Mandatory quality review program in public accountancy.
Purpose:
To implement section 7410 of the Education Law by establishing a mandatory quality review program for public accountancy.
Substance of proposed rule (Full text is posted at the following State website:www.op.nysed.gov):
The Commissioner of Education proposes to add a new section 70.10 to the Regulations of the Commissioner of Education, relating to establishing a mandatory quality review program in public accountancy. The following is a summary of the proposed amendment:
Subdivision (a) of section 70.10 of the Regulations of the Commissioner of Education establishes a mandatory quality review program requiring all applicants seeking a firm registration or renewal of a registration, other than a sole proprietorship or firms with two or fewer professionals, to participate in a quality review of the firm's attest services no more frequently than once every three years.
Subdivision (b) of section 70.10 of the Regulations of the Commissioner of Education defines terms used in section 70.10 including accounting professional, quality review report, review, review team, reviewer, sponsoring organization and team captain.
Subdivision (c) of section 70.10 of the Regulations of the Commissioner of Education indicates those firms that must participate in a quality review. This subdivision also requires any firm not required to participate in mandatory quality review to annually submit a written notification of exemption to the Department. Any firm that begins providing attest services or otherwise becomes subject to mandatory participation in the quality review program is required to notify the Department of its change in status within 30 days and to provide the Department with evidence that it has enrolled in an acceptable quality review program within one year of the earlier of the firm's initial registration or the firm's initial performance of services requiring a quality review. Such firms must have a quality review performed within 18 months of the date the services were first provided.
Subdivision (d) of section 70.10 of the Regulations of the Commissioner of Education establishes a Quality Review Oversight Committee (QROC) to oversee the mandatory quality review program. The QROC will consist of five members who must be New York licensed CPAs and hold a current registration with the Department. Members will serve five year terms except those first appointed will serve staggered terms so that an equal number of terms terminate annually. Responsibilities of the QROC include: receiving and approving quality review plans of entities seeking to be sponsoring organizations; monitoring sponsoring organizations to determine that each sponsoring organization is providing an acceptable level of oversight over reviewers, review teams and firms participating in the quality review program; inform the Department of issues and /or problems relating to the quality review program; annually report to the Department that the sponsoring organization holds qualifications necessary to continue as an approved sponsoring organization; annually assess the effectiveness of the quality review program; annually report on any recommended modifications to the quality review program; review each quality review report submitted by a firm to determine that the firm is complying with applicable professional standards and ensure that any documents received from a firm or reviewer, sponsoring organization or entity administering peer review outside the state of New York shall be confidential and not constitute a public record and shall not be subject to disclosure under article six and six-A of the Public Officers Law.
Subdivision (e) of section 70.10 of the Regulations of the Commissioner of Education defines the approval process for sponsoring organizations. Sponsoring organizations must submit a plan of administration that establishes committees and provides assurances that sufficient professional staff exist for the operation of the quality review program; provide assurances that the sponsoring organization will notify firms and reviewers of the latest developments in quality review standards and the most common deficiencies in quality reviews conducted by the sponsoring organization; establish procedures to resolve any disagreement between the firm and the reviewer that may arise out of the performance of a quality review; acknowledge that the sponsoring organization is subject to evaluation and periodic review; establish procedures to evaluate and document performance of each reviewer and to disqualify a reviewer who does not meet the standards for quality review; establish procedures to ensure that the sponsoring organization submits timely reports to the QROC; establish procedures to maintain the confidentiality of documents received from the firm or reviewer unless any such document is admitted into evidence in a hearing held be the Department; and provide annual reports to the QROC on the results of the quality review program, including number of reviews conducted; the number of firms complying with the quality review standards, the number of firms having some deficiencies, the number of firms not in compliance with the quality review standards.
Subdivision (f) of section 70.10 of the Regulations of the Commissioner of Education defines the process to be followed to approve and assign team captains and review teams. The sponsoring organization must provide a list of reviewers to the Department and from that list the Department must develop a roster of approved reviewers. Sponsoring organizations must perform procedures to test that review team members, including the team captain are licensed or otherwise authorized to practice in any state and that the review team and team captain meet a minimum set of competencies to commence a quality review. Competencies include specified experience performing attest services, participation in acceptable training, and knowledge of professional standards, rules and regulations appropriate to the industries included in the review.
