A performance audit of the Arizona State Board of Accountancy

              STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
A PERFORMANCE AUDIT
0 f
THE ARIZONA STATE BOARD OF ACCOUNTANCY
AUGUST 1979
UNLIKE 40 OTHER STATES, ARIZONA DOES NOT
LICENSE ACCOUNTANTS. AS A RESULT, THE
POTENTIAL FOH FINANCIAL HARM EXISTS FOR THE
GENERAL PUBLIC IN ARIZONA.
A REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 79- 5
DOUGLAS R. NORTON, CPA
AUDITOR GENERAL
SUITE 600
112 NORTH CENTRAL AVENUE
PHOENIX, ARIZONA 85004
255- 4385
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL SUITE 820
33 NORTH STONE AVENUE
TUCSON, ARIZONA 85701
882- 5465
August 7, 1979
The Honorable Bruce Babbitt, Governor
Members of the S t a t e Legislature
Members of the S t a t e Board of Accountancy
Transmitted herewith is a report of the Auditor General, A Performance Audit of
the Arizona S t a t e Board of Accountancy. This report is i n response t o a
September 19, 1978, resolution of the J o i n t Legislative Budget Committee and a
January 18, 1979, resolution of the J o i n t Legislative Oversight Committee.
A summary of t h i s report is found on the blue pages a t the front of the report.
A response t o t h i s report from members of the S t a t e Board of Accountancy is
found on the yellow pages preceding the appendices of t h e r e p o r t .
My s t a f f and I w i l l be happy t o meet with the appropriate l e g i s l a t i v e
committees, individual l e g i s l a t o r s or other s t a t e o f f i c i a l s t o discuss or
c l a r i f y any items i n t h i s report or t o f a c i l i t a t e the implementation of the
recommendations.
Staff: Gerald A. Silva
Coni R. Good
James A. Sexton
Steven A. Wallace
Respectfully submitted,
' J Douglas R. Norton
Auditor General
O F F I C E O F THE AUDITOR GENERAL
A PERFORMANCE AUDIT OF
THE ARIZONA STATE BOARD O F ACCOUNTANCY
A REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 79- 5
APPENDIX V -
APPENDIX V I -
APPENDIX V I I -
APPENDIX V I I I -
APPENDIX I X -
APPENDIX X -
APPENDIX X I -
APPENDIX X I 1 -
APPENDIX X I 1 1 -
APPENDIX X I V -
Memorandum from Legislative Council con-cerning
regulation of the accountant's
a t t e s t function - May 31, 1979
Memorandum from Legislative Council con-cerning
Arizona s t a t u t e s which now -
require the s e r v i c e s o f a Certified Public
Accountant or Public Accountant - March 14,
1979
Letters from Arizona f i n a n c i a l i n s t i t u t i o n s
regarding c r e d i t policies
Valley National Bank
F i r s t National Bank of Arizona
The Arizona Bank
Greater Arizona Savings
F i r s t Federal Savings
Memorandum from Legislative Council con-cerning
regulation of accounting- bookkeeping
and tax services offered by accountants -
April 13, 1979
Results of an Auditor General survey of
the Arizona accounting profession
Case s t u d i e s of the investigations resolved
by the S t a t e Board of Accountancy during
1978
Comments received from a Certified Public
Accountant regarding the scope and extent
of the Board's q u a l i t y review program
Memorandum from Legislative Council con-cerning
the authority of the S t a t e Board of
Accountancy to conduct peer review of
commercial a u d i t s - May 25, 1979
Attorney General opinion regarding the a b i l i t y
of the S t a t e Board of Accountancy t o access
f i n a n c i a l statements f i l e d with the Department
of Transportation - May 24, 1979
-
Memorandum from Legislative Council con-cerning
the r e s p o n s i b i l i t y of s t a t e licensing
agencies t o comply with Federal Equal
Employment Opportunity regulations - May 15,
1979
TABLE OF CONTENTS
SUMMARY
INTRODUCTION AND BACKGROUND
SUNSET FACTORS
FINDINGS
FINDING I
Unlike 40 other s t a t e s , Arizona does not l i c e n s e
accountants. A s a r e s u l t , t h e p o t e n t i a l f o r
f i n a n c i a l harm e x i s t s for the general p u b l i c
i n Arizona.
CONCLUSION
RECOMMENDATION
FINDING I1
The Public Accountant c l a s s i f i c a t i o n is unnecessary.
CONCLUSION
RECOMMENDATION
FINDING I11
The performance of the Arizona S t a t e Board of Accountancy
i n i n v e s t i g a t i n g and resolving complaints and reviewing
the competency of c e r t i f i c a t e holders has been superior
when c o n t r a s t e d w i t h o t h e r Arizona s t a t e r e g u l a t i n g
bodies and o t h e r s t a t e boards of accountancy. The
Board not only i n v e s t i g a t e s and r e s o l v e s complaints it
receives a g a i n s t c e r t i f i c a t e holders but a c t i v e l y pursues
a limited q u a l i t y review program as well. Such a program
is exceptional among Arizona r e g u l a t o r y bodies and s t a t e
boards of accountancy. However, our review has revealed
t h a t while the Board's q u a l i t y review program is commendable,
it appears t h a t t h i s program can be expanded t o include
a r e a s n o t c u r r e n t l y s u b j e c t t o review. -
Page
1
4
~-
9
CONCLUSION
RECOMMENDATION
FINDING I V
Page
7 5
The Arizona S t a t e Board of Accountancy has been
substandard i n its encouragement and use of public
input i n its operations. Information regarding
proposed r u l e s , regulations and l e g i s l a t i v e changes
has primarily been provided t o r e g i s t r a n t s and
not the consumer.
CONCLUSION
RECOMMENDATION
FINDING V
The Arizona S t a t e Board of Accountancy can reduce
operating costs by approximately $ 28,000 over a
four- year period. In addition, S t a t e general fund
i n t e r e s t earnings can be increased by as much as
approximately $ 27,000 i n four years.
CONCLUSION
RECOMMENDATION
OTHER PERTINENT INFORMATION
Entrance i n t o the Profession
WRITTEN RESPONSE TO THE AUDITOR GENERAL'S REPORT
APPENDICES
APPENDIX I - Selected Arizona s t a t u t e s regarding the accounting
profession
APPENDIX I1 - Comparative chart of s t a t e licensing requirements
for Certified Public Accountants
APPENDIX I11 - United S t a t e s S e c u r i t i e s and Exchange Commission's
commendation of the Arizona S t a t e Board of
Accountancy - July 1978
APPENDIX I V - L e t t e r from the Arizona Corporation Commission -
March 1, 1979 -
SUMMARY
The Arizona S t a t e Board of Accountancy was created i n 1919 together with the
f i r s t accountancy laws. The Board is responsible for administration and
enforcement of Arizona laws concerning the practice of accounting. These
d u t i e s include examination of applicants, issuance of c e r t i f i c a t e s t o
individuals that have f u l f i l l e d examination, experience and other
requirements; r e g i s t r a t i o n of firms and individuals t o practice accounting and
investigation of complaints and violations of accountancy law.
Arizona accountancy law provides for two types of c e r t i f i c a t e s t o be issued,
t h e C e r t i f i e d Public Accountant and the Public Accountant. Individuals meeting
requirements can be c e r t i f i e d and are then allowed t o use the reserved t i t l e s
of llCertified Public Accountant" and " Public Accountant."
The S t a t e Board of Accountancy consists of f i v e members, four of whom are
required t o be Certified Public Accountants and one member t o represent the
public a t large. The Board also has an advisory committee of f o u r Public
Accountants whose r e s p o n s i b i l i t i e s include providing advice and aid t o the
Board on matters a f f e c t i n g Public Accountants.
The a c t i v i t i e s of the Board and its administrative o f f i c e are funded through
fees charged for examination, c e r t i f i c a t i o n and r e g i s t r a t i o n , t e n percent of
which are deposited i n the s t a t e general fund.
Our review of the S t a t e Board of Accountancy revealed t h a t unlike 40 other
s t a t e s , Arizona does not license accountants but instead uses a l e s s extreme
form of regulation called " Reserve of T i t l e . " A s a r e s u l t , p o t e n t i a l for
f i n a n c i a l harm e x i s t s f o r the general public i n Arizona. ( page 23)
Our review revealed t h a t the Public Accountant c l a s s i f i c a t i o n is unnecessary.
( page 45)
In a d d i t i o n , our review disclosed the performance of the S t a t e Board of
Accountancy i n i n v e s t i g a t i n g and resolving complaints and reviewing the
competency of c e r t i f i c a t e h o l d e r s h a s been superior when c o n t r a s t e d with other
Arizona s t a t e r e g u l a t i n g bodies and other s t a t e boards of accountancy. The
Board not only i n v e s t i g a t e s and resolves complaints it r e c e i v e s , but a c t i v e l y
pursues a limited q u a l i t y review program. However, it appears t h a t t h i s
program can be expanded t o include a r e a s not c u r r e n t l y s u b j e c t to review.
( page 55)
Our review a l s o disclosed t h a t the S t a t e Board of Accountancy has been
substandard i n its encouragement and use of public input i n its o p e r a t i o n s .
Information regarding proposed r u l e s , r e g u l a t i o n s and l e g i s l a t i v e changes has
primarily been provided to r e g i s t r a n t s and not the consumer. ( page 75)
Our review revealed the S t a t e Board of Accountancy can reduce operating c o s t s
by approximately $ 28,000 over a four- year period by adopting a b i e n n i a l
r e g i s t r a t i o n cycle and by automating the r e g i s t r a t i o n process and maintenance
of i n v e s t i g a t i v e f i l e s . I n a d d i t i o n , S t a t e general fund i n t e r e s t earnings can
be increased by as much as approximately $ 27,000 i n four y e a r s . ( page 81)
F i n a l l y , an a n a l y s i s of entrance requirements revealed t h a t f i v e a r e a s
i n c l u d i n g e d u c a t i o n , examination, age, residency and moral c h a r a c t e r a r e
assessed before persons a r e c e r t i f i e d by the S t a t e Board of Accountancy. ( page
89
It is recommended t h a t :
1. The performance of the a t t e s t function be limited t o i n d i v i d u a l s
approved by t h e S t a t e Board of Accountancy and, t h e r e f o r e , required
t o adhere to the American I n s t i t u t e of C e r t i f i e d Public Accountants
standards for a u d i t i n g and accounting p r i n c i p l e s . ( page 49)
2. The Public Accountant c l a s s i f i c a t i o n be eliminated through
designation of the c l a s s i f i c a t i o n a s a " dying class" t h a t w i l l allow
c u r r e n t c e r t i f i c a t e holders t o r e t a i n t h e i r c e r t i f i c a t e s u n t i l they
no longer wish to do s o . ( page 54)
3. The S t a t e Board of Accountancy request an Attorney General's opinion
regarding t h e Board's l e g a l a u t h o r i t y to expand its q u a l i t y review program
t o include a u d i t r e p o r t s and f i n a n c i a l statements performed for
commercial and n o n p r o f i t o r g a n i z a t i o n s and c o r p o r a t i o n s by c e r t i f i e d
accountants. Within 90 days a f t e r r e c e i v i n g t h e Attorney General op- in ion,
the Board should formulate a p o l i c y regarding the expansion of its q u a l i t y
review program and communicate t h i s policy to a p p r o p r i a t e Senate and House
of Representatives committees. ( page 73 )
4. The Board adopt methods to encourage p u b l i c i n p u t and p a r t i c i p a t i o n i n the
promulgation of r u l e s and r e g u l a t i o n s and the development of l e g i s l a t i v e
proposals. ( page 80)
5. ARS 32- 730 r e q u i r i n g annual r e g i s t r a t i o n be amended t o allow l e s s frequent
r e g i s t r a t i o n . L e g i s l a t u r e and t h e Governor approve t h e S t a t e Board of
Accountancy budget to include c o s t s f o r automating the processing of data.
The Board review methods f o r automation and implement the method with
maximum cost savings and f l e x i b i l i t y f o r f u t u r e needs. ( page 88)
INTRODUCTION AND BACKGROUND
In response to a September 19, 1978, resolution of the Joint Legislative Budget
Committee and a January 18, 1979, resolution of the Joint Legislative Oversight
Committee, the Office of the Auditor General has conducted a performance audit
as part of the sunset review of the S t a t e Board of Accountancy i n accordance
with ARS 41- 2351 through 41- 2374.
The S t a t e Board of Accountancy is composed of f i v e members, four o f whom are
required by Arizona s t a t u t e * to be Certified Public Accountants and one member
to represent the public a t large.
The Board is responsible f o r t h e administration and enforcement of Arizona laws
concerning the practice of accounting. Board d u t i e s include:
1. Administration of i n i t i a l examination to be a c e r t i f i e d accountant.
2. Issuance of c e r t i f i c a t e s t o individuals meeting education, t e s t i n g
and experience requirements.
3. Annualregistration o f c e r t i f i e d i n d i v i d u a l s , p a r t n e r s h i p s and
professional corporations.
4. Resolution of complaints and v i o l a t i o n s o f Arizona accountancy laws.
The Board and its o f f i c e are funded through fees charged for examination,
c e r t i f i c a t i o n and r e g i s t r a t i o n . Ten percent of the fees received are deposited
i n the s t a t e general fund while the remaining ninety percent are used for Board
operations within the l i m i t s of an annual budget approved by the l e g i s l a t u r e .
Table 1 summarizes the a c t u a l fee r e c e i p t s , expenditures and full- time
equivalent employees of the S t a t e Board of Accountancy for f i s c a l years 1975- 76
through 1977- 78 and projections for f i s c a l years 1978- 79 and 1979- 80.
* Appendix I contains selected Arizona S t a t u t e s regarding the accountancy
profession.
TABLE 1
F i s c a l Year
ACTUAL AND PROJECTED FEE RECEIPTS,
EXPENDITURES AND FULL- TIME EQUIVA-LENT
EMPLOYEES ( FTE) FOR THE STATE
BOARD OF ACCOUNTANCY DURING FISCAL
YEAR 1975- 76 THROUGH 1979- 80
Actual Projected
Net Receipts ( fees) * $ 80,180 $ 1 27,530 $ 1 52,540 $ 1 45,420 $ 205,860
Expend it ures 83,420 108,620 136,880 160,600 222,200
Change i n Fund Balance ( 3,240) 18,910 15,660 ( 15,180) ( 16,340)
Beginning Fund Balance 36,200 32 ,960 51,870 67,530 52,350 a
Ending Fund Balance $ 32,960 $ 51,870 $ 67,530 $ 52,350 $ 36,010
Full- Time Equivalent
Employees -- 3 -- 3 - 5 -- 7 - 7
Accounting Profession Defined
Accounting is defined i n Arizona law** as:
" any accounting s e r v i c e , including recording and
summarizing f i n a n c i a l t r a n s a c t i o n s , analyzing and
v e r i f y i n g f i n a n c i a l information, r e p o r t i n g o f f i n a n c i a l
r e s u l t s t o an employer, c l i e n t s or other p a r t i e s and
rendering of tax and management s e r v i c e s t o an employer,
c l i e n t s or o t h e r p a r t i e s . "
According to the American I n s t i t u t e of C e r t i f i e d Public Accountants:
" Accounting is a s e r v i c e a c t i v i t y . Its function is t o
provide q u a n t i t a t i v e information, primarily f i n a n c i a l i n
n a t u r e , about economic e n t i t i e s t h a t is intended to be
u s e f u l i n making economic decisions. . . Through the
f i n a n c i a l accounting process, the myriad and complex
e f f e c t s o f t h e economic a c t i v i t i e s of an e n t e r p r i s e a r e
accumulated, analyzed, q u a n t i f i e d , c l a s s i f i e d , recorded,
summarized and reported.. ."
