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California lawmakers poised to adopt measures to strengthen federal accounting reform

Tuesday, August 13, 2002


SACRAMENTO, CA – As the California legislature’s 2002 session winds down, lawmakers are preparing to take final action on a series of bills designed to tighten rules governing accounting practices in the wake of recent scandals. Last week, the California Senate passed legislation to help close the “revolving door” between accountants and the companies they audit. Lawmakers are also expected to take final action this session on three other bills that will provide additional public protection against accountants who help to mislead investors. Governor Gray Davis has not yet indicated whether he supports the California accounting reform measures.
“The federal reforms adopted by Congress are a critical first step toward in restoring corporate accountability and public trust in the stock market,” said Gail Hillebrand, a Senior Attorney with Consumers Union’s West Coast Regional Office. “But now California lawmakers and Governor Gray Davis have an opportunity to set an even higher standard for the nation by strengthening the effectiveness of the state’s watchdog that licenses and oversees public accountants.”
Last week, the California Senate approved AB 2970 (Wayne), which makes it a violation of the state public accounting license for an accountant with audit responsibility to accept employment as a financial officer of a company they have audited. The new federal law addresses the flip side of this coin by banning accounting firms from providing audit services if certain high level persons responsible for accounting and fiscal controls were employed by the auditing firm and participated in the audit during the year before the audit is initiated. In other words, an accountant who takes a high level job with an audit client prevents his or her old accounting firm from auditing the company for a year, but has not violated the federal law. AB 2970 is waiting for enrollment, the step which sends it to the Governor for his consideration.
“The California ‘anti-revolving door’ bill will remove a financial incentive that could taint an audit of a public company by imposing a reasonable cooling off period before an accountant can go to work for a company they’ve audited,” said Hillebrand.
In the coming weeks, the California Assembly and Senate are expected to take final action on three other bills to strengthen accounting practices in the state. They are:
AB 270 (Correa) and SB 2023 (Figueroa): These virtually identical bills change the traditional accounting industry domination of the California Board of Accountancy by requiring a public majority on the Board. These bills also change the standard for disciplining an accountant so that the Board can take enforcement action more easily against an individual who has engaged in repeated negligent acts. Finally, these bills require accountants to report to the Board certain events that might trigger the Board to open an investigation into a particular account or accounting firm. For example, under the bills an accountant would have to tell the Board of Accountancy when a company that it has audited has restated its earnings. AB 270 is pending in the Senate Appropriations Committee. SB 2023 is awaiting action by the Assembly Appropriations Committee.
“The work of the California Board of Accountancy is too important to be dominated by the accounting industry,” said Hillebrand. “These bills will strengthen the Board’s independence by requiring that a majority of its members have no previous ties to the accounting industry.”
AB 2873 (Frommer and Correa): This anti-shredding bill requires that audit documentation must be maintained and be sufficiently complete so that a competent outsider can see the procedures, evidence, and conclusions of the auditor. The new federal bill addresses part of this issue. It imposes criminal penalties if documents are destroyed before five years, and it requires that the new federal accounting oversight board adopt regulations requiring that accounting firms prepare and maintain such records for at least seven years. The California bill makes the anti-shredding requirement go into effect immediately, creates a presumption that the work was not done if documentation is not maintained, extends the seven-year period in certain circumstances, and requires that the individual accountants that performed the work be identified. The measure has passed the Assembly and will soon be considered on the Senate floor.
“This anti-shredding measure will ensure that there’s a clear violation of state law and of the accountant’s license if documents are no longer available when the Board needs to investigate alleged wrongdoing by an auditor,” said Hillebrand.

Gail Hillebrand: 415-431-6747
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