Subdivision (g) of section 70.10 of the Regulations of the Commissioner of Education provides that the Department may upon notice and with the opportunity to be heard, remove a reviewer and/or review team member from the roster of approved reviewers for failure to meet the requirements of subdivision (f) or for having been subject to disciplinary action.
Subdivision (h) of section 70.10 of the Regulations of the Commissioner of Education provides that a firm which has received a report that the firm has failed to design a system of quality control over its attest services or that receives a quality review report indicating that the firm has failed to perform and report on engagements in conformity with applicable standards in material respects may be referred by the QROC for disciplinary action under Education Law section 6510.
Subdivision (i) of section 70.10 of the Regulations of the Commissioner of Education defines the standards for quality reviews. In addition to setting the standards of quality reviews, this subdivision requires that for any firm undergoing a review of its system of quality control, the review team shall review the firm's continuing education records on a sample basis and consider whether the records demonstrate that the licensee who supervised the services meets the competency requirements set forth in professional standards for such services, and in paragraph 13 of subdivision (a) of section 29.10 of the Rules of the Board of Regents.
Subdivision (j) of section 70.10 of the Regulations of the Commissioner of Education defines the requirements for access to the results of quality reviews by the department. Any firm required to participate in the program shall submit to the department: a quality review report, the firm's letter of response, an acceptance letter from a sponsoring organization, a letter(s) signed by the firm accepting the documents and a letter from the sponsoring organization notifying the reviewed firm that required actions have been appropriately completed. The quality review report, the reviewed firm's letter of response and acceptance of the quality review report by the sponsoring organization must be made available to the department via a secure website within 30 days of the date of the acceptance letter. If applicable, a letter signed by the reviewed firm accepting the quality review documents with the understanding that the firm agrees to take any actions required by the reviewer must be made available to the department within 30 days of the date the firm signs such letter. If applicable, the letter from the sponsoring organization notifying the reviewed firm that required actions have been appropriately completed must be made available to the department within 30 days to the date of the letter from the sponsoring organization. If the sponsoring organization cannot provide access to the quality review documents via a website, the firm shall provide copies of the quality review documents by mail or facsimile within 10 days of receipt of the applicable documents. Copies of equivalent quality review reports submitted in accordance with subdivision (m) must be made available to the department via a website provided by the entity administering the quality review. If it cannot be provided via a website, the firm shall provide copies by mail or facsimile.
Subdivision (k) of section 70.10 of the Regulations of the Commissioner of Education requires each reviewer and sponsoring organization, as applicable, to maintain documentation necessary to establish that each review conformed to the review standards of the relevant review program, including the review work papers, copies of the review report, and any correspondence indicating the firm's concurrence, non-concurrence, and any proposed remedial actions and related implementation. These documents must be retained by the reviewer for a period of time corresponding to the retention period of the sponsoring organization, and must be available to the Quality Review Oversight Committee. In no event, shall the retention period be less than 120 days from the date pf acceptance of the review by the sponsoring organization.
Subdivision (l) of section 70.10 of the Regulations of the Commissioner of Education requires any firm that undergoes an inspection conducted by the Public Company Accounting Oversight Board ("PCAOB") as required under the Sarbanes-Oxley Act of 2002 to submit to the Department a copy of the public version of its most recent inspection report within ten days of a receipt of the notice of completion from the PCAOB.
Subdivision (m) of section 70.10 of the Regulations of the Commissioner of Education establishes that the Department, at its discretion, may accept a review report from a firm which the Department deems to be the substantial equivalent of a quality review report issued under this section. A review report will be deemed substantially equivalent provided such reviews are conducted and reported on in accordance with the quality review standards set forth in subdivision (i) of this section. Peer reviews administered by entities located outside the state of New York acceptable to the Department and any affiliated administering entities may be accepted as substantially equivalent of a quality review report issued under this section.
Text of proposed rule and any required statements and analyses may be obtained from:
Christine Moore, New York State Education Department, Office of Counsel, 89 Washington Avenue, Room 144, Albany, NY 12234, (518) 473-8296, email: cmoore@mail.nysed.gov
Data, views or arguments may be submitted to:
Daniel Dustin, Executive Secretary for Public Accountancy, New York State Education Department, 89 Washington Avenue, 2nd Floor, Albany, New York 12257, (518) 474-3817, email: opopr@mail.nysed.gov
Public comment will be received until:
45 days after publication of this notice.
