November 2002

To Regulate or Not to Regulate?

Over the last several years, the accounting profession has been wrestling with the degree to which it should be regulated. Recently, in an extreme interpretation of the apparent motto “The only good regulation is no regulation,” the profession confronted the AICPA’s proposal for a global business credential, at one point called Cognitor, which would have created a new profession essentially unregulated by any governmental entity.

Many of the people and groups that opposed the recently passed Sarbanes-Oxley Act, a federal statute that mandates increased regulation aimed at creating a stronger, more open, and more trustworthy financial reporting process, did so because their “less is more” world-view where accounting regulation is concerned was under siege. Here in New York State, many still believe that the current state accounting laws are basically adequate to serving the needs of the public, even though those laws, first established in 1897, were last modified in 1947.

The public, on the other hand, has always had the impression that CPAs are subject to heavy government regulation, functioning as reliable third-party providers of a seal of approval on public companies’ financial reports—almost to the degree of being a quasi-extension of the government. Although the profession is less regulated than is popularly believed, the fact remains that the CPA exists primarily to serve the public trust. Otherwise, people might be inclined to keep their money under their mattresses rather than investing it in the markets, a feeling some may be experiencing acutely in the wake of recent scandals. The issue is how to earn that trust again and rebuild the profession’s reputation—and to do so with more than the rhetoric, empty promises, and proposed solutions that have many in the profession shaking their heads in disillusionment and despair.

A nuts-and-bolts aspect of how enactment of the provisions of Sarbanes-Oxley will play out in New York State is being battled over right now: The NYSSCPA is trying to get the state government to strengthen the New York State Board for Public Accountancy. Specific proposals would make peer review mandatory for all licensed CPAs and fortify the ethical standards and enforcement mechanisms for New York State CPAs. These are changes the NYSSCPA has been talking about for a while, but they’re even more important now because, under Sarbanes-Oxley, the Public Company Accounting Oversight Board (PCAOB) and the SEC could refer certain CPA-related cases to the relevant state board for review and appropriate action. In New York, the state board and the office of professional discipline in the State Education Department lack the adequate funding, staff, and other resources to conduct professional misconduct investigations, hold disciplinary hearings, or provide equitable and timely due process.

Similarly, debate over appointments of the chair and other four members of the PCOAB (only two of whom can be CPAs) has carried this discussion
forward. Reform-minded thinkers have advocated “tough love” regulation and supported PCAOB appoint-ees that would agree with such a model, while others wanted to see PCAOB appointees with little or no accounting background and no preconceived ideas about their charge or how to carry it out. The appointments have now been made, albeit it in a manner that may cause the public to question the profession’s willingness to be regulated by the government and the government’s desire to ensure honest financial reporting.

Whether to regulate the profession or not isn’t the real question because the answer is so obviously yes. The real question is whether the profession and the regulators are willing to do it in a way that restores investor confidence in our capital markets and serves the public rather than their own agendas.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA
lgrumet@nysscpa.org