Accountants a r e employed i n government, p r i v a t e i n d u s t r y , education and i n
public accounting ( t h e o f f e r i n g of accounting s e r v i c e s to the general p u b l i c ) .
Public accounting can include a wide range of s e r v i c e s including tax and
management s e r v i c e s , recording and analyzing f i n a n c i a l data and the a u d i t or
a t t e s t function.
* Amount is net a f t e r d e p o s i t i n g t e n percent of the amount received i n the
s t a t e general fund. ** S t a t e law a s amended i n 1979.
5
The recording and analyzing o f f i n a n c i a l data includes e s t a b l i s h i n g , modifying
or maintaining accounting systems. Tax s e r v i c e s include tax c o n s u l t i n g , t a x
planning and tax r e t u r n p r e p a r a t i o n while management s e r v i c e s may be analyzing
markets, product and market f e a s i b i l i t y , consumer a t t i t u d e s , a c t u a r i a l and
general management consulting. The a t t e s t function is the performance of an
a u d i t and expression of an opinion on t h e f i n a n c i a l statements of an
organization.
Regulation of the Accounting Profession
The f i r s t l e g i s l a t i o n r e g u l a t i n g accountancy i n the United S t a t e s wa, s
e s t a b l i s h e d by the S t a t e of New York i n 1896. I n 1919 Arizona l e g i s l a t o r s
passed the first Arizona accountancy l a w and created the Board of Accountancy,
the forerunner of the present Arizona S t a t e Board of Accountancy. By 1925 a l l
s t a t e s , including Arizona, had some form of accountancy l e g i s l a t i o n .
A s of March 1979, 40 of the 50 s t a t e s ( 80 percent) have enacted l e g i s l a t i o n
t h a t r e s t r i c t s the performance of the a t t e s t function t o l i c e n s e h o l d e r s . T h i s
type of l e g i s l a t i o n is c a l l e d a " l i c e n s i n g n law. Ten other s t a t e s ( 20
p e r c e n t ) , including Arizona, r e s t r i c t the use of the t i t l e s C e r t i f i e d Public
Accountant, t h e i r a b b r e v i a t i o n s and s i m i l a r t i t l e s to the c e r t i f i c a t e holder
through a " reserve of titleM law. *
Arizona l a w provides for two types of c e r t i f i c a t e s t o be issued. One, the
C e r t i f i e d Public Accountant, r e q u i r e s passage of a n a t i o n a l examination,
a p p r o p r i a t e education and two years of acceptable experience. The o t h e r ,
Public Accountant, r e q u i r e s passage o f c e r t a i n s u b j e c t s of the n a t i o n a l
examination p l u s s p e c i f i e d educational and experience requirements.
I n d i v i d u a l s meeting these requirements can be c e r t i f i e d and a r e then allowed t o
use the t i t l e " C e r t i f i e d P u b l i c Accountant" o r " Public Accountant."
Q Appendix I1 c o n t a i n s a comparison of s t a t e accountancy laws.
Both the examination f o r p r o f i c i e n c y and the standards for performance i n
accountancy t h a t the S t a t e Board of Accountancy has adopted a r e developed and
updated n a t i o n a l l y through the American I n s t i t u t e of C e r t i f i e d Public
Accountants ( AICPA). The r o l e of the Board i n c l u d e s t h e a d m i n i s t r a t i o n of the
n a t i o n a l examination i n Arizona and i n t e r p r e t a t i o n o f t h e AICPA standards i n
cases of complaint or v i o l a t i o n of Arizona accountancy l a w .
The Board has an advisory committee of four members not l e s s than t h r e e of whom
must be Public Accountants a c t i v e i n public p r a c t i c e i n t h i s s t a t e . Committee
r e s p o n s i b i l i t i e s are to advise and a i d the Board i n matters a f f e c t i n g Public
Accountants and to vote as a body with the Board on matters p e r t a i n i n g to
Public Accountants.
The Board's r e s p o n s i b i l i t i e s for r e g u l a t i n g t h e accountancy profession i n
Arizona have s t e a d i l y expanded as the number of c e r t i f i c a t e holders has
increased. Table 2 summarizes t h i s growth f o r f i s c a l years 1975- 76 through
1977- 78 and its projected continuation through f i s c a l year 1979- 80.
ACTUAL AND PROJECTED EXAMINATION,
CERTIFICATION AND CERTIFICATE RENEWAL
ACTIVITY OF ARIZONA STATE BOARD
OF ACCOUNTANCY FISCAL YEARS 1975- 76
THROUGH 1979- 80
Candidates
Examined
Percentage
Increase
F i s c a l Year Number Over 1975- 76
C e r t i f i c a t e s
Granted
Percentage
Increase
Number Over 1975- 76
R e g i s t r a t i o n s
Renewed
Percentage
Increase ( I
Number Over 1975- 76
In a d d i t i o n , t h e i n i t i a t i o n by the Board of an a c t i v e q u a l i t y monitoring and
review program has a l s o increased the l e v e l of the Board's a c t i v i t y . Using the
s e r v i c e s of a contracted i n v e s t i g a t o r , t h e Board has reviewed publicly f i l e d
a u d i t r e p o r t s for compliance with accountancy standards. If s e r i o u s viol_ ations
a r e detected, the Board e n t e r s motions i n the p u b l i c ' s behalf and i n s t i t u t e s
d i s c i p l i n a r y proceedings.
The Office o f t h e Auditor General expresses its g r a t i t u d e t o present and former
members of the S t a t e Board of Accountancy and its s t a f f f o r t h e i r cooperation,
a s s i s t a n c e and consideration during the course of our a u d i t .
SUNSET FACTORS
I n accordance with ARS 41- 2351 through 41- 2374, - nine f a c t o r s were considered t o
determine, i n p a r t , whether t h e S t a t e Board of Accountancy should be continued
or terminated.
--
These f a c t o r s are:
1. Objective and purpose i n e s t a b l i s h i n g the Board,
2. The degree to which the Board has been able to respond to the needs o f t h e
public and the e f f i c i e n c y with which it has operated,
3. The extent to which the Board has operated within the public i n t e r e s t ,
4. The extent t o which r u l e s and r e g u l a t i o n s promulgated by the Board a r e
c o n s i s t e n t with the l e g i s l a t i v e mandate,
5. The extent to which the Board has encouraged input from t h e p u b l i c before
promulgating its r u l e s and r e g u l a t i o n s and the extent t o which it has
informed the public as to its a c t i o n s and t h e i r expected impact on the
public,
6. The extent t o which the Board has been able to i n v e s t i g a t e and resolve
complaints t h a t a r e within its j u r i s d i c t i o n ,
7. The extent t o which the a t t o r n e y g e n e r a l or any other applicable agency of
s t a t e government has the a u t h o r i t y t o prosecute a c t i o n s under enabling
l e g i s l a t i o n ,
8. The extent t o which the Board has addressed d e f i c i e n c i e s i n t h e i r enabling
s t a t u t e s which prevent them from f u l f i l l i n g t h e i r s t a t u t o r y mandate, and
9. The extent t o which changes a r e necessary i n the laws of the Board t o
adequately comply with the f a c t o r s l i s t e d i n t h i s subsection.
SUNSET FACTOR: OBJECTIVE AND PURPOSE
I N ESTABLISHING THE BOARD
The purpose for the S t a t e Board of Accountancy has been defined by Arizona
Revised S t a t u t e s . The d u t i e s o f the Board follow:
1) The Board s h a l l issue a c e r t i f i c a t e of c e r t i f i e d public accountant or
public accountant to any person meeting specified requirements.
( ARS 32- 721 - 22 )
2) Examination of persons applying for c e r t i f i c a t e s s h a l l be held
within the s t a t e , as the Board decides, a t l e a s t once a year. ( ARS
32- 723
3) The Board may waive examination of and may issue a c e r t i f i c a t e of
c e r t i f i e d public accountant or public accountant to anyone who is a
holder of a valid and unrevoked c e r t i f i c a t e , from the s t a t e or
foreign country of o r i g i n a l issue. ( ARS 32- 727)
4 The Board s h a l l each year require every c e r t i f i e d public accountant,
every public accountant, every partnership and every professional
corporation to r e g i s t e r with the Board and pay a r e g i s t r a t i o n fee.
( ARS 32- 730
5) After notice and hearing, the Board may revoke or suspend any
c e r t i f i c a t e or may censure the holder for any one or any combination
of causes including :
a. Conviction of a felony where c i v i l r i g h t s have not been
restored.
b. Conviction of any crime which has a reasonable r e l a t i o n s h i p to
the p r a c t i c e o f accounting.
c. Fraud or deceit in obtaining a c e r t i f i c a t e .
d. Dishonesty, fraud or continuing negligence i n the practice
of accounting.
e. Cancellation, revocation or suspension of c e r t i f i c a t e or other
authority to practice or r e f u s a l to renew the c e r t i f i c a t e or
other authority to practice as a c e r t i f i e d public accountant by
any other s t a t e o r f o r e i g n country.
f. Violation of accountancy law or knowing violation o f r u l e s and
regulations promulgated by the Board.
g. Suspension or revocation for cause of the r i g h t to practice
before any governmental body or agency. ( ARS 32- 741
h. Final action i n a c i v i l o r a d m i n i s t r a t i v e proceeding where a
court or agency makes findings o f accounting v i o l a t i o n s ,
dishonesty, fraud, misrepresentation or breach of fiduciary
duty or fraud.
6 ) The Board may i n i t i a t e proceedings under accountancy law, for cause,
e i t h e r upon its own motion or a verified complaint. ( ARS 32- 743)
7) Upon application i n writing and a f t e r hearing, the Board may issue a
new c e r t i f i c a t e t o a c e r t i f i e d public accountant or public
accountant whose c e r t i f i c a t e s h a l l have been revoked or may permit
r e g i s t r a t i o n of anyone whose c e r t i f i c a t e has been suspended or may
reissue c e r t i f i c a t e s or modify suspension of a c e r t i f i c a t e . ( ARS 32-
748
8 ) The Board s h a l l e s t a b l i s h and c o l l e c t a uniform fee from each
applicant f o r an examination and from each applicant for a
c e r t i f i c a t e . ( ARS 32- 729)
9 ) The Board may adopt and amend regulations for the conduct of its
a f f a i r s and administration o f accountancy law. The Board may also
prescribe and amend rules of conduct appropriate to e s t a b l i s h and
maintain a high standard of competence, independence and i n t e g r i t y
i n public accounting. ( ARS 32- 703)
According to Board members, the overall objective of accountancy law and the
Board is to identify to the public those accountants t h a t have attained and
continue to possess a minimal level of s k i l l in the practice of accounting.
Specific operational o b j e c t i v e s e s t a b l i s h e d by the Board i n 1977 were:
- Obtain adequate long- range financing.
- Determine type and number of personnel needed for enforcement.
- Continue q u a l i t y c o n t r o l program.
- Review areas required for continued competence and recommend to the
Legislature any needed changes.
- Review and i n i t i a t e an o f f i c e organization capable of handling the
Board ' s future needs.
- Review rules t h a t need revising and hold hearings to amend those
rules on a timely basis.
SUNSET FACTOR: THE DEGREE TO WHICH THE
BOARD HAS BEEN ABLE TO RESPOND TO THE
NEEDS OF THE PUBLIC AND THE EFFICIENCY
WITH WHICH I T HAS OPERATED
The S t a t e Board of Accountancy has actively responded to the public's need for
competent, accurate accounting services through the use of a nationally
recognized examination for p o t e n t i a l c e r t i f i c a t e holders, scrutiny of
a p p l i c a n t s ' experience and educational background and an a c t i v e program to
enforce accountancy laws and Board adopted standards of performance. The
efficiency of Board operations can, however, be improved through use of
automated equipment and r e - d i s t r i b u t i o n of the workload. ( page 81)
Of p a r t i c u l a r note is the Board's i n i t i a t i v e i n monitoring publicly f i l e d
accounting reports for compliance with accountancy laws, r u l e s and
regulations. If a c e r t i f i e d accountant's work is substandard, the Board
imposes sanctions t h a t can include suspension or revocation of c e r t i f i c a t e ,
r e s t r i c t i o n of p r a c t i c e , peer review of work performed or continuing education.
In cases o f complaints or publicly known wrongdoing, the Board i n s t i t u t e s
proceedings to i n v e s t i g a t e and if valid, d i s c i p l i n e the c e r t i f i c a t e holder.
The Board has reviewed a s t e a d i l y increasing number of investigations r e s u l t i n g
from public and board i n i t i a t e d complaints. Table 3 summarizes i n v e s t i g a t i o n s ,
revocations, suspensions and consent order sanctions from f i s c a l year 1975- 76
through 1 977- 78.
TABLE 3
INVESTIGATIONS OF ACCOUNTANCY LAW, RULE
OR REGULATION VIOLATIONS AND RESULTING
REVOCATIONS, SUSPENSIONS AND CONSENT
ORDER SANCTIONS AND CEASE AND DESIST
ORDERS BY THE STATE BOARD OF
ACCOUNTANCY FOR CALENDAR YEARS 1976,
1977 AND 1978 AND THE FIRST QUARTER
OF 1979
INVENTORY OF INVESTIGATIONS
Beginning Investigations i n Process 14 3 2 5 1
New Investigations - 58 - 6 1 9 1
T o t a l I n v e s t i g a t i o n s 72 93 142
I n v e s t i g a t i o n s Completed - 4 0 - 4 2 - 78
Ending Investigations in Process - 32 - 5 1 - 64
SANCTIONS AND ORDERS IMPOSED
Revocations
Suspensions
Other Disciplinary Sanctions
Cease and Desist Orders
Totals
* 1st Quarter of 1979
a
( For a discussion of the Board's enforcement of accountancy laws and standards
of performance, see page 55.)
The administrative efficiency of the r e g i s t r a t i o n , complaint and r e c i p r o c i t y
c e r t i f i c a t i o n processes can be improved. Cost savings of up to $ 28,000 over a
four- year period could r e s u l t from automated processing of data and
r e d i s t r i b u t i o n of the workload generated by the annual r e g i s t r a t i o n process.
In addition, State general fund i n t e r e s t earnings can be increased by as much
as approximately $ 27,000 i n four years. ( For a discussion of t h i s issue, see
page 81.)
SUNSET FACTOR: THE EXTENT TO WHICH THE BOARD
HAS OPERATED WITHIN THE PUBLIC INTEREST
The Board's actions appear to be c o n s i s t e n t l y within t h e p u b l i c i n t e r e s t . The
Board has received both national and local recognition for its e f f o r t s t o
enforce accountancy l a w and adopted standards o f performance. In addition, the
Board has i n i t i a t e d interagency meetings to discuss accountancy i s s u e s and
problems, and has used volunteer committees to supplement its resources.
