Regulatory Review Requirements for California Accounting and Auditing

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Regulatory Review Requirements for California Accounting and Auditing Professionals Charles W. Hester CPA/CFE/CGFM

Regulatory Review Requirements for California Accounting and Auditing Professionals Charles W. Hester CPA/CFE/CGFM

Objectives This course will provide participants with: n n n A definition of ethics

Objectives This course will provide participants with: n n n A definition of ethics and ethical behavior The responsibilities and obligations of decision makers in the practice of professional ethics A review of current statutes and regulations specific to the practice of public accountancy and how they relate to licensees in the practice of public accountancy A review of disciplinary actions taken by the California Board of Accountancy Some of the pitfalls that may be encountered in ethical analysis The important principles as guides in the decisionmaking process when faced with ethical dilemmas 2

Definitions Morals Conduct Morals Rules Ethics Rules Compliance Integrity Compliance 3

Definitions Morals Conduct Morals Rules Ethics Rules Compliance Integrity Compliance 3

Definition of Morals u Pertains to character, conduct, intention, social relations, etc. n Moral

Definition of Morals u Pertains to character, conduct, intention, social relations, etc. n Moral Actions n Moral Certainty n Moral Consideration n Moral Obligation 4

Definition of Rules “An established standard, guide or regulation. Prescribed guide for conduct or

Definition of Rules “An established standard, guide or regulation. Prescribed guide for conduct or action, regulation or principle. ” 5

Definition of Compliance Submission u. Obedience u. Conformance u 6

Definition of Compliance Submission u. Obedience u. Conformance u 6

Definition of Conduct “Personal behavior; deportment; mode of action; any positive or negative act.

Definition of Conduct “Personal behavior; deportment; mode of action; any positive or negative act. ” 7

Definition of Ethics “Professionally right or befitting; conforming to professional standards of conduct. ”

Definition of Ethics “Professionally right or befitting; conforming to professional standards of conduct. ” 8

Definition of Integrity “Uncompromising adherence to ethical principles. ” 9

Definition of Integrity “Uncompromising adherence to ethical principles. ” 9

Most Frequent Questions and Violations in California Ownership of Accountant's Working Papers u Practice

Most Frequent Questions and Violations in California Ownership of Accountant's Working Papers u Practice without a Valid Permit u Name of Firm u Notification of Change of Address u Continuing Education u n n Basic Requirements Exceptions and Extensions 10

Current Top 3 Causes of Discipline 20/12 CPE Violation u Failure to Respond to

Current Top 3 Causes of Discipline 20/12 CPE Violation u Failure to Respond to CBA Inquires u Failure to Submit a Complete/Accurate Peer Review Reporting Form u 10/30/2020 11

Rule Number One It is your responsibility to know and comply with all related

Rule Number One It is your responsibility to know and comply with all related laws and regulations! 12

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State Professional Accounting Conduct & Ethics Requirements California Accountancy Act, Business and Professions Code,

State Professional Accounting Conduct & Ethics Requirements California Accountancy Act, Business and Professions Code, Division 3, Chapter 1, Accountants u Board of Accountancy Regulations, California Code of Regulations, Title 16, Division 1 u Selected Provisions of Other California Codes u 14

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California Accountancy Act, Business and Professions Code, Division 3, Chapter 1 u u u

California Accountancy Act, Business and Professions Code, Division 3, Chapter 1 u u u Article 1 - Administration Article 1. 5 - Continuing Education Article 2 - General Powers and Definitions Article 3 - Application of Chapter Article 3. 5 – Standards of Professional Conduct 16

California Accountancy Act, Business and Professions Code, Division 3, Chapter 1 - Continued u

California Accountancy Act, Business and Professions Code, Division 3, Chapter 1 - Continued u u Article 4 - Applications, Registrations, Permits Generally Article 5 - Certificates, Information and Records Article 5. 1 - Practice Privileges Article 5. 5 - Audit Documentation 17

California Accountancy Act, Business and Professions Code, Division 3, Chapter 1 u u u

California Accountancy Act, Business and Professions Code, Division 3, Chapter 1 u u u Article 6 - Disciplinary Proceedings Article 6. 5 - Administrative Penalties Article 7 - Prohibitions and Offenses Against the Chapter Generally Article 8 - Revenue Article 9 - Accountancy Corporations 18

Accountancy Act Div. 3, Chap. 1, Article 1 u Section 5018 - Professional Rules

Accountancy Act Div. 3, Chap. 1, Article 1 u Section 5018 - Professional Rules and Standards “The board may by regulation, prescribe, amend or repeal rules of professional conduct appropriate to the establishment and maintenance of a high standard of integrity and dignity in the profession. ” 19

Accountancy Act Div. 3, Chap. 1, Article 1 u Section 5000. 1 – Public

Accountancy Act Div. 3, Chap. 1, Article 1 u Section 5000. 1 – Public Protection Priority “Protection of the public shall be the highest priority for the California Board of Accountancy in exercising its licensing, regulatory, and disciplinary functions. Whenever the protection of the public is inconsistent with other interests sought to be promoted, the protection of the public shall be paramount” 20

Accountancy Act Division 3, Chapter 1 u Article 1. 5 – Continuing Education n

Accountancy Act Division 3, Chapter 1 u Article 1. 5 – Continuing Education n n Section 5026 – Continuing Education Section 5027 – Continuing Education Regulations Section 5028 – Exceptions from Continuing Education Requirements Section 5029 – Continuing Education Committee 21

Accountancy Act Division 3, Chapter 1 u Article 2 – General Powers and Definitions

Accountancy Act Division 3, Chapter 1 u Article 2 – General Powers and Definitions n n Section 5037 – Ownership of accountants’ working papers Section 5073. 1 – Construction of Licensees’ Obligations Under Section 5037 u Nothing in the subdivision of Section 17406 of the Financial Code shall be construed to impair or impede a licensee’s rights, duties, and obligations. 22

Accountancy Act Division 3, Chapter 1 - Continued u Article 3 – Application of

Accountancy Act Division 3, Chapter 1 - Continued u Article 3 – Application of Chapter n n n Section 5050 – Practice Without Permit, Temporary Practice Section 5050. 1 - Consent to Board's Jurisdiction Section 5050. 2 – Discipline of Out-of-State or Foreign Accountant of Firm 23

Article 3. 5 – Standards of Professional Conduct Section 5060 - Name of Firm

Article 3. 5 – Standards of Professional Conduct Section 5060 - Name of Firm u Section 5061 - Commissions u Section 5062 - Report Conforming to Professional Standards u Section 5062. 2 - Restrictions on Accepting Employment with an Audit Client u Section 5063 - Reportable Events u Section 5063. 1 - Reporting by Courts u Section 5063. 2 - Reporting By Insurers u Section 5063. 3 - Disclosure of Confidential Client Information Prohibited Section 5063. 10 - Restatements u 24

Article 3. 5 – Standards of Professional Conduct u Section 5060 – Name of

Article 3. 5 – Standards of Professional Conduct u Section 5060 – Name of firm n Cannot be misleading n MUST be in name that has valid permit to practice n Sole proprietor can use name registered with the Board 25

Article 3. 5 – Standards of Professional Conduct u Section 5061 – Commissions n

Article 3. 5 – Standards of Professional Conduct u Section 5061 – Commissions n n Cannot pay or accept fee for referring client Can accept fees or commissions from third parties if services are in conjunction with CPA services Cannot accept commissions if also providing audit, compilation or examination of prospective financial information MUST fully disclose that a fee or commission is being received 26

Article 3. 5 – Standards of Professional Conduct u u Section 5062 – Licensees

Article 3. 5 – Standards of Professional Conduct u u Section 5062 – Licensees shall issue reports that conform to professional standards Section 5062. 2 – Licensees exercising significant judgments in audit process prohibited from accepting position for 12 -months following issuance of audit report 27

Article 3. 5 – Standards of Professional Conduct u Section 5063 – Licensees MUST

Article 3. 5 – Standards of Professional Conduct u Section 5063 – Licensees MUST report certain events to the Board n n n Convictions of felonies Any crime related to CPA functions Any crime involving theft, embezzlement, breach of fiduciary responsibility or issuing improper financial reports or information 28

Article 3. 5 – Standards of Professional Conduct u u Section 5063. 1 –

Article 3. 5 – Standards of Professional Conduct u u Section 5063. 1 – Courts that rendered a conviction or judgment of a licensee shall report that to the Board Section 5063. 2 – Insurers or brokers providing professional liability insurance to licensee shall report to the Board civil action settlements or arbitration awards of $30, 000 or greater 29

Article 3. 5 – Standards of Professional Conduct u Section 5063. 3 – No

Article 3. 5 – Standards of Professional Conduct u Section 5063. 3 – No confidential information may be disclosed (including outside the U. S. ) without written permission, except that following: n When required by law or the Board n In compliance with a subpoena or summons enforceable by court order n In response to official inquiry from a federal or state regulatory agency n To organizations that provide professional standards review and ethics or peer review n In defense of a legal preceding initiated by the client n To another licensee for professional consultation or in connection with sale or merger 30

Accountancy Act Div. 3, Ch. 1, Article 3. 5 u Section 5036. 10 –

Accountancy Act Div. 3, Ch. 1, Article 3. 5 u Section 5036. 10 – Restatements n Any restatement of a financial statement that is included in any report filed with the SEC shall be exempt from the requirements in Section 5063. 10/30/2020 31

Accountancy Act Div. 3, Chap. 1, Article 4 u Section 5076 – Peer Review

Accountancy Act Div. 3, Chap. 1, Article 4 u Section 5076 – Peer Review n u Mandatory Peer Review of accounting and auditing practices every 3 years Section 5078 – Offices Not Under Personal Management of Certified Public Accountant n Shall be supervised by a Certified Public Accountant 10/30/2020 32

Accountancy Act Div. 3, Chap. 1, Article 4 u Section 5079 – Non-licensee Ownership

Accountancy Act Div. 3, Chap. 1, Article 4 u Section 5079 – Non-licensee Ownership of Firms n n Required to disclose to clients the actual or potential involvement of nonlicensee owners in the services provided Obligated to report investigations by SEC and PCAOB or professional licensing agency 10/30/2020 33

Accountancy Act Div. 3, Chap. 1, Article 5 u Section 5080 – Granting of

Accountancy Act Div. 3, Chap. 1, Article 5 u Section 5080 – Granting of Certified Public Accountant Certification n u The CPA license shall be granted to any person who meets the requirements, has not committed acts constituting grounds for denial, and files an application form. Section 5080. 1 – Personal Appearance of Applicant Before the Board n The Board may require an applicant to appear in person. 10/30/2020 34

Accountancy Act Div. 3, Chap. 1, Article 5 u u Section 5081 – Requirements

Accountancy Act Div. 3, Chap. 1, Article 5 u u Section 5081 – Requirements for Admission to Certified Public Accountant Examination Section 5082 – Certified Public Accountant Examination Section 5082. 1 – Administration of Certified Public Accountant Examination Section 5082. 2 – Reexamination 10/30/2020 35

Accountancy Act Div. 3, Chap. 1, Article 5 u u u Section 5082. 3

Accountancy Act Div. 3, Chap. 1, Article 5 u u u Section 5082. 3 – Qualification for Examination by Foreign Applicants Section 5082. 4 – Qualification for Examination by Canadian Chartered Accountants Section 5082. 5 – Passage of the Exam in Another State 10/30/2020 36

Accountancy Act Div. 3, Chap. 1, Article 5 u u u Section 5086 –

Accountancy Act Div. 3, Chap. 1, Article 5 u u u Section 5086 – Existing Certified Public Accountant Certificates Section 5087 – Licensure Requirements: Out-of-State Licensee Section 5088 – Out-of-State Certified Public Accountant Applying for California License 10/30/2020 37

Accountancy Act Div. 3, Chap. 1, Article 5 u u u Section 5090 –

Accountancy Act Div. 3, Chap. 1, Article 5 u u u Section 5090 – Education and Experience Requirements Section 5092 – Pathway 1 Section 5093 – Pathway 2 Section 5094 – Accredited Schools Section 5095 – Providing Attest Services 38

Accountancy Act Div. 3, Chap. 1, Article 5. 1 u Section 5096 – Practice

Accountancy Act Div. 3, Chap. 1, Article 5. 1 u Section 5096 – Practice Privilege General Requirements THROUGH u Section 5096. 21 – Determination Regarding Out-0 f-State Practitioners 39

Accountancy Act Div. 3, Ch. 1, Article 5. 5 u Section 5097 – Audit

Accountancy Act Div. 3, Ch. 1, Article 5. 5 u Section 5097 – Audit Documentation Requirements n n u Defined as procedures applied, tests performed, information obtained, and conclusions reached Sufficiently complete so knowledgeable reviewer can examine and understand u Not documented, presumed not done Section 5098 – MUST have written policies for destruction and retain for minimum of 7 years or longer 10/30/2020 40

Accountancy Act Div. 3, Chap. 1, Article 6 u Section 5100 – Discipline in

Accountancy Act Div. 3, Chap. 1, Article 6 u Section 5100 – Discipline in General THROUGH u Section 5115 – Petitions for Reinstatement or Reduction of Penalty 41

Accountancy Act Div. 3, Chap. 1, Article 6 u Section 5103. 5 – Notice

Accountancy Act Div. 3, Chap. 1, Article 6 u Section 5103. 5 – Notice of Formal Accusations n The Board shall post on its Internet Web site, in an easily marked and identifiable location, notice of all formal accusations. u 10/30/2020 The notice of any formal accusation shall contain a link to where a person may request and have sent to him or her a copy of the formal accusation, and the basis for the accusation and alleged violations filed by the Board against a licensee. 42

Accountancy Act Div. 3, Chap. 1, Article 6. 5 u Administrative Penalties n n

Accountancy Act Div. 3, Chap. 1, Article 6. 5 u Administrative Penalties n n n n Section 5116 – General Provisions Section 5116. 1 – All Accountancy Act Violations Section 5116. 2 – Specific Accountancy Act Violations Section 5116. 3 – Subversion of the Examination Section 5116. 4 – Procedures for Administrative Penalties Section 5116. 5 - Judgment Ordering Payment of Administrative Penalty Section 5116. 6 – Definition of “Licensee” 43

Accountancy Act Div. 3, Chap. 1, Article 7 u Prohibitions and Offenses Against the

Accountancy Act Div. 3, Chap. 1, Article 7 u Prohibitions and Offenses Against the Chapter Generally n n n Section 5120 – Violations as Misdemeanor Section 5121 – Evidence of Violation Section 5122 – Injunctions 44

Accountancy Act Div. 3, Chap. 1, Article 9 u Section 5156 – Unprofessional Conduct

Accountancy Act Div. 3, Chap. 1, Article 9 u Section 5156 – Unprofessional Conduct “An accountancy corporation shall not do or fail to do any act the doing of which or the failure to do which would constitute unprofessional conduct under any statute, rule or regulation now or hereafter in effect. ” 45

Board of Accountancy Regulations, California Code of Regulations, Title 16, Division 1 Article 1

Board of Accountancy Regulations, California Code of Regulations, Title 16, Division 1 Article 1 - General u Article 2 – Examinations u Article 2. 5 – License Status u Article 3 – Practice Privileges (Operative July 1, 2013 – December 31, 2018) u Article 4 –Practice Privileges (Inoperative on July 1, 2013) u 46

Board of Accountancy Regulations, California Code of Regulations, Title 16, Division 1 - Continued

Board of Accountancy Regulations, California Code of Regulations, Title 16, Division 1 - Continued u u u u Article 5 – Registration Article 6 – Peer Review Article 7 – