 20-281e; suspend any such certificate, registration, license or permit or refuse to renew any such certificate, license or permit; reprimand, censure, or limit the scope of practice of any licensee; impose a civil penalty not exceeding $1000 upon licensees or others violating provisions of section 20-281g or place any licensee on probation, all with or without terms, conditions and limitations, for any one or more of the following reasons in section 20-281a:
§ Fraud or deceit in obtaining a certificate, registration, license or permit;
§ Cancellation, revocation, suspension or refusal to renew authority to engage in the practice of public accountancy in any other state for any cause;
§ Failure of a licensee to maintain compliance with the requirements for issuance or renewal of such license or permit or to report changes to the board;
§ Revocation or suspension of the right to practice before any state or federal agency;
§ Dishonesty, fraud or negligence in the practice of public accountancy or in the filing or failure to file his own income tax returns;
§ Violation of any provision of sections 20-279b to 20-281m, inclusive, or regulation adopted by the board under said sections;
§ Violation of any rule of professional conduct adopted by the board;
§ Conviction of a felony, or of any crime an element of which is dishonesty or fraud, under the laws of the United States, of this state, or of any other state if the acts involved would have constituted a crime under the laws of this state, subject to the provisions of section 46a-80;
§ Performance of any fraudulent act while holding a registration, certificate, license or permit issued under sections 20-279b to 20-281m, inclusive, or prior law;
§ Any conduct reflecting adversely upon the licensee's fitness to engage in the practice of public accountancy; and
§ Violation by anyone of any provision of section 20-281g. (Issuance of report by person or firm not holding valid license and permit prohibited. Exceptions. Use of titles restricted.)
In lieu of or in addition to any remedy specifically provided, the board may require a licensee to submit to a quality review conducted in such fashion as the board may specify; or complete such continuing professional education programs as the board may specify, or both.
LRC Staff Issues:
· Consider increased penalties. Current penalty levels are not severe enough to influence behavior changes. Consider a multi-tier penalty structure such as follows based on firm revenue value (these are separate and in addition to sanctions imposed such as license suspension, revocation, scope limitation, etc.) Firms with after annual tax revenue of $1 million or more are subject to level I penalties; firms with annual after tax revenue of less than $1 million per year are subject to level II penalties.
Per Violation Penalty
Dishonesty, fraud or negligence in the practice of public accountancy or in the filing or failure to file his own income tax returns
Fraud or deceit in obtaining certificate, registration, license, permit
Failure to maintain competency requirements
Board of Accountancy Staff Recommendations:
· Penalty Changes:
o Increase penalties for violation of accounting act to $100,000
o Amend language to make clear that civil penalties apply to both C.G.S. §§20-281a and 20-281g
· Add as additional violations under §20-281a (see list on previous page)
o any discipline imposed by the SEC, IRS, or Public Company Accounting Oversight Board
o failure to cooperate with board investigation and failure to comply with board order
· Require licensees to report to the Board in writing within 30 days of the date the licensee has knowledge of these events, the occurrence of any of the following events:
o Any discipline imposed by SEC, IRS, or Public Company Accounting Oversight Board
o Any restatement of a financial statement and related disclosures by a client audited by the licensee
o Any civil action settlement or arbitration award against the licensee relating to the practice of public accountancy where the amount or value of the settlement or arbitration award is thirty thousand dollars ($30,000) or greater and where the licensee is not insured for the full amount of the award
o Any notice of the opening or initiation of a formal investigation of the licensee by the SEC or its designee
o Any notice from the SEC to a licensee requesting a Wells Submission
o Any notice of the opening or initiation of an investigation by the Public Company Accounting Oversight Board or its designee
· Require licensees to report to the Board in writing within 30 days of the date the licensee has knowledge of these events, the occurrence of any of the following events occurring on or after January 1, 1997:
o The conviction of the licensee of any of the following:
· A felony or any crime, an element of which is dishonesty
· As used in this section, a conviction includes the initial plea, verdict, or finding of guilt, pleas of no contest, or pronouncement of sentence by a trial court even though that conviction may not be final or sentence actually imposed until appeals exhausted
· The cancellation, revocation, or suspension of a certificate, other authority to practice or refusal to renew a certificate or other authority to practice, by any other state or foreign country
· The cancellation, revocation, or suspension of the right to practice before any governmental body or agency
· Require licensees to report to the Board in writing within 30 days of the entry of any judgment entered on or after January 1, 2003, against the licensee in any civil action alleging any of the following:
o Dishonesty, fraud, gross negligence or negligence
o Breach of fiduciary responsibility
o Preparation, publication, or dissemination of false, fraudulent, or materially misleading financial statements, reports, or information
o Embezzlement, theft, misappropriation of funds or property, or obtaining money, property, or other valuable consideration by fraudulent means or false pretenses, or other errors or omissions
o Any actionable conduct by the licensee in the practice of public accountancy, the performance of bookkeeping operations, or other professional practice
· Audit Documentation:
o Require audit documentation, as defined in statutes, to contain sufficient documentation to enable a reviewer with relevant knowledge and experience, but having no previous connection with an auditing engagement, to understand the nature, timing, extent, and results of auditing or other procedures performed, evidence obtained, conclusions reached, and the identity of the persons who performed and reviewed the work
o Create a presumption where the requirements are not met, which may be rebutted by a preponderance of the evidence, that the procedures were not applied, tests were not performed, information was not obtained, and relevant conclusions were not reached with regard to the portions of the audit not documented as required.