The U. S. S e c u r i t i e s and Exchange Commission, in a 1978 report to Congress on
the regulation of the accounting profession,* praised the Arizona S t a t e Board
of Accountancy and s t a t e d , i n part:
" A few s t a t e s , notably Arizona, Colorado and Florida, have
begun r e l a t i v e l y ambitious monitoring, review and
enforcement programs ." ( Emphasis added)
M r . James C. S e l l , Director of Regulations for the Arizona Corporation
Commission, i n a l e t t e r to the Office o f the Auditor General dated March 1,
1979** s t a t e d , in part:
" The aggressive actions taken by the S t a t e Board of
Accountancy over t h e p a s t two and one- half years has
g r e a t l y helped t h i s Agency i n upgrading the q u a l i t y of the
accounting work found i n public r e g i s t r a t i o n s ... The
Division believes the continued existence of the S t a t e
Board of Accountancy is v i t a l to t h e p r o t e c t i o n of Arizona
investors . I 1 ( Emphasis added)
* Appendix I11 contains t h e r e l e v a n t t e x t o f the Congressional report by
the S e c u r i t i e s and Exchange Commission. ** Appendix I V contains the l e t t e r from the Arizona Corporation Commission.
14
In 1978, the Board i n i t i a t e d quarterly meetings with other s t a t e agencies, such
a s the Corporation Commission, i n t e r e s t e d i n maintaining quality accounting
services. These meetings are held informally to discuss mutual concerns and to
exchange information.
--
Also notable is the Board's use of two volunteer committees which provide
additional resources i n regulating accounting services. A five- member
Complaint Committee, consisting of three c e r t i f i e d accountants, a lawyer and a
banker, conducts a preliminary review of complaints investigated and provides
the Board with a recommendation on any action needed. A three- member
Administrative Committee conducts a preliminary review of c e r t i f i c a t e
a p p l i c a n t s ' education and work experience and provides recommendations to the
Board.
SUNSET FACTOR: THE EXTENT TO WHICH RULES
AND REGULATIONS PROMULGATED BY THE BOARD
ARE CONSISTENT WITH THE LEGISLATIVE MANDATE
Based upon a review of l e g i s l a t i o n ( ARS Chapter 6 ) , it appears t h a t the Board,
with one exception, has promulgated r u l e s and r e g u l a t i o n s c o n s i s t e n t with
l e g i s l a t i v e mandate.
The one exception is r u l e R4- 1- 42 which has requirements for r e c i p r o c i t y beyond
those stated i n the law.
ARS 32- 727 s t a t e s , i n part:
" The board may waive the examination of and may issue a
c e r t i f i c a t e of c e r t i f i e d public accountant or public
accountant to any person who is the holder of a valid and
unrevoked c e r t i f i c a t e , from the s t a t e o r f o r e i g n country
of o r i g i n a l issue ... p rovided the applicant meets the
requirements s e t forth in Section 32- 721, paragraphs 1, 2
and 5."
An a d d i t i o n a l phrase was added t o r u l e R4- 1- 42 which s t a t e s :
l1 . . . meets the requirements s e t f o r t h i n Section 32- 72 1 . A.
1, 2 and 5, and the educational requirements e x i s t i n g i n
Arizona a t the time t h e a p p l i c a n t was issued the
c e r t i f i c a t e upon which r e c i p r o c i t y is requested.. . l1
( Emphasis added )
-
The Board had r e c e n t l y held t h i s r u l e i n abeyance and supported l e g i s l a t i o n t o
i n c o r p o r a t e t h e a d d i t i o n a l r e c i p r o c i t y requirement i n Arizona law during 1976,
1977 and 1978. During the 1979 l e g i s l a t i v e s e s s i o n , ARS 32- 727 was amended to
agree with r u l e R4- 1- 42, t h u s e l i m i n a t i n g t h e i n c o n s i s t e n c y .
SUNSET FACTOR: THE EXTENT TO WHICH THE AGENCY
HAS ENCOURAGED INPUT FROM THE PUBLIC BEFORE
PROMULGATING ITS RULES AND REGULATIONS AND THE
EXTENT TO WHICH IT HAS INFORMED THE PUBLIC AS
TO ITS ACTIONS AND THEIR EXPECTED IMPACT ON THE
PUBLIC
The S t a t e Board of Accountancy, i n t h e promulgation of its r u l e s and
r e g u l a t i o n s has limited its request f o r p u b l i c input t o compliance with
accountancy law and the Administrative Procedures Act. T h i s h a s r e s u l t e d i n
the encouragement of p u b l i c input being p r i m a r i l y l i m i t e d t o c e r t i f i e d
accountants, r a t h e r than the public using the s e r v i c e s o f accountants.
Accountancy law ARS 32- 703 states:
" A t l e a s t t h i r t y days p r i o r t o the promulgation of any such
r u l e o r amendment, the board s h a l l mail copies of the
proposed r u l e o r amendment t o each holder of a
c e r t i f i c a t e . . . " ( Emphasis added)
The Board has complied with t h i s law as well as submitting the proposed r u l e or
r u l e amendment t o the S e c r e t a r y of S t a t e as s t a t u t o r i l y required. These
proposals and t h e p r o s p e c t i v e adoption dates are published i n the monthly
Administrative Digest which is d i s t r i b u t e d t o p a r t i e s requesting it.
However, a s s t a t e d by noted law professor and former Dean of the College of Law
a t Arizona S t a t e University; Ernest Gellhorn:
" That existing procedures conform to c o n s t i t u t i o n a l minima
is not a reason for agencies to f a i l to explore appropriate
procedures for providing e f f e c t i v e notice to the affected
public and t h e i r representatives."
The Board also l i m i t s encouragement o f public input t o the c e r t i f i c a t e holders
and the accountancy profession when developing proposed changes t o the
accountancy law. ( For a f u l l discussion o f the issue of public i n p u t , s e e page
75.)
The Board has provided public notice of its meetings, publicly a d v e r t i s e d t h e
semiannual accountancy examination and provided information to the press
regarding d i s c i p l i n a r y a c t i o n s it has taken. Despite these e f f o r t s , 62.4
percent of users of accountant s e r v i c e s , who were aware of the Board, a s
revealed in a survey of 625 users conducted i n 1978, did not know or had
misconceptions of the S t a t e Board of Accountancy's r o l e and powers. ( page 78)
A notable accomplishment of the Board in communicating its actions t o
r e g i s t r a n t s is the quarterly newsletter, ASBA UPDATE, which d e t a i l s
d i s c i p l i n a r y a c t i o n s , c e r t i f i c a t e s granted and other board r e l a t e d a f f a i r s .
SUNSET FACTOR: THE EXTENT TO WHICH THE
BOARD HAS BEEN ABLE TO INVESTIGATE AND
RESOLVE COMPLAINTS THAT ARE WITHIN ITS
JURISDICTION
The S t a t e Board of Accountancy has actively investigated and resolved
complaints brought to its a t t e n t i o n and any violations of accountancy law
discovered through its own i n i t i a t i v e .
The Board reviews each complaint received. Complaints range from fee disputes
to corporate fraud. Complaint sources include consumers, c e r t i f i c a t e holders,
and Federal and S t a t e agencies. If the Board determines t h a t a complaint is
within its j u r i s d i c t i o n , it i n i t i a t e s an investigation.
-
The Board, through its q u a l i t y monitoring and review program, i n i t i a t e s
investigations to determine i f c e r t i f i c a t e holders are complying with adopted
standards of performance. If violations are detected, an i n v e s t i g a t i o n is
begun. It should be noted t h a t t h i s q u a l i t y monitoring and review is
r e s t r i c t e d to publicly f i l e d a u d i t s , such a s those performed for municipalities
and educational i n s t i t u t i o n s . Therefore, the Board's q u a l i t y monitoring and
review does not extend to c e r t i f i e d accountants who perform private audits.
( For a discussion of i n v e s t i g a t i o n procedures and c o n s t r a i n t s on q u a l i t y review
monitoring, see page 55.)
It should be noted t h a t the a b i l i t y o f t h e Board t o actively pursue both
complaint and q u a l i t y monitoring i n v e s t i g a t i o n s can p o t e n t i a l l y be limited by a
lack of s u f f i c i e n t funds. Our review revealed t h a t a complex i n v e s t i g a t i o n of
a large accounting f i r m involving a public hearing would leave the Board with
i n s u f f i c i e n t monies for other complaint and/ or q u a l i t y review investigations.
Table 4 i l l u s t r a t e s t h i s s i t u a t i o n .
TABLE 4
PROJECTED BUDGET
DEFICIT IF THE STATE BOARD OF
ACCOUNTANCY PERFORMS A COMPLEX
INVESTIGATION OF A LARGE ACCOUNTING
FIRM INVOLVING A PUBLIC HEARING%
Budget Allocation for I n v e s t i g a t i o n s
( FY 1977- 78)
Estimated Potential Cost of A Complex Investigation
of a Large Accounting Firm Involving A Public Hearing ( 11,600)
Remaining Budget Allocation Available for Complaints and
Quality Review
Estimated Annual Cost for Complaint and Quality
Review Investigations During 1977- 78
Projected Budget Deficit Resulting From A Complex Investigation $( I 1,628)
A s shown above, a complex i n v e s t i g a t i o n by the Board would n e c e s s i t a t e e i t h e r . ( I
a curtailment of complaint and/ or q u a l i t y review i n v e s t i g a t i o n s or a supple-mental
budget appropriation.
-
* Based on h i s t o r i c a l information from F i s c a l Year 1977- 78.
SUNSET FACTOR: THE EXTENT TO WHICH THE ATTORNEY GENERAL
OR ANY OTHER APPLICABLE AGENCY OF STATE GOVERNMENT HAS
THE AUTHORITY TO PROSECUTE ACTIONS UNDER ENABLING
LEGISLATION
-
Based upon a review of l e g i s l a t i o n ( ARS 32- 741 through 743, 32- 746, 32- 747, and
32- 7501, the Attorney General and the S t a t e Board of Accountancy have
s u f f i c i e n t authority to prosecute actions under the enabling l e g i s l a t i o n .
The Attorney General is empowered t o i n s t i t u t e criminal proceedings for
violation of accountancy law through ARS 32- 746. B which s t a t e s :
" Fraudulent audit practice is a c l a s s 5 felony, fraudulent
a u d i t p r a c t i c e s i n connection with any s e c u r i t i e s offering
or involving the f i l i n g of f i n a n c i a l statements with
s e c u r i t i e s agencies of t h i s s t a t e is a c l a s s 4 felony."
The Board has the necessary authority to prosecute v i o l a t o r s of s t a t e
accountancy laws through several sections of these laws. These s e c t i o n s a r e :
ARS32- 741 - Authority t o revoke or suspend a c e r t i f i c a t e granted by the
Board or censure the holder of such c e r t i f i c a t e f o r various
actions, primarily related to fraud or d e c e i t , committed by
the c e r t i f i c a t e holder.
ARS32- 742 - Authority to revoke the r e g i s t r a t i o n t o practice publice
accounting, of a partnership or professional corporation
for v i o l a t i o n s s i m i l a r t o those of individual c e r t i f i c a t e
holders.
ARS32- 743 - Authority t o i n i t i a t e proceedings under the accountancy
law, for cause, e i t h e r upon its own motion or a v e r i f i e d
complaint-. Includes t h e a u t h o r i t y to conduct
i n v e s t i g a t i o n s and hold hearings.
ARS32- 747 - Authority t o prosecute persons who are g u i l t y of a c l a s s 2
misdemeanor for using t i t l e s which suggest c e r t i f i c a t i o n
when, i n f a c t , the person is not c e r t i f i e d .
ARS 32- 750 - Authority to make an application to the applicable court to
issue an i n juction, r e s t r a i n i n g order o r o t h e r order to a
person who has engaged or is about to engage in a violation
of ARS 32- 747. -
SUNSET FACTORS: THE EXTENT TO WHICH THE BOARD
HAS ADDRESSED DEFICIENCIES I N THEIR ENABLING
STATUTES WHICH PREVENT THEM FROM FULFILLING
THEIR STATUTORY MANDATE
The S t a t e Board of Accountancy has proposed l e g i s l a t i v e changes i n the
accountancy laws, i n the years 1973 through 1979, t o address d e f i c i e n c i e s t h e
Board perceived i n t h e i r enabling s t a t u t e s .
A s a r e s u l t , in 1973, several changes i n the accountancy s t a t u t e s were enacted
including t h e a d d i t i o n of a public member to the Board and adjustments i n the
examination requirements. During the 1975 through 1978 s e s s i o n s , t h e S t a t e
Board of Accountancy proposed unsuccessful l e g i s l a t i v e changes t h a t included
the following major issues:
1975 - Restriction of a t t e s t function t o c e r t i f i e d accountants; continuing
educational requirements; deletion of r e c i p r o c i t y f o r public
accountants. ( HB 2321)
1976 - Restriction of a t t e s t function to c e r t i f i e d accountants; continuing
educational requirements; education requirements for r e c i p r o c i t y ;
additional c e r t i f i c a t i o n requirements r e l a t i n g to fraud. ( HB 2140)
1977 - Similar to 1976 plus suspension f o r c e r t a i n actions r e l a t i n g to fraud.
( SB 1295)
1978 - Similar t o 1976 plus d e f i n i t i o n of accounting and other r e l a t e d terms;
rule making power for e s t a b l i s h i n g and maintaining- high standards of
competence, independence and i n t e g r i t y as required by generally
accepted accounting p r i n c i p l e s , a u d i t i n g standards and s e c u r i t i e s law;
power t o authorize Attorney General t o bring action t o recover c i v i l
penalties. ( SB 1220)
During the 1979 l e g i s l a t i v e session, the Board proposed successful l e g i s l a t i o n
concerning mandatory continuing education, education requirements for
r e c i p r o c i t y , reinstatement of revoked c e r t i f i c a t e s , various accounting
d e f i n i t i o n s and other changes. ( HB 2131)
SUNSET FACTOR: THE EXTENT TO WHICH CHANGES ARE NECESSARY
I N THE LAWS OF THE BOARD AGENCY TO ADEQUATELY COMPLY WITH
THE FACTORS L I S T E D I N T H I S SUBSECTION
For a discussion o f these i s s u e s , s e e pages 44, 54, 73 and 88.
FINDING I
UNLIKE 40 OTHER STATES, ARIZONA DOES NOT LICENSE ACCOUNTANTS. AS A RESULT, THE
POTENTIAL FOR FINANCIAL HARM EXISTS FOR THE GENERAL PUBLIC I N ARIZONA.
Under the Arizona accountancy law any individual may provide the publi- s with
the same accounting services provided by Certified Public Accountants and
Public Accountants. Arizona law only r e s t r i c t s the usage o f t h e titles
" Certified Public Accountant" and " Public Accountant" and abbreviations of
these titles to persons who have demonstrated a minimum level of s k i l l and
competency. This form of s t a t e regulation does not c o n s t i t u t e licensing but
r a t h e r a l e s s extreme degree of s t a t e regulation called " Reserve of T i t l e . "
However, in 40 s t a t e s one accounting service, the a t t e s t function, has been
recognized to be of such importance to the f i n a n c i a l and economic welfare of
the general public t h a t its p r a c t i c e is r e s t r i c t e d t o Certified Public
Accountants and Public Accountants. The g e n e r a l p u b l i c i n Arizona does not
have t h i s protection from f i n a n c i a l harm.
Alternative Methods of
S t a t e Regulation of Occupations
Licensing is the most extreme form of s t a t e occupational regulation. In March
1978, the Council of S t a t e Governments* published Occupational Licensing:
Questions A Legislator Should Ask. In t h i s p u b l i c a t i o n l i c e n s i n g is defined
as:
* The Council of S t a t e Governments is a joint agency of a l l the s t a t e
governments - created, supported and directed by them. It conducts
research on s t a t e programs and problems; maintains an information service
available to s t a t e agencies, o f f i c i a l s , and l e g i s l a t o r s ; i s s u e s a v a r i e t y
of publications; a s s i s t s i n s t a t e - f e d e r a l l i a i s o n ; promotes regional and
s t a t e - l o c a l cooperation; and provides s t a f f for a f f i l i a t e d organizations.