Regulatory Impact Statement
1. STATUTORY AUTHORITY:
Section 207 of the Education Law grants general rule-making authority to the Board of Regents to carry into effect the laws and policies of the State relating to education.
Section 6504 of the Education Law authorizes the Board of Regents to supervise the admission to and regulation of the practice of the professions.
Subdivision (1) of section 6506 of the Education Law authorizes the Board of Regents to promulgate rules in the supervision of the practice of the professions.
Paragraph (a) of subdivision (2) of section 6507 of the Education Law authorizes the Commissioner of Education to promulgate regulations in administering the admission to and practice of the professions.
Section 7410 of the Education Law, as added by Chapter 651 of the Laws of 2008, establishes a mandatory quality review requirement for the renewal of public accounting firm registrations and requires the Commissioner to promulgate regulations specifying how quality reviews are to be conducted.
2. LEGISLATIVE OBJECTIVES:
The proposed amendment to the Regulations of the Commissioner of Education is necessary to implement the requirements of section 7410 of the Education Law, which becomes effective on January 1, 2012. The purpose of the new law is to establish a mandatory quality review program to enhance the protection of clients and the general public by requiring certain public accounting firms to undergo a quality review of the firm's attest services as a condition to renewal of their registration, as specified in the Commissioner's regulations.
3. NEEDS AND BENEFITS:
Section 7410 of the Education Law requires all firms, as a condition of renewal of their registrations, to undergo a quality review of the firms' attest services as a condition to renewal of their registration, in a manner specified in the Regulations of the Commissioner. Sole proprietorships and firms with two or fewer accounting professionals are exempt from quality review; however, such firms may voluntarily participate in the quality review program.
The quality review process must include a verification that individuals in the firm who are responsible for supervising attest services or who sign or authorize someone to sign the accountant's report on the financial statements meet competency requirements set out in professional standards for such services and in the Regulations of the Commissioner of Education.
In addition, the new law requires the Commissioner's regulation to include reasonable provisions for compliance by an applicant for firm registration showing that the firm has undergone a quality review in the last three years or a peer review in another state that is the satisfactory equivalent; require that organizations that administer quality review programs be subject to evaluations by the Department or its designee to periodically assess the effectiveness of the quality review program; and require that quality reviews be conducted by reviewers acceptable to the Department in accordance with Commissioner's regulations. In addition, the Commissioner of Education is authorized to require firms undergoing quality review and organizations administering quality review programs to timely submit quality review reports to the State Board for Public Accountancy. Reports submitted must be maintained as confidential in accordance with state law, unless the report is admitted into evidence in a hearing held by the Department.
Any firm, including a sole proprietorship or a firm with two or fewer accounting professionals, that performs attest services for any New York state or municipal entity performing a governmental or proprietary function for New York State or performs attest services specifically required pursuant to New York State law must undergo an external peer review in accordance with Government Auditing Standards issued by the Comptroller General of the United States.
4. COSTS:
(a) Cost to State government: There are no additional costs beyond those imposed by statute.
(b) Cost to local government: There are no costs to local government.
(c) Cost to private regulated parties: There are no costs to private regulated parties beyond those imposed by statute.
(d) Costs to the regulatory agency: As stated above in "Costs to State Government," the proposed amendment will not impose any additional costs on SED beyond those imposed by statute.
5. LOCAL GOVERNMENT MANDATES:
The proposed amendment relates to the mandatory quality review of a public accounting firm's attest practice. The amendment does not impose any programs, service, duty, or responsibility upon local governments.