o Require audit documentation to be maintained for the longer of a 7-year period or a period sufficient to satisfy professional standards and comply with applicable laws and regulations. The bill would also require licensees to maintain a written audit documentation retention and destruction policy that sets forth the licensees’ practices and procedures.
Sarbanes-Oxley has established that it is unlawful for a registered public accounting firm to provide any non-audit service to an issuer contemporaneously with the audit, including: (1) bookkeeping or other services related to the accounting records or financial statements of the audit client; (2) financial information systems design and implementation; (3) appraisal or valuation services, fairness opinions, or contribution-in-kind reports; (4) actuarial services; (5) internal audit outsourcing services; (6) management functions or human resources; (7) broker or dealer, investment adviser, or investment banking services; (8) legal services and expert services unrelated to the audit; (9) any other service that the Board determines, by regulation, is impermissible.
LRC Staff Issues:
· While it seems appropriate to institute this policy for publicly held companies, it does not seem financially reasonable in the general case to prohibit smaller companies from using their accounting firms for multiple services. Consider applying the two tier system offered for use in levying penalties; firms with after annual tax revenue of $1 million or more may not receive non-audit services contemporaneously with the audit from the same firm; firms with annual after tax revenue of less that $1 million per year may use the same accounting firm to provide non-audit services. In the latter case, disclosure must be provided. Consider whether there are other specific contexts such as fiduciary, investor or public interest, where independence rules should apply.
Board of Accountancy Staff Recommendations:
· When non-audit work above a de minimus amount is done for audit, review or compilation client (except compilation where lack of independence is disclosed), disclose in either a footnote to the report, or in the report itself the nature and amount of the non-audit services provided.
· Prohibit a licensee from accepting employment with a publicly traded corporation or its affiliate within 12 months of the date of issuance of a financial statement where the licensee had a specified level of participation in the audit engagement and the employment would permit the licensee to exercise significant authority over accounting or financial reporting.
· Existing law prohibits a person engaged in the practice of public accountancy from performing services for a client for a commission or from receiving a commission from a client when that person also performs specified services for that client. Include in that prohibition services for a commission for, or receiving a commission from, an officer or director of a client or client sponsored retirement plan.
Currently the Board is unable to look behind any quality review report without subpoena; bad reviews cannot be used to level disciplinary or corrective action but only can be used to trigger an investigation by the Board.
Board of Accountancy Staff Recommendations:
· Require that qualified oversight panel be established and appointed by the Board; make committee report to forensic accountant on Board staff
· Strengthen Board’s ability to require remedial action and discipline based on review
· Let Board set report due date by regulation
· Make report public
· Prohibit reviewer from excusing from sample engagements that are subject of litigation, regulatory investigation, or other dispute or else require all such engagements be reviewed as part of the quality review
Board of accountancy Staff recommendations:
· Fees and Licensing
o Need statutory authority to collect back license fees for those found to have been practicing without license, permit or certificate
o Require everyone in public practice to get a license, not just the partners or owners
o Require all firms, including solo practitioners, to pay the $75 license fee
o §20-281d(d)(2) – delete reference to out of state experience; permit experience gained either in or out of state
o Delete requirement to print directory of licensees (this is an expense that is unnecessary but is mandated by statute §20-280(d); directory will soon be available online)
· Note: these enhancements are estimated to generate approximately $500,000 per year in additional revenue
· Add staff resources
o Forensic accountant
o Money for outside expert
There are additional steps that can be considered to go beyond revising accountancy laws that enhance corporate accountability. This would entail replicating and extending some of the Sarbanes-Oxley requirements and prohibitions, established by the Corporate and Criminal Fraud Accountability Act of 2002, for non-publicly held corporations. These are:
· Make it a felony to "knowingly" destroy or create documents to "impede, obstruct or influence" any existing or contemplated official investigation
· Make it a felony for tampering with a record or otherwise impeding any official proceeding.