" Licensing is a process by which an agency or government
grants permission t o an individual to engage i n a given
occupation upon finding t h a t the applicant has a t t a i n e d
the minimal degree of competency required to ensure t h a t
the public health, s a f e t y , and welfare w i l l be reasonably
well protected.
Licensing makes it i l l e g a l for anyone who does not hold a
license to engage i n the occupation, profession, trade, --
etc. covered by the s t a t u t e . . . "
According to the Montana Office of the Legislative Auditor i n its 1978
publication e n t i t l e d , Alternative Methods of Regulating Professions,
Occupations, and I n d u s t r i e s , t h e r e are seven a l t e r n a t i v e methods of s t a t e
occupational regulations.
These methods of occupational regulation range from the most extreme,
l i c e n s i n g , to the l e a s t extreme, no regulation. The appropriate method of
regulation for a p a r t i c u l a r occupation is dependent upon the s e v e r i t y of
p o t e n t i a l physical o r f i n a n c i a l harm incompetent or unscrupulous p r a c t i t i o n e r s
may i n f l i c t upon the general public. The more severe t h e p o t e n t i a l for harm is
to the public, the more extreme the appropriate method of s t a t e regulation.
Conversely, the l e s s severe the p o t e n t i a l f o r harm is to the public, the l e s s
extreme the appropriate method of s t a t e regulation.
The seven a l t e r n a t i v e methods of s t a t e occupational regulations a r e l i s t e d
below in order from the most extreme to the l e a s t extreme:
Licensing - The granting by some government authority of a r i g h t or
permission t o carry on a business or do an a c t which would
otherwise be i l l e g a l . The e s s e n t i a l elements of
licensing a r e t h e s t i p u l a t i o n of circumstances and
individual p r e r e q u i s i t e s under which permission t o
perform an otherwise prohibited a c t i v i t y may be granted
and the a c t u a l determination of permission in s p e c i f i c
instances. The l a t t e r function is generally an
administrative r e s p o n s i b i l i t y and includes rule- making
authority by some e n t i t y . Licensing may a l s o create a
mechanism for monitoring an occupation or profession on
an ongoing basis. This may e n t a i l enforcement decisions
made during complaint adjudication, periodic inspections
or investigations. Licensing a l s o provides a " police
e f f e c t " over the regulated profession, trade or industry.
Practice
Restriction - Differs from licensing i n t h a t there is no need for an
interim body with the general authority to promulgate
r u l e s and regulations, and no s p e c i f i c mechanism for
monitoring the profession, trade or industry on an
ongoing basis.
Reserve o f T i t l e - Any member of the public, who d e s i r e s , could p a r t i c i p a t e
i n the regulated occupation. However, the titles of
l l c e r t i f i e d , l l lllicensed, ll or llregisteredll would be
reserved by law f o r only those who have mec c e r t a i n
s t a t u t o r y requirements. The s t i p u l a t i o n of Individual
p r e r e q u i s i t e s would be set by the l e g i s l a t u r e .
Requirements such as examination or education may be
imposed. An administrative body attached t o a s t a t e
agency or department may also be necessary.
Limited Statutory
Regulation - S t a t e regulation of an occupation via s t a t u t e s which
specify c e r t a i n requirements. Under t h i s a l t e r n a t i v e ,
the s t a t e would s t a t u t o r i l y require an individual to
comply with c e r t a i n measures t o protect the public.
These measures include requirements such a s bonding,
e r r o r s and omissions insurance, or a recovery fund which
would monetarily protect the public i n the case of harm or
l o s s through erroneous actions.
Registration - Allows persons practicing i n a profession, trade or
industry t o r e g i s t e r with the s t a t e , p r i v a t e o r profes-s
i o n a l association. This a l t e r n a t i v e provides the public
with a list of registered individuals but provides no
assurance of the competency of the individuals. Non-registered
individuals may p a r t i c i p a t e i n the regulated
profession, trade or industry.
C e r t i f i c a t i o n s - Requires no s t a t e involvement. The profession, t r a d e o r
industry is responsible f o r c e r t i f i c a t i o n requirements
and procedures. C e r t i f i c a t i o n a c t s as an i d e n t i f i c a t i o n
measure only, indicating t h a t the individual has complied
with c e r t a i n requirements.
No Regulation - No regulation by the s t a t e or d i r e c t regulation by the
profession, trade or industry.
* The Council of S t a t e Governments defines llCertificationll as a form of
regulation which grants recognition t o individuals who have met
predetermined q u a l i f i c a t i o n s set by a s t a t e agency. Only those who meet
the q u a l i f i c a t i o n s may l e g a l l y use the designated t i t l e . However,
noncertified individuals may offer similar services to the public as long
a s they do not describe themselves as being llcertified. ll
For our purposes we have c l a s s i f i e d t h i s method of occupational regulation
a s " Reserve of T i t l e . "
Professional and Occupational
Regulation i n Arizona
In Arizona 81 professional and occupational areas are regulated. P r a c t i t i o n e r s
in 68 ( 84 percent) of the professions and occupations are licensed; 12 ( 15
percent) have reserved t i t l e s ; and one ( 1 percent) is registered. Table 5
lists the type of regulation for these 78 professions and occupations.
TABLE 5
PROFESSIONAL* AND OCCUPATIONAL REGULATION I N ARIZONA
Regulated Professions
CERTIFIED PUBLIC ACCOUNTANT
PUBLIC ACCOUNTANT
Architect
Assayer
Attorney a t Law
Barber
Chiropractor
Cosmetologist
Cosmetologist**
Dental Hygienst
Dental Laboratory Technician
Dentist
Denturist
Doctor of Medicine
Embalmer
Engineer
Finger Waver
Funeral Director
Geologist
Hair S t y l i s t
Manicurist
Naturopath
Optometrist
Osteopath Physician and Surgeon
Pharmacist
Pharmacist Intern
Physicial Therapist
Physician's Assistant
Podiatrist
Practical Nurse
Psychologist
Registered Nurse
Student I n t e r n o r Resident
Surveyor
Teacher, Administrative Officer
Veterinarian
Regulated Occupations
Ambulance Driver and Attendant
Agriculture Pest Control Advisor
Boxing and Wrestling Personnel
Cemetery Broker
Cemetery Salesman
Citrus Broker
Citrus Commission Merchant
Citrus Dealer
Citrus Packer
Citrus Shipper
Collection Agencies
Contractor
Court Reporter
Dispensing Optician
Egg Dealer
Egg Manufacturer
Egg Producer
Emergency Medical Technician
Escrow Agent
Hay and Feed Grain Broker
Hearing Aid Dispenser
Insurance Agent
Insurance Adjustor
Insurance Broker
Insurance Solicitor
Meat Processor, Wholesaler or Jobber
Midwife
Mobile and Manufactured Housing
Standards: Dealer
I n s t a l l e r
Manufacturer
Mortgage Broker
Motor Carrier Transportation Agent
Motor Vehicle Dealer and Wrecker
Motor Vehicle Operator and Chauffeur
Polygraph Examiner
Private Investigator
Private Security Guard Service
Private Security Guard
Professional Driver Training School
Instructor
Public Weigbaster
Racing Officials and Personnel
Radiologic Technologists
Real Estate Broker
Real Estate Salesman
Securities Dealer and Salesman
Structural Pest Control
Structural Commercial Application
Taxidermist
Trapper and Guide
Weight and Measure Serviceman
Type of Regulation
Reserved T i t l e
Reserved T i t l e
Licensure
Reserved T i t l e
Licensure
Licensure
Lioensure
Licensure
Reserved T i t l e
Licensu~ e
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Reserved T i t l e
Licensure
Reserved T i t l e
Reserved T i t l e
Licensure
Registration***
Reserved T i t l e
Reserved T i t l e
Licensure
Reserved T i t l e
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Reserved T i t l e
Licensure
Licensure
Licensure
Licensure
Reserved T i t l e
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
ticensure****
Licensure"**
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Licensure
Webster's Seventh New C o l l e ~ i a t eD ictionary defines a profession as:
" A calling requiring s p e c ~ a l i z e d knowledge and often long and intensive academic preparation."
Accordinely, the professional regulatory agencies were determined by a post- high school educational
requirement to enter the profession. ** Cosmetologists practicing without compensation have a reserved t i t l e . *** Student interns or residents must meet minimum requirements in addition to r e g i s t e r i n g . **** Must be licensed only i f compensation is received for the service.
It should be noted, a s shown in Table 5, t h a t the Certified Public Accountant
and Public Accountant c o n s t i t u t e two ( 17 percent) of the 12 reserved t i t l e s i n
Arizona.
J u s t i f i c a t i o n for S e l e c t i n g t h e
Licensing Method of Regulating
t h e A t t e s t Function
The a t t e s t function is the one accounting service t h a t should be r e s t r i c t e d to
Certified Public Accountants and Public Accountants.* This conclusion is
based upon the following:
- Forty s t a t e s and s e v e r a l f e d e r a l agencies currently r e s t r i c t the
a t t e s t function t o Certified Public Accountants and Public
Accountants.
- A number of legal and p r a c t i c a l l i m i t a t i o n s e x i s t i n Arizona which
have the e f f e c t of r e s t r i c t i n g the a t t e s t function t o Certified
Public Accountants and Public Accountants.
- The severity of p o t e n t i a l f i n a n c i a l harm incompetent or unscrupulous
p r a c t i t i o n e r s may i n f l i c t upon the general public.
- Potential users cannot be expected to possess the knowledge needed to
properly evaluate the q u a l i f i c a t i o n s of those offering service.
- Benefits to the public outweigh any p o t e n t i a l harmful e f f e c t s such as
decrease in the a v a i l a b i l i t y of p r a c t i t i o n e r s , higher costs of
service and r e s t r i c t i o n s on optimum use of personnel.
* In Occupational Licensing: Questions A Legislator Should Ask, the
Council of State Governments i d e n t i f i e d those questions a s t a t e must
answer when evaluating the need for licensing an occupation. The
questions are :
( 1) whether the unlicensed p r a c t i c e o f an occupation poses a serious r i s k
t o the consumers1 l i f e , health, and s a f e t y or economic well- being;
( 2) whether p o t e n t i a l users of the occupational service can be expected
t o possess the knowledge needed to properly evaluate the
q u a l i f i c a t i o n s of those offering services; and
( 3) whether benefits to the public c l e a r l y outweigh any p o t e n t i a l
harmful e f f e c t s such as a decrease i n the a v a i l a b i l i t y of
p r a c t i t i o n e r s , higher costs of goods and services, and r e s t r i c t i o n s
on optimum u t i l i z a t i o n of personnel.
A t t e s t Function Defined
The a t t e s t function is the most c r i t i c a l public accounting s e r v i c e a f f e c t i n g
the general public. A memorandum* from t h e L e g i s l a t i v e Council, dated May 31,
1979, includes a d e f i n i t i o n o f the a t t e s t function and states i n p a r t :
" The a t t e s t function of an independent a u d i t o r is the
performance of an a u d i t i n accordance with generally
accepted a u d i t i n g standards and expressing an opinion on
the f i n a n c i a l statements as t o the f a i r n e s s of those
statements i n r e p r e s e n t i n g t h e f i n a n c i a l condition of the
audited e n t i t y . " Arizona S t a t e Board of Accountancy v.
Keebler, ( 1977 c t . App.) 115 Ariz. 239.
" The Generally Accepted Auditing Standards and Generally
Accepted Accounting P r i n c i p l e s of the American I n s t i t u t e
of C e r t i f i e d Public Accountants have been adopted by the
Arizona Board of Accountancy ... The d i f f e r e n c e between the
standards and p r i n c i p l e s ... is t h a t the generally accepted
a u d i t i n g standards involve how an a u d i t o r goes about
obtaining information, while the generally accepted
accounting p r i n c i p l e s involve the format i n which t o
p r e s e n t the information." ( Emphasis added)
National R e s t r i c t i o n s on the P r a c t i c e of
The Attest Function
Although Arizona accountancy law does not r e s t r i c t the p r a c t i c e of the attest
function t o C e r t i f i e d Public Accountants and/ or Public Accountants, agencies
of t h e f e d e r a l government and a s u b s t a n t i a l number of other s t a t e s have imposed
such r e s t r i c t i o n s . For example, t h e S e c u r i t i e s and Exchange Commission ( SEC),
which is the primary r e g u l a t o r of publicly held corporations, r e q u i r e s t h a t a l l
publicly held corporations be audited and t h e i r f i n a n c i a l statements a t t e s t e d
t o by a licensed accountant, e i t h e r a C e r t i f i e d Public Accountant or Public
Accountant.
* Appendix V contains a f u l l t e x t of t h e L e g i s l a t i v e Council memorandum.
In a d d i t i o n , t h e General Accounting Office ( GAO) i n s e t t i n g standards for
governmental audits, has s t a t e d :
" When outside auditors a r e engaged for assignments
requiring the expression of an opinion on f i n a n c i a l
r e p o r t s o f governmental organizations, only f u l l y
qualified public accountants should be employed."
The Comptroller General of the United S t a t e s , has further confirmed the GAO
position on the need f o r q u a l i f i e d accountants:
lfGovernmental e n t i t i e s provide some of the most diverse
and challenging work i n the accounting and auditing f i e l d .
Accordingly, government departments and agencies need the
best audit s k i l l s obtainable. Authorizing auditors who
have not demonstrated t h a t they possess such s k i l l s to
render opinions on f i n a n c i a l statements w i l l not provide
the public with t h e p r o t e c t i o n it needs."
A number of federal agencies have responded to the GAO declaration and now
require independent auditors who express opinions on f i n a n c i a l r e p o r t s of
federal funds be licensed accountants. These federal agencies include the
United S t a t e s Treasury Department, which requires revenue sharing r e c i p i e n t s
to have licensed accountants perform independent audits of t h e i r f i n a n c i a l
statements, the Department of Health, Education and Welfare and Department of
Labor, which s t i p u l a t e s t h a t licensed accountants must perform any required
audits.
In addition to federal r e s t r i c t i o n s of the a t t e s t function, a s of March 22,
1979, 40 of the 50 s t a t e s have enacted laws r e s t r i c t i n g the performance of the
a t t e s t function to Certified Public Accountants and Public Accountants. Table
6 lists the 40 s t a t e s t h a t have enacted accountancy laws r e s t r i c t i n g the a t t e s t
functions to c e r t i f i e d accountants, and the s t a t e s , including Arizona, t h a t
have not.
TABLE 6
Alabama
Alaska
Arkansas
California
Colorado
Montana
Nebraska
Nevada
New Hampshire
New Jersey
STATES RESTRICTING AND NOT
RESTRICTING THE ATTEST FUNCTION
TO CERTIFIED ACCOUNTANTS AS OF MARCH 22, 1979*
STATES RESTRICTING THE ATTEST FUNCTION
Connecticut Indiana
Florida Iowa
Georgia Kentucky
Hawaii Louisiana
Idaho Maine
New York Pennsylvania
North Dakota Rhode Island
Ohio South Carolina
Oklahoma South Dakota
Oregon Tennessee
STATES NOT RESTRICTING THE ATTEST FUNCTION
ARIZONA
Delaware
I l l i n o i s
Kansas
Minnesota
New Mexico
North Carolina
Vermont
West Virginia
Wyoming
Maryland
Massachusetts
Michigan
Mississippi
Missouri
Texas
Utah
Virginia
Washington
Wisconsin
* SOURCE: Survey of 50 s t a t e boards of accountancy by the Arizona Office
o f t h e Auditor General as of March 22, 1979.