6. PAPERWORK:
Public accounting firms that are established for the business purpose of lawfully engaging in the practice of public accountancy pursuant to Education Law section 7401(1) and (2) or that use the title "CPA" or "CPA firm" or the title "PA" or "PA firm" are required to register with the Department. As a condition of registration, Education Law section 7410 requires all firms, except sole proprietorships and firms with two or fewer professionals, as a condition of renewal of their registrations, to undergo a quality review of the firms' attest services conducted in a manner specified in the Regulations of the Commissioner. Any firm, including a sole proprietorship or a firm with two or fewer accounting professionals, that performs attest services for any New York State or municipal entity or performs attest services specifically required pursuant to New York State law must undergo an external peer review in accordance with Government Auditing Standards issued by the Comptroller General of the United States. Any firm registered with the department that is not required to participate in the program shall submit an annual written notification of the basis for such non-participation, as part of the firm's submission of its annual report.
Any firm that begins providing attest services or otherwise becomes subject to mandatory participation in the quality review program shall notify the department of its change in status within 30 days and provide the Department with evidence of enrollment in an acceptable program.
Sponsoring organizations must provide annual reports to the Quality Review Oversight Committee on the results of the organization's quality review program, including information on completed reviews, including the most common deficiencies noted by reviewers, the number of reviews conducted, the number of firms found to be performing and reporting in compliance with applicable professional standards, the number of firms found to have some deficiencies in complying with applicable professional standards and the number of firms found not to be in compliance with applicable professional standards. Each sponsoring organization shall also provide a list of reviewers to the Department.
Any firm required to participate in the program shall submit the following documents to the department: a quality review report issued by an approved reviewer; the firm's letter of response; an acceptance letter from the sponsoring organization; a letter signed by the firm accepting the documents with the understanding that the firm agrees to take any actions required by the reviewer; and a letter from the sponsoring organization notifying the reviewed firm that required actions have been appropriately completed.
The proposed amendment requires each reviewer and sponsoring organization to maintain all documentation necessary to establish that each review conformed to the review standards of the relevant review program, including the review working papers, copies of the review report, and any correspondence indicating the public accounting firm's concurrence or non-concurrence and any proposed remedial actions and any related implementation. These documents must be retained by the reviewer for a period of time corresponding to the retention period established by an entity approved by the Department to oversee and facilitate quality reviews, and shall be made available upon request of the Department. In no event shall the retention period be less than 120 days from the date of acceptance of the review by the approved entity.
7. DUPLICATION:
The proposed amendment does not duplicate any other existing State or Federal requirements, except as discussed below in the Federal Standards section.
8. ALTERNATIVES:
There are no viable alternatives to the proposed amendment and none were considered.
9. FEDERAL STANDARDS:
The federal Sarbanes-Oxley Act of 2002 (Act) requires all public accounting firms that audit publicly traded companies to register with the Public Company Accounting Oversight Board (PCAOB) and undergo an inspection performed by the PCAOB to assess the degree of compliance of each registered public accounting firm and associated persons of that firm with the Act, the rules of the PCAOB, the rules of the U.S. Securities & Exchange Commission, and professional standards, in connection with the public accountancy firm's performance of audits, issuance of audit reports, and related matters involving publicly traded companies.
The proposed regulations require public accounting firms registered with the PCAOB to provide the Department with a copy of the public version of the public accounting firm's inspection report.
Government Audit Standards issued by the Comptroller General of the United States require each public accounting firm that performs audits or attestation engagements in accordance with generally accepted government auditing standards to establish a system of quality control that is designed to provide the audit organization with reasonable assurance that the public accounting firm and its personnel comply with professional standards and applicable legal and regulatory requirements, and have an external peer review at least once every 3 years.
Education Law section 7410 requires those firms, including sole proprietorships and firms with two or fewer professionals, that perform attest services for any New York State or municipal department, board, bureau, division, commission, committee, public authority, public corporation, council, office, or other governmental entity performing a governmental or proprietary function for New York State or any one or more municipalities thereof, or performs attest services specifically required to be performed pursuant to New York State law, to undergo an external peer review in conformity with the requirements pursuant to the government auditing standards issued by the Comptroller General of the United States.
10. COMPLIANCE SCHEDULE:
Chapter 651 of the Laws of 2008, requires that the addition, amendment and/or repeal of any rule or regulation necessary for the implementation of section 7410 of Education Law to be made and completed by the Commissioner of Education on or before January 1, 2011. The proposed amendment becomes effective on November 3, 2010. No additional period of time is necessary to enable regulated parties to comply with the regulation.
