Accounting firms, consumer advocates wrangle over reform

By Jennifer Coleman, The Associated Press
Wednesday May 08, 2002

SACRAMENTO — A fight between public-interest groups and the powerful accounting industry is building in California’s Legislature, following Congress’ approval of a bill consumer advocates call a “red herring of reform” of auditors and accountants. 

At issue are three bills, all inspired by the collapse of energy giant Enron and the alleged accounting fraud, that would change accounting rules and limit the activities of accountants and auditors. 

An Assembly committee approved one bill Tuesday, and consumer groups hope the other two will pass the Assembly Appropriations Committee Wednesday. 

But the accounting industry is doing everything it can to stop them, as it has unleashed a mass letter-writing and telephone call campaign to legislators. Assembly members on the Business and Professions Committee have received hundreds of letters from accountants — from sole practitioners and employees from four large accounting firms. 

“It’s a truly impressive lobbying effort,” said Jerry Flanagan of the California Public Interest Research Group, “except that they all say the same thing.” 

Flanagan said his group and others are pushing for the California bills, because a bill passed last month in Congress “lacked any new reforms. California is our chance to get these reforms into place.” 

Anything passed in California could then ripple across the nation, said Assemblyman Lou Correa, an Anaheim Democrat who chairs the Business and Professions Committee. “As California goes, so goes the rest of the nation.” 

If passed and signed by Gov. Gray Davis, the bills would prohibit some consulting-auditing relationships that firms have now and require them to keep records for seven years. 

Correa, author of one of the bills targeted by the accountants, compared the lobbying effort to “thermonuclear war. Every day I turn around and they’ve hired a new lobbyist.” 

Correa’s committee approved a bill by Assemblyman Howard Wayne, D-San Diego, on a 6-3 vote. That bill mirrors recommendations from the state Board of Accountancy and would prohibit auditors from going to work for publicly traded companies they have audited for two years after they performed those services. 

Assemblyman John Campbell, R-Irvine, an accountant, called the Wayne and Correa bills a “political ploy” and an attempt to regulate companies under federal jurisdiction. 

Congress, not California should made the necessary changes in accounting, Campbell said. “California doesn’t have separate accounting standards than the rest of the nation, nor should it.” 

State legislatures throughout the nation are considering accounting and auditing bills, said Sheri Bango of the American Institute of Certified Public Accountants, the national trade organization that sets professional standards. 

States shouldn’t have “different standards than other places in the country,” Bango said. “Especially where it may conflict with what Congress and the Securities and Exchange Commission has proposed.” 

The SEC considered a “global ban” of non-auditing services by accountants as part of reforms it passed last year, but rejected that idea, said Jesse Choper, a professor at University of California, Berkeley’s Boalt Hall School of Law. 

Choper testified Tuesday against a fourth bill, this one offered by Senate President Pro Tem John Burton, D-San Francisco, which would ban those relationships in state law. 

Choper testified on behalf of four major accounting firms — Deloitte and Touche, KPMG, PricewaterhouseCoopers, and Ernst and Young. Burton’s bill, he said, would violate the U.S. Constitution because it would interfere with federal regulators’ oversight of the industry. 

That shouldn’t keep California from enacting a tougher law “to protect our people,” Burton said. “To think the SEC is the fount of all wisdom boggles me.” 

California’s status as the world’s fifth-largest economy makes it necessary for the state to protect investors, Flanagan said. 

Congress’ efforts to strengthen investor and consumer protections have “turned to mush,” Correa said, and state lawmakers “are here to do what’s good for the state of California. And frankly, I don’t know how having better audits could be bad for business.” 

The accounting industry, however, said the bill would force “nearly every California business to hire at least two CPAs to obtain the same services now performed quite aptly by one — doubling business costs and resulting in significant inefficiency.” 

Correa disagreed, saying that businesses who need both services are already paying for both. 

Accountants aren’t fighting a bill by Assemblyman Dario Frommer, which would require auditors and accountants to save records for seven years, said Michael Ueltzen, past president of the California Society of Certified Public Accountants. Cal-CPA represents 27,000 accountants in California, about 2,000 of which work for the “Big Five” firms. 

There is no state requirement that accountants or auditors save documents. The industry’s standards are generally such that papers should be saved for at least five years, but the state has no way to enforce that. 

“If that restores some trust, then that’s fine,” Ueltzen said. “But it’s interesting, there’s only one state in the U.S. that has a record retention regulation and that’s Texas.” 

The law obviously didn’t keep records from being shredded at the Houston headquarters of Enron, the corporate bankruptcy that inspired these bills, Ueltzen said.