Arizona Limitations on the
Practice of t h e A t t e s t Function
Although Arizona accountancy law does not l i m i t the a t t e s t function t o licensed
accountants, a number of l e g a l and p r a c t i c a l l i m i t a t i o n s e x i s t which have the
e f f e c t of r e s t r i c t i n g the a t t e s t function.
The Securities Division of the Arizona Corporation Commission performs a
similar regulatory function for publicly owned Arizona corporations as does the
Federal Securities Exchange Commission. ARS 44- 1872 requires an i s s u e r of
s e c u r i t i e s to f i l e f i n a n c i a l statements prepared by a Certified Public
Accountant or Public Accountant. In addition, 26 other Arizona s t a t u t e s
s p e c i f y C e r t i f i e d Public Accountants ( CPA) or Public Accountants ( PA) s h a l l
provide c e r t a i n accounting services, primarily r e l a t e d to the a t t e s t function
or inay provide these accounting services in l i e u of others. These 26 s t a t u t e s
include a u d i t s of c i t i e s and towns, escrow agents, h o s p i t a l s , public t r a n s i t
a u t h o r i t i e s , s t a t e compensation, police pension and other public funds.*
In addition to these legal r e s t r i c t i o n s , many f i n a n c i a l i n s t i t u t i o n s i n Arizona
impose de facto r e s t r i c t i o n s upon t h e p r a c t i c e of the a t t e s t function. For
exanple, Mr. Bud Clark, Assistant Vice- president, of Valley National Bank
s t a t e d in a February 7, 1979, l e t t e r to the Office of the Auditor General that:
" Basically our policy s t a t e s t h a t a l l c r e d i t f a c i l i t i e s t o
business e n t i t i e s of $ 250,000.00 or more, the borrower and
guarantors ( i f any) must submit a minimum of three years
annual f i n a n c i a l statements with unqualified opinions
by a recognized competent c e r t i f i e d public accountant."**
( Emphasis added)
Ms. Tina A. Zeller, Assistant Vice- president of F i r s t National Bank of Arizona,
in a l e t t e r to the Office of the Auditor General dated February 8, 1979,
s t a t e d :
" When a c e r t i f i e d f i n a n c i a l statement is received the loan
o f f i c e r r e l i e s heavily on t h e f i g u r e s i n making the loan
decision. He also t r u s t s t h a t t h e p r e s e n t a t i o n adheres to
the AICPA standard ( generally accepted accounting
p r i n c i p l e s ) and is in f a i r and consistent form unless
otherwise noted."** ( Emphasis added)
* Appendix V I is a memorandum from Legislative Council dated March 14, 1979,
t h a t d e t a i l s these s t a t u t e s . ** Appendix V I I contains the f u l l t e x t of these l e t t e r s and similar ones from
other Arizona f i n a n c i a l i n s t i t u t i o n s .
A s a r e s u l t of these l e g a l and p r a c t i c a l r e s t r i c t i o n s , the a c t u a l amount of the
a t t e s t function being performed i n Arizona by non- Certified Public Accountants
and Public Accountants is r e l a t i v e l y i n s i g n i f i c a n t . ( page 40)
The Severity of Potential Financial
Harm Incompetent or Unscrupulous -
P r a c t i t i o n e r s May I n f l i c t Upon
The General Public
According to Legislative Council i n a memorandum dated April 13, 1979:
" It is evident t h a t the only accounting function which is
s u f f i c i e n t l y endowed with public i n t e r e s t to j u s t i f y legal
r e s t r i c t i o n is the auditing and expression of opinion on
f i n a n c i a l statements on which t h i r d p a r t i e s rely.""
The c r i t i c a l nature of the f i n a n c i a l a u d i t stems from the reliance others place
on its accuracy and completeness and the independence of the auditor. Audited
f i n a n c i a l statements are a primary means of communicating f i n a n c i a l
information to those outside an e n t i t y . The f i n a n c i a l statements most
frequently prepared are ( a) balance s h e e t o r statement of f i n a n c i a l position,
( b) income or earnings statement, ( c ) statement of retained earnings, ( dl
statement of other changes i n owners1 or stockholders1 equity, and ( e)
statement of changes in f i n a n c i a l position ( source and application of funds).
Persons o u t s i d e t h e organization rely on audited f i n a n c i a l statements to be
accurate, complete and f a c t u a l .
Audited f i n a n c i a l statements are intended to provide information that is useful
in making business and economic decisions. Individuals, e n t e r p r i s e s , markets
and governments i n making decisions use audited f i n a n c i a l statement
information to evaluate various a l t e r n a t i v e s and a s s e s s t h e expected r e t u r n s ,
costs and r i s k s .
* Appendix V I I I is f u l l t e x t of t h i s memorandum.
3 3
The users of f i n a n c i a l statement information include business owners, l e n d e r s ,
s u p p l i e r s , p o t e n t i a l i n v e s t o r s and c r e d i t o r s , employees, management,
d i r e c t o r s , customers, f i n a n c i a l a n a l y s t s , . brokers, u n d e r w r i t e r s , s t o c k
exchanges, lawyers, economists, taxing a u t h o r i t i e s , regulatory a u t h o r i t i e s ,
l e g i s l a t o r s , news media, labor unions, t r a d e a s s o c i a t i o n s , business
r e s e a r c h e r s and the general public. Users most d i r e c t l y concerned with the
operation of any e n t i t y include owners, c r e d i t o r s and employees i n t h a t they
invest cash, goods or s e r v i c e s i n an e n t i t y with the e x p e c t a t i o n o f obtaining
s u f f i c i e n t cash i n r e t u r n t o make the investment worthwhile. According t o
AICPA Professional Standards, " Objectives of Financial Accounting and
Financial Statements and General Financial Accounting,'' f i n a n c i a l r e p o r t s and
statements provide these users with the evenhanded and unbiased information
necessary to form judgments about the a b i l i t y of the e n t e r p r i s e t o s e r v i c e ,
adapt, grow and prosper amid changing economic conditions.
A s noted i n the AICPA P r o f e s s i o n a l Standards, " Objectives of Financial
Reporting by Business E n t e r p r i s e s , " when f i n a n c i a l statements are audited,
users w i l l believe they a r e f a c t u a l and dependable f o r decision- making:
" Independent a u d i t o r s commonly examine or review f i n a n c i a l
statements and perhaps other information, and both those
who provide and those who use t h a t information often view
an independent a u d i t o r ' s opinion as enhancing the
r e l i a b i l i t y o r c r e d i b i l i t y of the information."
If generally accepted a u d i t i n g standards and generally accepted accounting
p r i n c i p l e s , as s p e c i f i e d by the AICPA, a r e not followed, an accountant can
s u b s t a n t i a l l y misrepresent an e n t i t y ' s f i n a n c i a l p o s i t i o n . The g e n e r a l
p u b l i c , r e l y i n g upon t h i s f i n a n c i a l information, would then reach inaccurate
conclusions, invest or extend c r e d i t t o the e n t i t y and increase the l i k e l i h o o d
t h a t f i n a n c i a l harm would occur. Two notable n a t i o n a l examples, McKesson
Robbins, Incorporated and Equity Funding Corporation of America, demonstrate
the f i n a n c i a l harm t h a t can occur when inadequate a u d i t s a r e performed.
-
In 1939 a serious fraud was disclosed in the accounts of McKesson Robbins,
Incorporated, which had for years been audited by a f i r m of independent
auditors. Approximately $ 19 million i n f i c t i t i o u s inventories and accounts
receivable were l i s t e d i n the balance sheet t o t a l of $ 87 million i n a s s e t s , a
21.8 percent misrepresentation. The f i c t i t i o u s a s s e t s were supported by
invoices, advices, shipping and other documents using f i c t i t i o u s names;
records o f f i c t i t i o u s transactions; forged c o n t r a c t s ; guarantees and
supposedly independent c r e d i t r a t i n g reports. After an SEC inquiry i n t o t h i s
fraud, confirmation o f receivables and physical observation of inventory were
incorporated i n t o mandatory auditing standards.
In 1972 Equity Funding Corporation of America was discovered to have created
$ 120 million in nonexistent a s s e t s and to have sold, t o r e i n s u r e r s , up to $ 2
b i l l i o n in fraudulent l i f e insurance p o l i c i e s . Auditors apparently f a i l e d to
s u f f i c i e n t l y confirm a s s e t s and data processing reports on loans and were ( I
misled by Equity Funding o f f i c i a l s .
In Arizona i n 1975, Lincoln T h r i f t Association, t h e r e l a t e d U. S. T h r i f t
Association and 53 s u b s i d i a r i e s were discovered t o be involved i n fraud of the a
public. In a prospectus for the Arizona Corporation Commission, the accountant
for Lincoln Thrift s i g n i f i c a n t l y departed from generally accepted accounting
p r i n c i p l e s , committed reporting d e f i c i e n c i e s and f a i l e d t o comply with
generally accepted auditing standards by inappropriately issuing an •
unqualified opinion on the f i n a n c i a l statements for calendar years 1971, 1972,
1973 and s i x months of 1974. The two firms had more than 20,000 investors and
l i a b i l i t i e s exceeded a s s e t s by $ 32.5 million. In December 1975 the f i r m s were
placed in federal receivership. a
Certified Public Accountants and Public Accountants in Arizona are l e g a l l y
required to comply with the AICPA standards adopted by the S t a t e Board of
Accountancy. Other practicing accountants are not required by law to comply
with the AICPA standards. If a c e r t i f i e d accountant f a i l s to comply with the
AICPA standards the Board can revoke or suspend the accountant's use of the
" Reserved T i t l e s f f under Arizona l a w . However, t h i s authority does not extend
to non- titled accountants. A s a r e s u l t , the s t a t e of Arizona cannot currently
r e s t r i c t the most c r i t i c a l accounting service - the a t t e s t function - to
persons with demonstrated competence. Further, persons whose titles have been
revoked by the Board f o r f a i l u r e to comply with AICPA standards, a s i n the
instance o f the accountant for Lincoln T h r i f t Association, can still l e g a l l y
perform an audit and express an opinion on f i n a n c i a l statements.
Potential Users Cannot Be
Expected to Possess the
Knowledge Needed to Properly
Evaluate the Q u a l i f i c a t i o n s
of Those Offering Service
The objective of an auditor i n performing the a t t e s t function is, according to
AICPA Professional Standards for Field Work:
"... to form an opinion on whether t h e f i n a n c i a l statements
present f a i r l y ( t h e ) f i n a n c i a l position, r e s u l t s of
operations and changes in f i n a n c i a l position in conformity
with generally accepted accounting p r i n c i p l e s c o n s i s t e n t l y
applied. Consequently, under generally accepted auditing
standards the independent auditor has t h e r e s p o n s i b i l i t y
t o plan h i s examination, t o search f o r e r r o r s or
i r r e g u l a r i t i e s t h a t would have a m a t e r i a l e f f e c t on the
f i n a n c i a l statements, and to exercise due s k i l l and care
i n the conduct of t h a t examination."
The audit procedures and standards which must be followed i n order to
accomplish the above objective of the a t t e s t function appears to be
s u f f i c i e n t l y technical and complex to preclude members of t h e g e n e r a l public
who are not f i n a n c i a l l y sophisticated from evaluating the q u a l i f i c a t i o n s of
those offering the service. The a t t e s t function requires t h e a u d i t o r t o apply
a s e r i e s of a n a l y t i c a l reviews of f i n a n c i a l information. These reviews include
the following:
- Comparison, of the f i n a n c i a l information with information for
comparable prior period( s).
- Comparison of the f i n a n c i a l information with anticipated r e s u l t s
( f o r example, budgets and f o r e c a s t s ) .
- Study of the r e l a t i o n s h i p s of f i n a n c i a l d a t a that would be expected
t o conform to a predictable pattern based on the e n t i t y ' s experience.
- Comparison of t h e f i n a n c i a l information with similar information
regarding the area in which the e n t i t y operates.
- Study of r e l a t i o n s h i p s of t h e f i n a n c i a l information with relevant
nonfinancial information.
- Investigation and documentation of any material i r r e g u l a r i t i e s .
Most o f the a u d i t o r ' s work c o n s i s t s of obtaining and examining accounting data
and corroborating information. Such information includes:
- source documents of o r i g i n a l entry
- general and s u b s i d i a r y l e d g e r s
- accounting manuals
- worksheets explaining a l l o c a t i o n s of c o s t s , computations and recon-c
i l i a t i o n s
- documentary material such a s checks, invoices, contracts and minutes
of meetings
- confirmations and o t h e r w r i t t e n representations by knowledgable
people
- information obtained by inquiry, observation, inspection and
physical examination.
I n summary, t o reach a conclusion on the f i n a n c i a l statements, the a u d i t o r :
- t e s t s underlying accounting data by a n a l y t i c a l review
- r e t r a c e s t h e procedures and s t e p s followed i n the accounting process
and i n developing work s h e e t s and a l l o c a t i o n s
- r e c a l c u l a t e s and
- r e c o n c i l e s r e l a t e d types and a p p l i c a t i o n s of f i n a n c i a l information.
F i n a l l y , t h e a u d i t o r prepares a r e p o r t which must include the following to be
i n compliance with AICPA p r o f e s s i o n a l standards:
1) Whether the f i n a n c i a l statements a r e presented f a i r l y i n accordance with
g e n e r a l l y accepted accounting p r i n c i p l e s , '
2 ) t h a t the accounting p r i n c i p l e s have been used c o n s i s t e n t l y i n the time
period r e f l e c t e d i n the f i n a n c i a l statements and t h a t the information is
comparable t o previous time p e r i o d s ,
3) whether the f i n a n c i a l statements adequately d i s c l o s e a l l matters needed
t o make them s u f f i c i e n t l y informative t o the r e a d e r s , and
4) e i t h e r an opinion regarding t h e f i n a n c i a l statements Ifas a whole" or a
statement t h a t an opinion cannot be expressed.
* According t o the AICPA, the phrase " generally accepted accounting
p r i n c i p l e s " can be defined as " a t e c h n i c a l accounting term which
encompasses the conventions, r u l e s , and procedures necessary t o define
accepted accounting p r a c t i c e at a p a r t i c u l a r time. It includes broad
g u i d e l i n e s of general a p p l i c a t i o n , and d e t a i l e d p r a c t i c e s and
procedures.. .
General accounting p r i n c i p l e s d e f i n e which economic resources and
o b l i g a t i o n s should be recorded as assets and l i a b i l i t i e s , which changes i n
them should be recorded, when these changes should be recorded, how the
recorded a s s e t s and l i a b i l i t i e s and changes i n them should be measured,
what information should be d i s c l o s e d , how it should be d i s c l o s e d , and
which f i n a n c i a l statements should be prepared...
The a u d i t o r ls judgment is applied i n determining ' f a i r n e s s ' within t h i s
framework of ' g e n e r a l l y accepted accounting p r i n c i p l e s 1 t h a t r e p r e s e n t a
uniform standard for judging t h e f i n a n c i a l statements."
Therefore, although not surveyed due t o the complexity of i d e n t i f y i n g the users
of the a t t e s t function, it appears t h a t the procedures, standards and r e p o r t i n g
a s p e c t s of the a t t e s t function a r e s u f f i c i e n t l y complex and t e c h n i c a l t o
preclude assessment of t h e p r a c t i t i o n e r s professed q u a l i f i c a t i o n s by anyone
other than the most f i n a n c i a l l y s o p h i s t i c a t e d users.