· Makes it a felony for any person to corruptly alter, destroy, mutilate, or conceal any document with the intent to impair the object's integrity or availability for use in an official proceeding or to otherwise obstruct, influence or impede any official proceeding.
· Require accountants and auditors to report to state authorities any client violations of state accounting laws or regulations
· Extend whistleblower protection to accountants and auditors who report client violations.
If you have any questions, or require additional information, please advise. We look forward to discussing these items with you on November 7, 2002 at 3:00 p.m. in LOB Room 1B.
· Require a majority of the members on the State Board of Accountancy (the Board) to be "public members."
· Require the Board to study their oversight authorities to see if they need to be strengthened.
· Create a new Class C felony charge (10 years) for knowingly or recklessly filing a report that contains untrue statements of material facts or that omits material facts.
· Allow the Board to levy penalties on people and corporations up to $100,000 per violation.
· Require retention of all accountant work papers and other information related to any audit for five years after the fiscal year in which the work was performed.
· Create a new Class C felony for anyone who destroys corporate audit records.
· Amend Banking laws to increase fines
· Investigative subpoenas
· Enhance current penalty structure for crimes involving tampering with evidence, commercial bribery, tampering with witnesses, and hindering prosecution.
· Increase fines and penalties for violations of banking, credit union, and securities laws.
· Authorize the Commissioner to issue cease and desist orders against those who aids and abets violators of the Securities Act.
· Increase "look-back period" from five to ten years for sanctions imposed by other securities regulatory agencies on brokers, investment advisors, and agents. Increase "look-back period" from one to five years in actions to suspend or revoke registration.
· Broaden the Commissioner’s authority to suspend, revoke, or deny registration of persons engaged in the securities business to include out-of-state persons and persons who engaged in fraudulent securities practices outside of CT.
· Require Banking Commissioner to consider bank and credit union compliance with the USA Patriot Act prior to approval of transactions.
· Require CT banks to adopt and implement a written loan policy.
· Institute a 5-year "look-back" period for any accountant who audits an issuer of securities. During this period an auditor cannot alter, destroy or conceal any documents sent, received, or created in connection with any audit
· Require corporations to certify that their financial statements are accurate.
· Prohibit accountants from consulting with corporations it audits.
· Provide CUTPA remedy for those financially injured by deceptive sales or accounting practices.
· Enhance resources available to the Board of Accountancy by adding professional investigator/forensic accountant capabilities to strengthen its ability to investigate complaints and suspected violations
· Tighten the accounting “quality review” statute by requiring review of all cases in which complaints have been made and/or are in litigation and by making review reports public.
· Establish more comprehensive Board of Accountancy appointment procedures, to broaden the selection for each vacancy beyond the names submitted by the CPA trade association.
· Strengthen penalties on accountants and firms that violate corporate fraud laws; specifically, lift the maximum allowable penalty cap from $1000 to $10,000 for civil violations and require the Board of Accountancy to bring all cases in which the Board has reason to believe that a person or firm has knowingly engaged in acts or practices that constitute a violation of applicable statutes to the State’s Attorney’s attention.
· Enhance powers for the Board of Accountancy to let it pursue restitution against accountants whose illegal acts cause the loss of money to investors.
· Allow the Department of Banking to pursue accountants and other professionals who aid and abet principals in perpetrating securities fraud.
· Increase penalties imposed under the Uniform Securities Act on individuals who engage in fraud; for example, raise the maximum allowable penalty to $100,000
· Allow the use of Grand Juries in white-collar crime cases in which all other appropriate tools have been exhausted.
· Establish in the Chief State Attorney’s Office a high-profile, specialized unit focused exclusively on financial crime; return to the State’s Attorney the power to issue an investigative subpoena for white collar crimes.
· Legislation requiring companies with more than 50 employee that receive state economic development assistance – in the form of loans, grants, loan guarantees or tax benefits, valued at more than $500,000 in any given year – to: comply fully and completely with federal and state law; provide compensation – including benefits or their actual value – to full and part-time employees that is at or equal to certain set thresholds; maintain or increase full-time employment; and provide CEO certified financials.
 Resources Solicited for comment: Bernard Blum, Chair, Board of Accountancy; Arthur Renner, CT Society of Certified Public Accountants, Attorney General’s Office; Treasurer’s Office; CT Trial Lawyers Association; Raymond Green, Day Berry & Howard; Prof. Andrew Rosman, UConn; Prof. Rick Antle, Yale School of Management; CBIA; Metro Hartford Chamber of Commerce; CT Department of Revenue Services; CT Department of Banking; State Auditor; Secretary of State’s Office