Regulatory Flexibility Analysis
(a) Small Businesses:
1. EFFECT OF RULE:
The purpose of the proposed amendment is to implement Chapter 651 of the Laws of 2008 by establishing a mandatory quality review program in New York State. It is estimated that there are approximately 3,200 registered public accounting firms in New York State. A majority of these public accounting firms are small businesses, with 100 or fewer employees.
2. COMPLIANCE REQUIREMENTS:
Section 7410 of the Education Law requires all firms, as a condition of renewal of their registrations, to undergo a quality review of the firms' attest services conducted in a manner specified in the Regulations of the Commissioner. Sole proprietorships and firms with two or fewer accounting professionals are exempt from quality review; however, such firms may voluntarily participate in the quality review program.
The quality review process must verify that individuals in the firm who are responsible for supervising attest services or who sign or authorize someone to sign the accountant's report on the financial statements meet the competency requirements set out in professional standards and in the Regulations of the Commissioner of Education. In addition, the quality review program must include reasonable provisions for compliance by an applicant for firm registration showing that the firm has undergone a quality review in the last three years or a peer review in another state that is the satisfactory equivalent; require that organizations that administer quality review programs be subject to evaluations by the Department or its designee to periodically assess the effectiveness of the quality review program; and require that quality reviews be conducted by reviewers acceptable to the Department in accordance with Commissioner's regulations. In addition, the Commissioner of Education is authorized to require firms undergoing quality review and organizations administering quality review programs to timely submit quality review reports to the State Board for Public Accountancy. Reports submitted must be maintained as confidential in accordance with state law, unless the report is admitted into evidence in a hearing held by the Department.
Any firm, including a sole proprietorship or a firm with two or fewer accounting professionals, that performs attest services for any New York state or municipal entity or performs attest services specifically required pursuant to New York State law must undergo an external peer review in accordance with Government Auditing Standards issued by the Comptroller General of the United States.
3. PROFESSIONAL SERVICES:
The proposed regulation will require public accounting firms, except sole proprietorships and firms with two or fewer professionals, to hire an independent reviewer or review team to conduct a quality review of the accounting firm's quality controls over its attest services. Any public accounting firm, including sole proprietorships and firms with two or fewer accounting professionals, that performs attest services for any New York state or municipal entity or performs attest services specifically required pursuant to New York State law must undergo an external peer review. Public accounting firms, including those public accounting firms that are considered "small businesses" are subject to this provision.
4. COMPLIANCE COSTS:
The proposed amendment implements Chapter 651 of the Laws of 2008, which imposes costs on private regulated parties by requiring these parties to hire an independent reviewer and/or review team to conduct a quality review in accordance with the statute.
The fee paid by a registered public accounting firm to an independent reviewer or review team for a quality review varies depending on the size of the firm and the complexity of the attest engagements subject to quality review. A sole proprietorship or a small firm that performs a limited number of attest engagements may undergo an engagement review that costs approximately $700 or more depending on the complexity of the public accounting firm's practice. A large multi-state or international firm could pay tens of thousands of dollars to undergo a quality review. It is estimated that approximately 85% of registered New York State public accounting firms voluntarily participate in and pay a fee associated with an existing peer review program established by a national professional accountancy organization that is substantially equivalent to the proposed quality review program. No additional fees associated with performing a quality review are anticipated for those firms that participate in the voluntary peer review process.
5. ECONOMIC AND TECHNOLOGICAL FEASIBILITY:
The proposed regulation will not impose any technological requirements on regulated parties, including those that are classified as small businesses, and is economically feasible. See above "Compliance Costs" for the economic impact of the regulation.
6. MINIMIZING ADVERSE IMPACT:
The proposed amendment implements the requirements of section 7410 of the Education Law, which provides an exception to the mandatory quality review provisions for sole proprietorships and firms with two or fewer professionals. However, this exemption does not apply to firms that performs attest services for any New York State or municipal entity or performs attest services specifically required pursuant to New York State law.
7. SMALL BUSINESS PARTICIPATION:
The State Board for Public Accountancy, which includes members who have experience in a small business environment, assisted in the development of the proposed regulation. In addition, the State Education Department provided the New York State Society of Certified Public Accountants and the American Institute of Certified Public Accountants, both of which includes members who own and operate small businesses, with draft regulatory language concerning the proposed regulation and engaged in an ongoing conversation with these organizations to ensure that their comments were addressed.