Benefits t o the Public Outweigh
Any P o t e n t i a l Harmful E f f e c t s
Such a s Decrease i n t h e A v a i l a b i l i t y
o f P r a c t i t i o n e r s , Higher Costs of
Service and R e s t r i c t i o n s On Optimum
Use of Personnel
It does not appear t h a t r e s t r i c t i n g the a t t e s t function t o C e r t i f i e d Public
Accountants and Public Accountants would decrease the a v a i l a b i l i t y of p r a c t i -
t i o n e r s , r e s u l t i n higher c o s t s of s e r v i c e or cause any a d d i t i o n a l r e s t r i c t i o n s
on the optimum use of personnel.
In a survey conducted by the Office of the Auditor General* of Arizona, t i t l e d
and n o n - t i t l e d accountants i d e n t i f i e d the type and amount of accounting
s e r v i c e s offered t o the general public. Table 7 summarizes t h e s e r v i c e s
provided by Arizona t i t l e d and n o n - t i t l e d accountants and t h e percentage each
s e r v i c e r e p r e s e n t s o f t h e accountants' t o t a l p r a c t i c e .
* Appendix I X c o n t a i n s t h e complete r e s u l t s of t h i s survey.
TABLE 7
PERCENTAGE OF TOTAL ACCOUNTING PRACTICE
ATTRIBUTABLE TO VARIOUS ACCOUNTING
SERVICES FOR TITLED AND NON- TITLED ARIZONA
ACCOUNTANTS BY ACCOUNTING FIRM SIZE
Titled and Non- Titled
Accountants
By Firm Size
C e r t i f i e d Public Accountants
Sole P r a c t i t i o n e r s
2- 5 Employees
6- 12 Employees
13- 25 Employees
Over 25 Employees
Average Total Percentage
Public Accountants
Sole P r a c t i t i o n e r s
2- 5 Employees
6- 12 Employees
Over 25 Employees
Average Total Percentage
Non- Titled Accountants
Sole P r a c t i t i o n e r s '
2- 5 Employees
6- 12 Employees
13- 25 Employees
Over 25 Employees
Average Total Percentage
Percentage of Total Accounting Practice
By Type of Accounting Service*
a,
* Percent of t o t a l p r a c t i c e is based on amount of c l i e n t fees received for performance of each service compared t o t o t a l fees
SOURCE: Survey of the Arizona accounting profession by the Office of the Auditor General, March 1979. 1
A s Table 7 i l l u s t r a t e s , both t i t l e d and non- titled accountants o f f e r a l l
accounting services to the public. However, a t t e s t a u d i t i n g r e p r e s e n t s a
r e l a t i v e l y i n s i g n i f i c a n t proportion of non- titled accountants' practices
(. 3%). Thus, r e s t r i c t i n g the a t t e s t function to t i t l e d accountants would not
have a s i g n i f i c a n t impact on the a v a i l a b i l i t y of practioners to perform the
service.
In a d d i t i o n , s i n c e t i t l e d accountants generally perform the a t t e s t function
while non- titled accountants do not, r e s t r i c t i o n of the a t t e s t function t o
t i t l e d accountants would not cause any s i g n i f i c a n t change i n the u t i l i z a t i o n of
accounting personnel.
Our survey also revealed t h a t t h e c o s t of accounting services appears to be
more a function of firm s i z e and not the accountant's t i t l e . For example, the
average sole p r a c t i t i o n e r C e r t i f i e d Public Accountant charges l e s s per hour to
perform the a t t e s t function than does the average Public Accountant and only
s l i g h t l y more than the non- titled accountant. However, the average hourly r a t e
for Certified Public Accountants and non- titled accountants who responded t o
the survey by the Office o f the Auditor General to perform the a t t e s t function
increases in d i r e c t proportion to the s i z e of f i r m providing the service."
Table 8 summarizes the hourly r a t e s for accounting services charged by
Certified Public Accountants, Public Accountants and non- titled accountants by
firm size.
Responses from Public Accountants were limited to two s i z e s of f i r m - sole
p r a c t i t i o n e r and firms with 2- 5 employees - and for these the average
hourly r a t e was the same.
TABLE 8
SUMMARY OF HOURLY RATES FOR
ACCOUNTING SERVICES CHARGED
BY CERTIFIED PUBLIC ACCOUNTANTS,
PUBLIC ACCOUNTANTS AND NON- TITLED
ACCOUNTANTS BY FIRM SIZE
T i t led and Non- Tit led
Accountants By
Firm Size
Certified Public Accountants
Sole P r a c t i t i o n e r s
2- 5 Employees
6- 12 Employees
13- 25 Employees
Over 25 Employees
Public Accountants
Sole P r a c t i t i o n e r s
2- 5 Employees
6- 12 Employees
13- 25 Employees
Over 25 Employees
Non- Titled Accountants
Sole P r a c t i t i o n e r s
2- 5 Employees
6- 12 Employees
13- 25 Employees
Over 25 Employees
Average Hourly Rate Charged
Income,
Attest Estate and Accounting
Function G i f t Taxes Bookkeeping
Number a
Responding
SOURCE: Survey of the Arizona accountancy profession, Office of the Auditor a
General, March 1979. Appendix I X Table 11, contains a complete
l i s t i n g of hourly r a t e s by type o f service.
It does not appear that r e s t r i c t i n g the a t t e s t function t o t i t l e d accountants
w i l l r e s u l t in higher costs of service based upon the s i m i l a r i t y of hourly
r a t e s charged by t i t l e d and non- titled accountants as shown i n Table 8 coupled
with the r e l a t i v e l y i n s i g n i f i c a n t amount of a t t e s t auditing now being perf- or med
by non- titled accountants in Arizona.
CONCLUSION
Arizona accountancy law now r e s t r i c t s the usage of the titles Certified Public
Accountant and Public Accountant to persons approved by the S t a t e Board of
Accountancy. Lawmakers in 40 other s t a t e s have determined t h a t t h i s was
i n s u f f i c i e n t protection for the public and have f u r t h e r r e s t r i c t e d the a t t e s t
function to t i t l e d accountants. In Arizona anyone can legally perform the
a t t e s t function without being approved by the S t a t e Board of Accountancy.
Substantial f i n a n c i a l harm can and has occurred when generally accepted
standards of accounting and auditing were not followed i n the performance of
the a t t e s t function.
It appears appropriate to r e s t r i c t the performance of the a t t e s t function t o
t i t l e d accountants who have demonstrated a minimum level of competence since
the a t t e s t function meets the three c r i t e r i a for l i c e n s i n g o u t l i n e d by the
Council of State Governments, i n t h a t :
1. The unlicensed practice of the a t t e s t function can
r e s u l t i n severe f i n a n c i a l harm t o the general
public.
2. The performance of audit is s u f f i c i e n t l y technical
and complex to preclude proper evaluation o f t h e
audit or the persons offering the service by the
general public.
3 Benefits to the public outweigh p o t e n t i a r harmful
e f f e c t s such as a decrease i n available p r a c t i t i o n e r s ,
higher costs o f t h e s e r v i c e and f u r t h e r r e s t r i c t i o n on the
usage of available personnel.
P r a c t i c a l r e s t r i c t i o n s imposed by business and federal and s t a t e law r e s t r i c t
the a t t e s t function to t i t l e d accountants, and r e s u l t in minimal p r a c t i c e o f
the a t t e s t function by non- titled accountants in Arizona. Therefore, public
protection from f i n a n c i a l harm would be increased with minimal adverse e f f e c t
i f the a t t e s t function were limited to t i t l e d accountants. -
RECOWEND ATION
Consideration should be given t o l i m i t i n g the performance of the a t t e s t
function to individuals approved by the S t a t e Board of Accountancy. These
individuals w i l l , therefore, be required to adhere to AICPA standards for
auditing and accounting principles.
Legislation w i l l be needed to implement t h i s recommendation.*
* Appendix V is a memorandum from Legislative Council dated March 14, 1979,
s t a t i n g l e g i s l a t i v e change is needed to l i m i t the a t t e s t function.
FINDING I1
THE PUBLIC ACCOUNTANT CLASSIFICATION IS UNNECESSARY
The Arizona S t a t e Board of Accountancy grants c e r t i f i c a t e s and has authority
over two classes of accountants - Certified Public Accountant ( CPA) and Public
Accountant ( PA).
Our review of the PA c l a s s i f i c a t i o n reveals that there does not appear to be a
demonstrated need for the PA designation i n Arizona i n t h a t -
- Since 1955 only 246 persons have been c l a s s i f i e d as PAS
- From 1961 to 1978 the number of PAS has declined 39 percent while the
number of CPAs has increased 281 percent
- 58 percent of the 91 PAS as of December 31, 1978, had been granted
c e r t i f i c a t e s as PAS between 1955 and 1960 without examination
through a " grandfather" clause i n accountancy law
- Of the 119 persons c l a s s i f i e d as PAS during the 22 year period from
1957 to 1979, approximately 53 percent subsequently became CPAs
- Arizona is one of only 15 s t a t e s t h a t currently grants PA
c e r t i f i c a t e s
- The accounting services generally provided by PAS do not j u s t i f y
regulation.
History of the PA C l a s s i f i c a t i o n
The PA c l a s s i f i c a t i o n was established in Arizona in 1933 when the accountancy
law was amended to provide t h a t the Board of Accountancy would
"... issue to a l l accountants of good moral character who
were maintaining an office and engaged exclusively i n
public practice on t h e i r own account on January 1, 1933,
and who do not qualify under the provisions ... of t h i s
section, a c e r t i f i c a t e of a u t h o r i t y to practice a s a
public accountant. This c e r t i f i c a t e of authority s h a l l
not confer any added t i t l e and the, holder s h a l l be known
and styled only as a ' Public Accountant'. Application
must be made for t h i s c e r t i f i c a t e of authority before
January 1, 1934." ( ARS 67- 604, Laws 1933)
The above amendment provided for a one- time granting of PA c e r t i f i c a t e s t o
persons not qualified to be CPAs and an estimated 56 practicing accountants
applied for and were granted PA c e r t i f i c a t e s . No new PA c e r t i f i c a t e s were
granted a f t e r 1933 u n t i l the accountancy law was amended i n 1955 to provide for
a continuing PA c l a s s i f i c a i o n . With the enactment of the 1955 law, 137 persons
-
were " grandfathered" ( granted PA c e r t i f i c a t e s without having t o pass an
examination) if a major portion of t h e i r income for the previous three years
was earned in the p r a c t i c e of accounting.
The 1955 amendment defined the present requirements for CPAs and PAS. The
primary difference between the two c l a s s i f i c a t i o n s being t h a t a CPA must pass
a l l four subjects of the AICPA examination ( accounting p r a c t i c e , theory of
accounts, auditing and commercial law) while a PA must pass e i t h e r the
accounting practice subject of the AICPA examination or t h e o t h e r three
subjects. The requirements for CPAs and PAS are contrasted below.
Requirements For Requirements For
A Certified Public Accountant ( ARS 32- 721) A Public Accountant ( ARS 32- 722)
A person s h a l l : A person s h a l l :
1 ) be eighteen years of age, a resident 1) be eighteen years of- age,
of the s t a t e and of good moral a resident of the s t a t e and
character of good moral character
2) has not engaged i n conduct that
would c o n s t i t u t e grounds for
c e r t i f i c a t e revocation or suspension
3) obtain score of 75 o r b e t t e r on 2) obtain a score o f 75 or
each subject of the AICPA b e t t e r on the accounting
examination* p r a c t i c e or each of the other
subjects given in the AICPA
examination
4) have two years experience as a 3) have the same experience as
s t a f f member in the o f f i c e of a CPA required for a Certified
or PA t h a t includes the practice of
accounting including examination
Public Accountant
and reporting of f i n a n c i a l statements
or a master's degree in accounting or
business administration and one year's
experience
It should be noted t h a t since Arizona accountancy law does not r e s t r i c t the
performance of any accounting service, the CPA and PA can perform the same
functions.
* To qualify to t a k e t h e examination, individuals must 1) have, or w i l l
within 90 days, have a bachelor's degree with 24 semester hours i n
accounting, 12 of which must be i n intermediate theory or advanced
accounting or cost accounting or auditing theory and practice or income
taxes and, s h a l l also have 18 additional hours in economics and business
administration c l a s s e s or 2) have, or within 90 days w i l l have, a
bachelor's degree and passes an examination by the S t a t e Board of
Accountancy i n accounting, economics, business law, English composition
and business mathematics.
Number of Public Accountants Declines
Since the 1955 enactment of t h e Public Accountant c l a s s i f i c a t i o n , 246
i n d i v i d u a l s have been granted PA c e r t i f i c a t e s by the Board of Accountancy.
Table 9 summarizes t h e number of PA certificates granted from 1955 t o December
1978, the method of c e r t i f i c a t i o n , the number of PA c e r t i f i c a t e h o l d e r s who
subsequently became CPAs and t h e number of lapsed PA c e r t i f i c a t e s .
TABLE 9
SUMMARY OF THE NUMBER OF PUBLIC ACCOUNTANTS
CERTIFIED AND BY WHAT METHOD, THE NUMBER
OF PA CERTIFICATE HOLDERS WHO SUBSEQUENTLY
BECAME CPA'S AND THE NUMBER OF LAPSED
PA CERTIFICATES FROM 1955 TO DECEMBER 1978
ld
a, hc,
Q d C
c d c , 5
o c o
a, 0 L 4 3 o
. rl CT 4
. Q a,
LV) O
a, a . d u 3 d rn n
4 5
a o_ a
Waiver 137
Examination 107
R e c i p r o c i t y - 2
T o t a l 246
* Includes 14 i n d i v i d u a l s over 65 years of age.
** Includes one i n d i v i d u a l whose PA l i c e n s e was revoked. *** Includes two i n d i v i d u a l s over 65 y e a r s .
The number of PAS i n Arizona reached its peak i n 1961 when t h e r e were 150 PAS.
Since 1961 the number of PAS i n Arizona has s t e a d i l y declined while the number
of CPAs has increased dramatically as is i l l u s t r a t e d i n Table 10.
TABLE 10
COMPARISON OF THE NUMBER
OF PAS AND CPAs I N ARIZONA
FROM 1961 TO 1978
Year
Percent of
Increase ( Decrease)
PAS
Number
CPAs
Number
A s shown i n Table 10 above, since 1961 the number of PAS has- decreased from
150 to 92, a decrease of 39 percent, while the number of CPAs has increased
from 519 t o 1,979, an increase of 281 percent. According t o M r . Gerald
-
Rosen, a member of the Arizona S t a t e Board of Accountancy, Public Accountants
Advisory Committee, the decline i n the number of PAS w i l l continue as the
number of llgrandfathered" PAS continues t o diminish. M r . Rosen s t a t e d :
"... as we ( t h e grandfathered public accountants) continue
t o d i e the public accountant c l a s s w i l l continue t o
diminish i n size..."
Licensing In Other S t a t e s -
Forty- seven s t a t e s including Arizona have two c l a s s e s of accountants. However,
i n 32 of these s t a t e s the non- CPA c l a s s i f i c a t i o n is t r e a t e d a s a " dying class"
and no new c e r t i f i c a t e s a r e being granted.
Table 11 summarizes the accounting c l a s s i f i c a t i o n s by s t a t e and i d e n t i f i e s
which states treat the non- CPA as a " dying class".
