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Good afternoon. My name is Russ Haven and I am the Legislative Counsel for the New York Public Interest Research Group (NYPIRG). Thank you to the Office of the Professions State Board for Public Accountancy for conducting this hearing on the practice and licensure of accountants in New York State.

NYPIRG is New York State's largest non-profit student directed research and advocacy organization. NYPIRG's primary areas of interest include consumer protection, corporate accountability, and social justice issues. In its nearly 30-year history NYPIRG has monitored practices and oversight of New York's professions, including physicians and attorneys.

At the outset what separates those in the professions from others who may provide similar services are a set of ethics and licensure. The public expects that when it seeks and pays for the services of a professional that there is a code of conduct and a licensing agency standing behind the licensed individual. The public's trust and confidence are built on this foundation.

As the licensed financial professionals in New York State, certified public accountants must be held to high standards commensurate with the public's trust. This is true whether CPAs are auditing publicly held corporations, in which members of the public may invest, or providing services to the small business or to an individual. CPAs proudly display their degree, certification and licensure in offering an array of services. New York's oversight of the CPA profession must match consumers' reasonable expectations.

While the issue of the oversight and conduct of public accountants is not new for the profession or regulators, recent events have understandably raised the public's concerns. The steady drumbeat of reports of firms using their audits to leverage huge consulting fees, auditors landing top-level positions with former clients, markets roiled by profit statement adjustments, and the specter of frantic document shredding provide the context for the discussion of how to tighten regulation and restore public confidence in the profession of accountancy.

Against this backdrop and in light of the likelihood that Congress will not act to regulate accountants, New York State has an opportunity as the financial capital of the world to lead the way in restoring public confidence. Only New York State has full powers to license, discipline and disbar accountants. It must assert its primacy to maintain the integrity of the profession. As the regulator with broad authority, New York must assert its primacy to maintain the integrity of the profession and protect the public's interest.

NYPIRG urges that the following statutory and administrative reforms be pursued.

1. Separate audit and consulting. To the greatest extent feasible, the state should seek to ensure that the audit function is separated from other client services. It's clear that in the current climate the consulting fees tail is wagging the audit dog.

2. Rotate audit firms every 5 years. While there are efficiencies to having the same firm conduct an audit year after year, the risk is that the independent skepticism of the auditor-client relationship diminishes over time and that things are overlooked when not viewed with a fresh set of eyes.

3. Mandatory cool-off period before hiring former auditors. The Washington Post reported that according to an SEC order, every CFO and CAO for Waste Management for the 26-year period from 1971 to 1997 were former Andersen auditors! Audit team members and managers should be barred from employment or other personal financial relationships with audit subjects for two years from completion of an audit to remove any risk or perception of a quid pro quo.

4. Require a seven-year period for audit record retention. Effective oversight of the audit performance requires that records be retained for a sufficient amount of time to ensure they can be reviewed in the event questions are subsequently raised. Seven years seems like a reasonable amount of time and is the duration in legislation moving in the California legislature.

5. Ban fixed-fee audits. Setting a fixed price for an audit can create a dynamic that leads to cutting corners and compromises the independence and thoroughness of the auditor. Firms also may low-ball the price to get the client and seek more lucrative consulting fees, using the audit as a "loss leader."

6. Peer review of audit firms. This requirement should apply to all firms, regardless of whether they are members of a trade association. Peer review rules must ensure that there's no exchange of "soft looks" between firms and that the state can use peer reviews as a basis for further inquiry.

7. Expand scope of practice regulation to cover consulting, tax and consumer services. Other states such as Texas, California, Illinois and Ohio have broader definitions of scope of practice. The public assumes that utilizing the services of a "certified public accountant" covers the range of financial services provided by the licensed professional. New York State should expand the scope of practice of the profession to honor this expectation and protect the public.

8. Expand enforcement, including the ability to conduct random audits. The best enforcement is done by deterrence. Individual professionals and firms would be deterred from illegal and unethical conduct through the credible risk of enforcement.

9. Require that 50% of the membership of the State Board for Public Accountancy be lay members who are independent of accountants and the industry. Education Law § 7403 establishes the State Board for Public Accountancy directing that it "shall be composed of not less than twenty licensed accountants, not less than fifteen of whom shall be licensed as certified public accountants in this state. . . ." A review of the current membership indicates that few members of the current board are independent of the profession or of accounting firms. Public membership is critically important to ensuring that there is a sufficient level of distance from self-interested professionals and that the public's interest is served.