(b) Local Governments:
The purpose of the proposed amendment is to implement Chapter 651 of the Laws of 2008 by establishing a mandatory quality control program for registered public accounting firms. Because it is evident from the nature of the proposed rule that it does not affect local governments, no further steps were needed to ascertain that fact and none were taken. Accordingly a regulatory flexibility analysis for local governments is not required and one has not been prepared.
Rural Area Flexibility Analysis
1. TYPES AND ESTIMATED NUMBER OF RURAL AREAS:
The proposed amendment will affect an estimated 260 public accounting firms that are located in a rural county in New York State.
2. REPORTING, RECORDKEEPING AND OTHER COMPLIANCE REQUIREMENTS; AND PROFESSIONAL SERVICES:
Section 7410 of the Education Law requires all firms, as a condition of renewal of their registrations, to undergo a quality review of the firms' attest services conducted in a manner specified in the Regulations of the Commissioner. Sole proprietorships and firms with two or fewer accounting professionals are exempt from quality review; however, such firms may voluntarily participate in the quality review program.
The quality review process must verify that individuals in the firm who are responsible for supervising attest services or who sign or authorize someone to sign the accountant's report on the financial statements meet the competency requirements set out in professional standards and in the Regulations of the Commissioner of Education. In addition, the quality review program must include reasonable provisions for compliance by an applicant for firm registration showing that the firm has undergone a quality review in the last three years or a peer review in another state that is the satisfactory equivalent; require that organizations that administer quality review programs be subject to evaluations by the Department or its designee to periodically assess the effectiveness of the quality review program; and require that quality reviews be conducted by reviewers acceptable to the Department in accordance with Commissioner's regulations. In addition, the Commissioner of Education is authorized to require firms undergoing quality review and organizations administering quality review programs to timely submit quality review reports to the State Board for Public Accountancy. Reports submitted must be maintained as confidential in accordance with state law, unless the report is admitted into evidence in a hearing held by the Department.
Any firm, including a sole proprietorship or a firm with two or fewer accounting professionals, that performs attest services for any New York state or municipal entity or performs attest services specifically required pursuant to New York State law must undergo an external peer review in accordance with Government Auditing Standards issued by the Comptroller General of the United States.
3. COSTS:
The proposed amendment implements the requirements of Chapter 651 of the Laws of 2008, which imposes costs on private regulated parties by requiring them to hire an independent reviewer and/or review team to conduct a quality review in accordance with the statute.
The fee paid by a registered public accounting firm to an independent reviewer or review team for a quality review varies depending on the size of the firm and the complexity of the attest engagements subject to quality review. A sole proprietorship or small firm that performs a limited number of attest engagements may undergo an engagement review that costs approximately $700 or more depending on the complexity of the public accounting firm's practice. A large multi-state or international firm could pay tens of thousands of dollars to undergo a quality review. It is estimated that approximately 85% of registered New York State public accounting firms voluntarily participate in and pay a fee associated with an existing peer review program established by a national professional accountancy organization that is substantially equivalent to the proposed quality review program. No additional fees associated with performing a quality review are anticipated for those firms that currently participate in the voluntary peer review process.
4. MINIMIZING ADVERSE IMPACT:
Education Law section 7410 provides an exception to the mandatory quality review provisions for sole proprietorships and firms with two or fewer professionals. This exemption does not apply to firms that performs attest services for any New York state or municipal entity or performs attest services specifically required pursuant to New York State law.
5. RURAL AREA PARTICIPATION:
The State Education Department solicited comments from the State Board for Public Accountancy, the New York State Society of Certified Public Accountants and the American Institute of Certified Public Accountants, which includes members located in all areas of New York State, including rural areas of the State.
Job Impact Statement
The purpose of the proposed amendment is establish the requirements for the mandatory quality review program for public accountancy in order to implement section 6410 of the Education Law, as added by Chapter 651 of the Laws of 2008. Because it is evident from the nature of the proposed regulation that it will have no impact on jobs or employment opportunities, no further steps were needed to ascertain that fact and none were taken. Accordingly, a job impact statement is not required and one has not been prepared.
