The Cascade Effect — The Political Climate in Virginia and Nationwide

Last year, accounting scandals and the Sarbanes-Oxley Act of 2002caused a major disruption for CPAs nationwide. Sarbanes-Oxley places federal regulation on the auditors of public companies and increases the responsibilities of corporate leaders, officers and other professionals involved in publicly traded companies.

The law also creates the Public Company Accounting Oversight Board (PCAOB), which has the authority to set and enforce auditing, attestation, quality control and ethics (including independence) standards for public companies. It is empowered to inspect the auditing operations of public accounting firms that audit public companies as well as impose disciplinary and remedial sanctions for violations of PCAOB rules, securities laws and professional auditing standards.

Independent of the accounting profession, PCAOB members are appointed by the Securities and Exchange Commission (SEC). The five-member board must have at least three seats held by public members and the remaining seats can be CPAs who will not be allowed to vote on any disciplinary matters.

On October 25, 2002, the SEC selected the members of the PCAOB. They are:

• Kayla J. Gillan, former general counsel of the the California Public Employee's Retirement System
• Daniel L. Goelzer, CPA and attorney, former SEC general counsel
• Charles D. Niemeier, CPA and attorney, current chief accountant of the SEC Enforcement division
• Willis D. Gradison Jr., a former Ohio Congressman

William H. Webster, former judge and head of the FBI and CIA, was selected as chair, but later resigned. The new chair, selected by the SEC, is William McDonough, senior U.S. Federal Reserve official.

Virginia Legislature

For Virginia CPAs, the formation of the PCAOB, the possibility of more stringent or new provisions, unreasonable restrictions and a possible cascade effect at the state level are causing a stir of emotions from disbelief, anger and fear for the future of the profession.

"I believe our laws and regulations as they are presently enacted provide adequate protection for the public," said Virginia Senator Walter A. Stosch, CPA. "There's not a great deal we need to be changing in Virginia because our laws address the public interests very well."

VSCPA Chair Stephanie Saunders said, "Based on our discussions with key legislators, there is no anticipated legislation in regard to Sarbanes-Oxley at the state level [in Virginia]. Various other states have pending legislation expanding the restriction on nonaudit services to audits of private companies, increasing the public membership on Boards of Accountancy, audit rotation and document retention. Our support and dialogue on the issues with the Virginia Board of Accountancy may prevent action in the Virginia General Assembly."

In 2003, the Virginia Board of Accountancy (BOA) is commencing a regulatory review that could create changes affecting VSCPA members and CPAs across the state. In emergency regulations, they are planning to institute an annual ethics CPE requirement into the new regulations. The Board is also changing the fee structure to require a $250 reinstatement fee for lapsed licenses. In addition, firms will be required to submit a copy of its peer review report and any letter of comments if the report is adverse, or if the latest peer review report is the second consecutive modified report that the firm has received.

Ellis Dunkum, CPA, BOA board member and immediate past chair, said the Board of Accountancy is planning to introduce a bill in this year's legislative session. Major highlights of the measure include:

• Increasing the maximum monetary penalty from $2,500 to $100,000 for violation of Board regulations
• Modifying the language in the Code and resulting regulations related to use of the CPA title to provide clarification and eliminate excess verbiage
• Establishing a CPE ethics requirement for CPAs and non-CPA owners of firms

When asked about increasing the limit on monetary penalties, Dunkum said, "The present maximum penalty is insufficient in egregious enforcement cases involving substantial monetary losses to investors."

The BOA bill will also encompass other minor changes to the Code and regulations governing CPAs.

Nationwide Impact

In other states, the cascade effect of the new law is underway. Thirty bills have been introduced in 12 states and more than 20 of these bills will directly affect CPAs. In California, all licensed CPAs are now required to report any restatements and situations that may cause an investigation of clients to the state Board of Accountancy. A legislative study is also now required on the California Peer Review to check its effectiveness, changes occurred to document retention requirements and more.

In New Jersey, a new law will prohibit CPAs from providing nonaudit services to privately held companies. It also prohibits any business from hiring an audit firm for one year if the CEO, controller, CFO or CAO have worked for the audit firm and participated in the audit.

New York's State Education Department is proposing rules to the Regents on implementing aspects of Sarbanes-Oxley for public companies that may address such issues as proscribed nonaudit services for audit clients, audit partner rotation and employment of auditors by auditees.

Member and Public Outreach

In response to the law, the VSCPA, AICPA and other state societies have been proactive in protecting the interests of CPAs with continuous communication with members, legislators and the public. The VSCPA increased its efforts by continuing to monitor the Virginia General Assembly and the BOA, strengthening relationships with public officials and the BOA and creating new alliances and strategic partnerships with other professional associations. Communication with legislators have increased through face-to-face meetings, a VSCPA position statement, the 2003 Legislators' Tax Guide, white papers and a new advocacy section on the VSCPA Web site that includes issue statements, briefing requests and resources.

"I was very pleased and proud that Virginia is standing tall in terms of the manner in which it protects the public, and that's what it's all about," Stosch said. VSCPA member communication efforts have increased with numerous articles in Disclosures magazine and Footnote e-newsletter, and a letter to members from the VSCPA chair and president regarding the Society position and plans for the future. On the VSCPA Web site, the new advocacy section, a Profession and the Public Trust Resource center and an online member survey were created to gather member input regarding the law and to shape future communications. The VSCPA member outreach initiative also incorporated town hall meetings, member conference calls and chapter and firm visits.

The events surrounding the passage of the law also affected public perception of the accounting profession. Negative portrayals of CPAs in the media damaged the public image of CPAs as they questioned the integrity and morals of the profession and its members. The VSCPA stepped in by enhancing the Image Campaign to include new print and radio advertisements, additional ad insertions and exposure and new venues such as cultural arts and collegiate sports. VSCPA talking points were also created for addressing the media and clients, and CPAs were asked to assist in upholding the profession's 100-year tradition of ethics, high standards and instilling the profession's core values of integrity, competence and objectivity.

"It is our responsibility to restore the public's trust in our profession. This requires a commitment from each member to not only to uphold the standards of our profession, but also to become involved in the changes needed to better our profession to meet the future needs of society at large," said Saunders.

"We need to be in the forefront of reassuring the public that financial reporting is sound, accounting principals are sound and that the accounting profession is an honorable one that plays a unique and special role in our system of commerce," said Stosch.

It takes more than the drive of the VSCPA staff to protect the profession. VSCPA members have also assisted in the proactive advocacy efforts by participating in related resource groups and task forces, meeting with legislators through the Key Person Network and contributing to the CPA/PAC of Virginia. Now more than ever, membership participation and staff assistance is a crucial partnership to ensure the future of the CPA profession. Visit the advocacy section of the VSCPA Web site to become a volunteer, join the Key Person Network and contribute to the CPA PAC. If you have any questions or comments, contact Erin Collins at (800) 733-8272.