TABLE 11
SUMMARY OF ACCOUNTING
CLASSIFICATIONS BY STATE*
S t a t e s with Certified Public
Accountants and Public
Accountants t h a t Treat Public
Accountants A s A " Dying Class"
S t a t e s Witn and The Year The PA
Certified Public C l a s s i f i c a t i o n Was Established
Accountants Only a s A " Dying Classn
Delaware
Kansas
IJy omi ng
Alabama ( 1974)
Arkansas ( 1980 )
California ( 1955)
Colorado ( 1959)
Connecticut ( 1955)
Florida ( 1927)
Hawaii ( 1955)
Idaho ( 1976)
I l l i n o i s ( 196 1 )
Kentucky ( 1 946)
Louisiana ( 1975)
Maine ( 1967)
Maryland ( 1970)
Massachusetts ( 1972)
Michigan ( 1926)
Minnesota ( 1979 ) **
Mississippi ( 1930)
Missouri ( 1943)
Nebraska ( 1957)
Nevada ( 1960 )
New Jersey ( 1977)
New York*** ( 1959)
North Carolina ( 1925)
North Dakota ( 1976)
Pennsylvania ( 1980)
Rhode Island ( 197 1 )
Texas ( 1947)
Utah ( 1959)
Virginia ( 1928)
Washington ( 1949)
West Virginia ( 1966 )
Wisconsin ( 1935)
S t a t e s with
Certified Public
Accountants and
Public Accountants
( O r Other
C l a s s i f i c a t i o n
of Accountants)
Alaska
ARIZONA
Georgia
Indiana
Iowa
Montana
New Hampshire
New Mexico
Ohio
Oklahoma
Oregon
South Carolina
South Dakota
Tennessee
Vermont
* Appendix I1 is a comparative analysis of s t a t e requirements.
i* Legislation has passed both houses of Minnesota Legislature and
awaiting Governor's signature.
* Y+ I n i t i a l s " PA" are not permitted in New York. " Public Accountantsw
must use f u l l t i t l e .
It should be noted t h a t North Carolina was the first s t a t e t o e s t a b l i s h the PA
C l a s s i f i c a t i o n as a " dying classM i n 1925. Since 1955 there has been a decided
trend toward t r e a t i n g the PA a s a Itdying class" as shown i n Table 11.
Services Generally Provided by PAS
Do Not J u s t i f y Regulation -
A survey of PAS in Arizona conducted by the Office o f the Auditor General ( page
40) revealed t h a t a preponderence of the work performed by PAS c o n s i s t s o f
income tax and bookkeeping type services. The Legislative Council, i n an April
13, 1979*, opinion s t a t e d t h a t income tax and bookkeeping services are not of
s u f f i c i e n t public i n t e r e s t to j u s t i f y regulation. The opinion s t a t e s i n part:
" The a t t o r n e y g e n e r a l ( Arizona, 1970) determined t h a t
preparation o f income t a x r e t u r n s would not f a l l under the
p r a c t i c e of public accounting. The attorney general
concluded that:
1. Freedom to follow any lawful occupation not injurious
t o others is a fundamental American l i b e r t y ...
2. The public convenience, prosperity, health, morals or
safety was not advanced nor was danger from
incompetency decreased by r e s t r i c t i n g the preparation
of income t a x r e t u r n s to c e r t a i n persons.
3. The preparation o f tax returns is not a function of
t h e p r a c t i c e of accounting which is endowed with
public i n t e r e s t s u f f i c i e n t t o j u s t i f y regulation..."
( Emphasis added)
-
A complete t e x t of t h i s opinion is contained in Appendix V I I I .
52
Bookkeeping, according to t h e L e g i s l a t i v e Council, has generally:
"... been considered separate and d i f f e r e n t from the
practice of public accounting ... Bookkeeper ... is ' one who
keeps accounts : one whose business or vocation is
bookkeeping distinguished from accountant.' Bookkeeping
is defined as ' a branch of accounting t h a t deals with the
systematic c l a s s i f i c a t i o n , recording and summarizing of
business t r a n s a c t i o n s i n books of accountl... One may -
c e r t a i n l x argue and conclude t h a t l e g i s l a t i v e regulation
of bookkeeping and similar technical services offered by
accountants would i n t e r f e r e with the normal r i g h t of an
individual to deal with anyone he chooses absent a
l e g i s l a t i v e finding t h a t t h e r e g u l a t i o n of bookkeepers is
necessary t o protect the public welfare." ( Emphasis
added)
CONCLUSION
Since 1961 the number of Public Accountants ( PAS) i n Arizona has s t e a d i l y
declined while the number of CPAs has dramatically increased. This trend is
expected to continue. The PA c l a s s i f i c a t i o n , i n general, is comprised of
persons who were c e r t i f i e d as PAS prior t o 1960 and persons who use the PA
c l a s s i f i c a t i o n as an interim step to becoming CPAs. A s such, PAS do not
presently c o n s t i t u t e a viable segment of the accounting p r a c t i t i o n e r s i n
Arizona. In a d d i t i o n , t h e v a s t majority o f accounting services provided by PAS
do not require s t a t e regulation. A s a r e s u l t , it appears t h a t the PA
c l a s s i f i c a t i o n is unnecessary and should be established i n Arizona as a " dying
class" of accountants a s it is in 32 other s t a t e s .
RECOMMENDATION
It is recommended t h a t consideration be given to the following:
- Elimination o f the lfPublic Accountant" c l a s s i f i c a t i o n through the
designation of t h i s c l a s s i f i c a t i o n as a " dying classf1. A " dying
class" designation w i l l allow current c e r t i f i c a t e holders to r e t a i n
t h e i r c e r t i f i c a t e s u n t i l they no longer wish to do so. -
Legislation w i l l need to be enacted to implement t h i s recommendation.
FINDING I11
THE PERFORMANCE OF THE ARIZONA STATE BOARD OF ACCOUNTANCY I N INVESTIGATING AND
RESOLVING COMPLAINTS AND REVIEWING THE COMPETENCY OF CERTIFICATE HOLDERS HAS
BEEN SUPERIOR WHEN CONTRASTED WITH OTHER ARIZONA STATE REGULATING BODIES AND
OTHER STATE BOARDS OF ACCOUNTANCY. THE BOARD NOT ONLY INVESTIGATES- AND
RESOLVES COMPLAINTS IT RECEIVES AGAINST CERTIFICATE HOLDERS BUT ACTIVELY
PURSUES A LIMITED QUALITY REVIEW PROGRAM AS WELL. SUCH A PROGRAM IS
EXCEPTIONAL AMONG ARIZONA REGULATORY BODIES AND STATE BOARDS OF ACCOUNTANCY.
HOWEVER, OUR REVIEW HAS REVEALED THAT WHILE THE BOARD'S QUALITY REVIEW PROGRAM
IS COMMENDABLE, IT APPEARS THAT THIS PROGRAM CAN BE EXPANDED TO INCLUDE AREAS
NOT CURRENTLY SUBJECT TO REVIEW.
The S t a t e Board of Accountancy receives complaints against accountants and
i n i t i a t e s investigations of complaints when appropriate. In addition, the
Board i n i t i a t e d in 1976, a q u a l i t y review program f o r a u d i t s and f i n a n c i a l
statements f i l e d with public agencies. This q u a l i t y review program has proven
to be an e f f e c t i v e means of identifying substandard accounting work. However,
a u d i t s and f i n a n c i a l statements f i l e d with public agencies represent only a
portion of the a t t e s t work being performed in Arizona by Certified Public
Accountants and Public Accountants. According t o Board members, a u d i t s and
f i n a n c i a l statements performed and prepared by Certified Public Accountants
and Public Accountants for p r i v a t e organizations, corporations, and i n limited
instances s t a t e agencies, have not been subject to the Board's q u a l i t y review
program because the Board does not have the l e g a l authority t o examine
supporting documentation and workpapers for these a u d i t s and f i n a n c i a l
statements, unless a complaint has been lodged with the Board against the
accountant. A s a r e s u l t , substandard accounting such a s has been i d e n t i f i e d by
the Board during the course of its q u a l i t y review of public._ f i l i n g s may go
undetected, perhaps with r e s u l t a n t f i n a n c i a l losses to the public. However,
based upon a Legislative Council opinion, the Board may have access t o a u d i t s
and f i n a n c i a l statements performed and prepared by Certified Public
Accountants and Public Accountants f o r p r i v a t e organizations and corporations.
In addition, a recent Attorney General opinion includes the suggestion that
currently c o n f i d e n t i a l s t a t e agency f i l e s be made accessible t o S t a t e Board of
Accountancy review. Therefore, it appears t h a t the Board can expand its
q u a l i t y review program to include areas not currently subject t o review.
Process of Investigation
and Resolution of Complaints
and Quality Review Findings
The S t a t e Board of Accountancy responds t o a l l public complaints t h a t appear to
infringe on s t a t e accountancy law, r u l e s or regulations and i n i t i a t e s an
investigation of the s i t u a t i o n . -
Since 1976 the Board has a l s o increased i n v e s t i g a t i o n s through the
implementation of a " quality review" for public f i l i n g s . Audit reports and
expressions of opinion regarding f i n a n c i a l statements a r e , i n selected
instances, public f i l i n g s when specified by law. Examples of these public
f i l i n g s include a u d i t r e p o r t s o f c i t i e s and towns and f i n a n c i a l statements
f i l e d when a corporation proposes t o o f f e r s e c u r i t i e s f o r public sale. When
conducting a " quality review", the Board i n v e s t i g a t o r compares the f i l i n g s to a
preliminary review checklist containing the basic elements of " generally
accepted auditing standards and accounting principles." The i n v e s t i g a t o r
reports exceptions from these standards and principles to the Board for its
consideration and action.
The Board follows a standard procedure in q u a l i t y review and complaint i n v e s t i -
gations. The Board begins by reviewing 1) complaints, 2) r e f e r r a l s , and then
determines 3) if s u f f i c i e n t resources e x i s t to d i r e c t t h a t a specified number
of q u a l i t y reviews be conducted.
The Board may e l e c t t o obtain additional information on complaints and
r e f e r r a l s from such sources a s the Attorney General or the r e f e r r a l agency
before proceeding.
- If, based on t h i s information, no f u r t h e r a c t i o n is warranted, the
Board may c l o s e t h e case. For complaints, the Board w i l l send a
l e t t e r to the complaintant explaining the closure.
- I f , however, an in depth investigation appears to be needed, the
Board w i l l assign t h e i n v e s t i g a t o r t o perform a " cold review" of the
f i n a n c i a l statements. -
The Board investigator conducts the " cold review" using a checklist developed
by the Arizona Society of Certified Public Accountants. This checklist is
based on generally accepted auditing standards and accounting principles. The
same review is used for complaint i n v e s t i g a t i o n s and q u a l i t y reviews performed
by the investigator.
The reviewer then prepares a report for Board consideration noting any
d e f i c i e n c i e s or deviations from standards.
Upon r e c e i p t of the i n v e s t i g a t o r ' s r e p o r t t h e Board may: request additional
information from the r e g i s t r a n t , order a f u r t h e r investigation, r e f e r the
matter to the Board's complaint committee, r e f e r to the Attorney General for
consent order negotiation, i n i t i a t e a formal hearing o r r e f e r the case to the
Attorney General prior to rendering a f i n a l decision.
For cases not dismissed, the Board votes upon sanctions t o be ordered based on
hearing r e s u l t s , consent order negotiations and a l l obtained information.
The procedure described is used for i n v e s t i g a t i n g d e v i a t i o n s from standards for
auditing and f i n a n c i a l statement preparation. Complaints regarding i l l e g a l
use of the r e s t r i c t e d t i t l e s " Certified Public Accountant" or " Public
Accountantll are usually resolved through d i r e c t correspondence with affected
p a r t i e s .
Resolution and Source of
Investigations Conducted
During 1978, the S t a t e Board of Accountancy issued 60 r e s o l u t i o n s o f investi-gations.
Table 12 summarizes these resolutions.
Resolution
Revocation
Suspension
Corrective Sanctions
Cease and Desist Orders
Advisory Notices
No Action
TABLE 12
RESOLUTIONS* OF INVESTIGATIONS BY
THE STATE BOARD OF ACCOUNTANCY
DURING CALENDAR YEAR 1978
Total
Percent
Number of Total
A s Table 12 d e t a i l s , sanctions were imposed i n 4 . 6 percent of the
i n v e s t i g a t i o n s resolved i n 1978. These include revocations, suspensions,
corrective sanctions, cease and d e s i s t orders and advisory notices.
Appendix X contains a b r i e f summary of each of the 60 resolutions issued
during 1978.
Definitions of these r e s o l u t i o n s a r e :
Revocations - An i n d i v i d u a l ' s c e r t i f i c a t e is rescinded along with
privilege of use of t i t l e and a b i l i t y t o perform c e r t a i n functions
r e s t r i c t e d by law.
Suspension and Corrective Sanctions - An i n d i v i d u a l ' s c e r t i f i c a t e is
revoked for a period of time and the individual must complete c e r t a i n
c o r r e c t i v e t a s k s before regaining the c e r t i f i c a t e .
Corrective Sanctions - Requirements, such as professional education,
peer review and r e s t r i c t i o n s o f p r a c t i c e , are imposed t o c o r r e c t t h e
d e f i c i e n t p o r t i o n o f t h e accountant's p r a c t i c e .
Cease and Desist Orders - Used in enforcement of r e s t r i c t i v e t i t l e
s t a t u t e s , whereby v i o l a t o r s a r e sent a notice d i r e c t i n g the
individual to stop t h e v i o l a t i o n . If t h e i n d i v i d u a l does not agree
and comply, f u r t h e r sanctions may be imposed.
Advisory Notices - If a minor v i o l a t i o n of the law o r r u l e s has
occurred, t h e v i o l a t o r is n o t i f i e d .
No Action - If an i n v e s t i g a t i o n d i s c l o s e s no v i o l a t i o n s or the Board
determines the case is o u t s i d e o f its j u r i s d i c t i o n , no action is
taken. If i n i t i a t e d by a complaint, the Board i s s u e s a letter of
explanation to the complaintant.
Quality of Investigation
In a survey o f t h e accounting profession conducted by the Office of the Auditor
General i n March 1979, accountants who had been subjected t o an i n v e s t i g a t i o n
by the Board were asked t o r a t e the q u a l i t y and f a i r n e s s of the Board's
i n v e s t i g a t i o n process. Table 13 summarizes the accountants' r a t i n g s .
TABLE 13
RATING OF THE STATE BOARD OF
ACCOUNTANCY'S INVESTIGATION
PROCESS BY ACCOUNTANTS INVOLVED
BOARD HANDLING OF CASES AND FAIRNESS OF BOARD DECISION
Neutral
S a t i s - or No Unaccep- Total
Excellent f a c t o r y Opinion Poor t a b l e Responses
C e r t i f i e d Public Accountant 10 18 7 10 12 5 7
Public Accountant - 1 - - - 1
Non- licensed Accountant - 1 -- -- -- -- - 1
Total -- 11 - 19 - 7 - 10 -- 12 -- 5 9
19% 32% 12% 17% 20%
A s Table 13 r e v e a l s , 51 percent of the accountants r a t e d t h e Board's perfor-mance
as e x c e l l e n t or s a t i s f a c t o r y ; 12 percent had no opinion or were n e u t r a l ;
and 37 p e r c e n t d e s c r i b e d t h e i r case a s handled i n a poor or unacceptable
manner.
Those survey respondents who r a t e d the Board's i n v e s t i g a t i v e process and/ or
f a i r n e s s of decision a s " pooru o r " unacceptablef' were a l s o asked t o comment on
t h e i r r a t i n g . The following comments were made:
- Findings were i n a c c u r a t e , incomplete or a matter of i n t e r p r e t a t i o n *
- Board is " power hungryv, prejudiced or unresponsive
- I n v e s t i g a t i o n was not kept c o n f i d e n t i a l
* It should be noted t h a t the Auditor General reviewed f i v e s e l e c t e d cases
i n v e s t i g a t e d by the Board. These cases were s e l e c t e d based on whether
s u b s t a n t i a l o b j e c t i o n s regarding t h e use and i n t e r p r e t a t i o n of
a p p r o p r i a t e standards were r a i s e d by the accountant being i n v e s t i g a t e d .
The Auditor General agreed with the a p p r o p r i a t e n e s s of the standards used
and the i n t e r p r e t a t i o n by t h e i n v e s t i g a t o r .
- Resolution was overly d i s c i p l i n a r y r a t h e r than c o r r e c t i v e
- Board's l e g a l counsel exerted undue pressure
- Process was too slow
- Individual f e l t they were " g u i l t y u n t i l proven innocent"
- Board tends to favor l a r g e , " Big- 8" accounting firms
- Informal discussions should be held before proceedings -
- Sanctions should be based on s e v e r i t y o f d e f i c i e n c i e s
- I n v e s t i g a t i o n process was f a i r and prompt, but s t e r n
In a d d i t i o n , 12 p r a c t i c i n g accountants who had sanctions imposed on them by the
Board f o r v i o l a t i o n s o f " g e n e r a l l y accepted a u d i t i n g standards and accounting
principles1' were interviewed. Subjects included i n the interview were
e f f e c t i v e n e s s of the sanctions i n improving s k i l l s , t i m e l i n e s s of the
i n v e s t i g a t i o n , f a i r n e s s o f d i s p o s i t i o n and whether undue hardships were
incurred. A s Table 14 i n d i c a t e s , a m a j o r i t y o f interviewees s t a t e d t h e
sanctions were f a i r and e f f e c t i v e and the i n v e s t i g a t i o n was timely, o r had no
comment; but h a l f a l s o s t a t e d undue hardships had occurred.
TABLE 14
Yes
N 0
No Comment
T o t a l
RESPONSES BY SANCTIONED ACCOUNTANTS
REGARDING INVESTIGATION AND CASE
DISPOSITION BY THE STATE BOARD OF ACCOUNTANCY
-
Questions Asked
Are Sanctions Was I n v e s t i g a t i o n Were Were Undue
E f f e c t i v e i n Completed i n Sanctions Hardships
Improving S k i l l s ? Timely Manner? F a i r ? Incurred? T o t a l s
Table 14 i l l u s t r a t e s t h a t accountants p r a c t i c i n g under s a n c t i o n s as of March
30, 1979, had a g e n e r a l l y favorable a t t i t u d e towards t h e Board's performance.
Negative comments included 1) undue i n f l u e n c e by the Attorney General, 2)
" leaks" on the i n v e s t i g a t i o n before formal n o t i f i c a t i o n , 3) high expenses f o r
a t t o r n e y fees, 4) excessive p u b l i c i t y damaging to the a c c o u n t a n t ' s p r a c t i c e ,
and 5) Board a c t i o n s being based on s e r v i c e rendered too far ( f i v e years) i n
the past.*
Timeliness of Board Complaint Review Process
A review of the complaints resolved by t h e Board during 1978 revealed t h a t , on
the average, q u a l i t y reviews of public f i l i n g s take t h e l e a s t amount of time t o
r e s o l v e ; while i n v e s t i g a t i o n s t h a t a r e i n i t i a t e d a s a r e s u l t of newspaper
a r t i c l e s , take the most time. In a d d i t i o n , those cases t h a t r e s u l t i n the
Board revoking the r e g i s t r a n t ' s c e r t i f i c a t e take longer t o complete than any
other type of d i s c i p l i n a r y a c t i o n . Table 15 summarizes - the t i m e l i n e s s o f t h e
Board's complaint and q u a l i t y review i n v e s t i g a t i o n s .
* Appendix X I contains a statement by a C e r t i f i e d Public Accountant t h a t
d e s c r i b e s negative a s p e c t s of the i n v e s t i g a t i v e process.
TABLE 15
Reason The I n v e s t i g a t i o n
Was I n i t i a t e d
TIMELINESS* OF STATE BOARD
ACCOUNTANCY'S COMPLAINT AND
QUALITY REVIEW INVESTIGATIONS
I N CALENDAR YEAR 1978
Public F i l i n g s Reviewed by
Board I n v e s t i g a t o r
Board Member o r S t a f f I n i t i a t e d
Other S t a t e Agency R e f e r r a l
Public Complaint
Newspaper A r t i c l e
Board Action
Revocation
Suspension
Corrective Sanctions
Cease and D e s i s t Orders
Advisory Notices
No Action
Overall Average Time f o r a l l I n v e s t i g a t i o n s
Average Time I n
Calendar Days
* Timeliness is c a l c u l a t e d as the number of days e l a p s i n g from the
date of i n i t i a l Board review t o t h e d a t e of d i s p o s i t i o n by t h e
Board.
It should be noted that when a criminal offense is involved in a complaint,
the Board may take preliminary d i s c i p l i n a r y a c t i o n ; but does await the
completion of criminal court action before rendering a f i n a l resolution of the
case. This policy causes a s u b s t a n t i a l increase i n the time needed for
resolution.
Quality Review Programs of
Other S t a t e s and Other Arizona
Regulatory Programs
The S t a t e Board of Accountancy is exceptional i n its attempt t o assure that
r e g i s t r a n t s a r e complying with accountancy laws and r u l e s . Among Arizona
p r o f e s s i o n a l r e g u l a t i n g bodies only two other q u a l i t y review programs e x i s t and
among other S t a t e Boards of Accountancy the Arizona Board has been nationally
recognized as a leader i n developing its q u a l i t y review program.
An Auditor General survey of 19 Arizona professional regulatory bodies revealed
t h a t the S t a t e Board of Accountancy is one of only three professional
regulatory bodies that conduct q u a l i t y reviews as w e l l a s investigation of
complaints. Table 16 lists the 19 professional regulatory bodies surveyed.
TABLE 16
SUMMARY OF PROFESSIONAL QUALITY REVIEW
PROGRAMS AMONG ARIZONA PROFESSIONAL
REGULATORY BODIES
Maintain Q u a l i t y
Review Program*
- Yes - No
X
P r o f e s s i o n a l Regulatory Body
STATE BOARD OF ACCOUNTANCY
S t a t e Bar of Arizona
S t a t e Board of Barber Examiners
S t a t e Board of C h i r o p r a c t i c Examiners
S t a t e Board of Cosmetology
S t a t e Dental Board
S t a t e Board of Education*"
S t a t e Board of Funeral Directors and Embalmers
Board of Medical Examiners
S t a t e Naturopathic Board of Examiners
S t a t e Board of Nursing
Board of Optometry
Arizona Board of Osteopathic Examiners i n Medicine and Surgery
Arizona S t a t e Board of Pharmacy
Board of Physical Therapy Examiners X
S t a t e Board of Psychologist Examiners X
S t a t e Board of Technical R e g i s t r a t i o n X
Arizona S t a t e Veterinary Medical Examiners Board - - X
Total
* A q u a l i t y review program is defined a s a systematic review of r e g i s t r a n t s
to determine i f they a r e i n compliance with the a p p l i c a b l e s t a t u t e s
and r e g u l a t i o n s . This review is conducted even though a formal complaint
may not have been received by the agency. ** A teacher assessment program is conducted by i n d i v i d u a l s c h o o l d i s t r i c t s
for t h e i r use.
Nationally, the Arizona S t a t e Board of Accountancy has been recognized as a
leader among other s t a t e boards of accountancy. The U. S. S e c u r i t i e s and
Exchange Commission has reported to Congress, " A few s t a t e s , notably Arizona,
Colorado and Florida have begun r e l a t i v e l y ambitious monitoring, review and
enforcement programs." An Auditor General survey of the 50 s t a t e accountancy
boards revealed t h a t only eight boards have quality review programs. These
s t a t e s are:
ARIZONA North Dakota
Colorado Oregon
Florida Virginia
Iowa Washington
The Board's Quality Review
Program For Public F i l i n g s
Has Proven To Be An
Effective Means Of Identifyinq
Substandard Accounting Work
During 1978, the State Board of Accountancy resolved 60 investigations of which
26 were quality reviews of public f i l i n g s . Of these 26 quality review
i n v e s t i g a t i o n s , nine resulted i n the Board imposing some form of d i s c i p l i n e on
the r e g i s t r a n t who performed t h e a u d i t or prepared t h e f i n a n c i a l statement t h a t
was f i l e d with the public agency. The Board's resolution of the 26 quality
reviews of public f i l i n g s and complaint i n v e s t i g a t i o n s completed during 1978
are summarized in Table 17.
TABLE 17
Board Resolution
SUMMARY OF BOARD RESOLUTION
OF THE 26 QUALITY REVIEWS OF
PUBLIC FILINGS AND COMPLAINT
INVESTIGATIONS COMPLETED
DURING 1978
Revocation
Suspension
Consent Order o r Other Sanction
Cease and Desist Order
Advisory Warning
No Action
Number o f Q u a l i t y Reviews of
Public F i l i n g s Completed
Q u a l i t y Reviews
of Public
F i l i n g s
Complaint
I n v e s t i g a t i o n s
A s shown i n Table 17, t h e q u a l i t y review program f o r public f i l i n g s has been
comparable t o t h e i n v e s t i g a t i o n of complaints i n the i d e n t i f i c a t i o n o f
accounting work s u f f i c i e n t l y substandard to require some form of d i s c i p l i n e .
S t a t e Board Of Accountancy
I n t e r p r e t s Law To Preclude Q u a l i t y
Reviews Of P r i v a t e F i l i n g s
Members o f t h e S t a t e Board of Accountancy s t a t e d t h a t , i n accordance with
Arizona Revised S t a t u t e ( ARS 32- 744), without a complaint, a u d i t r e p o r t s and
f i n a n c i a l statements used by p r i v a t e e n t i t i e s a r e not aEcessible t o the board
for its q u a l i t y review program. ARS 32- 744 reads, i n p a r t :
" A l l s t a t e m e n t s , s c h e d u l e s , working papers and memoranda
made by a c e r t i f i e d public accountant or public accountant
i n c i d e n t t o or i n the course o f p r o f e s s i o n a l s e r v i c e t o
c l i e n t s , except r e p o r t s submitted t o a c l i e n t , s h a l l be
and remain the property of the c e r t i f i e d public accountant
or public accountant i n the absence of a n e x p r e s s
agreement between t h e c e r t i f i e d p u b l i c accountant o r
p u b l i c accountant and the c l i e n t t o the contrary."
When the Board i n i t i a t e d the q u a l i t y review program i n 1976, it determined t h a t
commercial or p r i v a t e f i l i n g s were beyond t h e i r a u t h o r i t y t o review; and,
t h e r e f o r e , limited the program t o f i l i n g s with public agencies.
A s discussed on pages 33 t o 36, i n d i v i d u a l s could be f i n a n c i a l l y harmed who
r e l y on a u d i t r e p o r t s and f i n a n c i a l statements t h a t deviate from g e n e r a l l y
accepted accounting p r i n c i p l e s and a u d i t i n g standards. McKesson- Robbins,
Incorporated, Equity Funding Corporation of America and the Lincoln T h r i f t
Association a r e n a t i o n a l and s t a t e examples of harm t h a t can occur. This
p o t e n t i a l f o r f i n a n c i a l harm is not l i m i t e d t o t h e public f i l i n g s now a v a i l a b l e
f o r review by the Arizona S t a t e Board of Accountancy.
Lending i n s t i t u t i o n s , p r i v a t e c o r p o r a t i o n s and s u p p l i e r s r e l y on the opinion of
independent a u d i t o r s regarding t h e f a i r n e s s and accuracy of f i n a n c i a l
s t a t e m e n t s . I n a c c u r a t e a t t e s t work could r e s u l t i n c r e d i t being extended or
o t h e r decisions being made erroneously, based on the a u d i t o r ' s opinion.
Arizona S t a t e Board of Accountancy members have expressed concern regarding the
current l i m i t a t i o n s o f q u a l i t y review and complaint i n v e s t i g a t i o n . M r . D. Jay
Ryan, P r e s i d e n t o f t h e Board, s t a t e d on June 19, 1979:
" The public is not completely protected because p r i v a t e
f i l i n g s cannot be reached without a complaint. We ( The
Board) don't know t h a t they ( a u d i t s , e t c . ) even e x i s t
u n l e s s t h e banker, for example, s u p p l i e s us with a copy.
Whether our subpoena power would permit a general ' f i s h i n g
expedition' i n a CPA1s f i l e s , p r i v a t e company's books or
bank records I cannot say at t h i s time."
Mr. Archie Walker, member of the S t a t e Board of Accountancy, s t a t e d on June 19,
" The s u b s t a n t i a l amount of work performed by CPA's r e l a t e s
t o commercial business. Our economic system is dependent
upon financing. For the system t o work, the f i n a n c i a l
statements of the v a r i o u s o r g a n i z a t i o n s have t o be
r e l i a b l e . To enhance t h e public p r o t e c t i o n from
substandard work, t h e Board should become more a c t i v e i n
obtaining commercial a u d i t s f o r review. Based upon the
r e s u l t s of the Board's i n v e s t i g a t i v e a c t i v i t i e s t o date,
the need f o r such a review e x i s t s . "
M r . Mike Marusich, Vice- president of the Board on March 23, 1979, s t a t e d :
" The best method o f c o n t r o l l i n g p r i v a t e f i l i n g s is through
mandatory p e r i o d i c peer review conducted by another
licensee."
L e g i s l a t i v e Council Opinion S t a t e s
Audit Reports, Financial Statements
And Supporting Working Papers Made By Any
C e r t i f i e d Accountant Are Accessible To The Board.
In a memorandum t o the Auditor General dated May 24, 1979, t h e L e g i s l a t i v e
Council s t a t e d t h a t f o r purposes of conducting q u a l i t y review of a c e r t i f i e d
a c c o u n t a n t l s work, the S t a t e Board of Accountancy does have access t o
a u d i t r e p o r t s , f i n a n c i a l statements and supporting work papers.
The Legislative Council cited ARS 32- 749, as amended i n the 1979 l e g i s l a t i v e
session, which s t a t e s i n part:
" Certified public accountants and public accountants
practicing i n t h i s s t a t e s h a l l not be required t o divulge,
nor s h a l l they voluntarily divulge information which they
have received by reason of the c o n f i d e n t i a l nature of
t h e i r employment. Information derived from o r a s a r e s u l t
of such professional source s h a l l be deemed confidential,
but t h i s section s h a l l not be construed as modifying,
changing or affecting the criminal or bankruptcy laws of
t h i s s t a t e o r t h e United S t a t e s , nor s h a l l it be construed
t o l i m i t the authority of t h i s s t a t e or agency of t h i s
s t a t e t o subpoena and use such information i n connection
with any investigation, public hearing or other
proceeding.
The Legislative Council noted t h a t the S t a t e Board of Accountancy is granted
broad powers t o administer the regulation of Certified Public Accountants and
Public Account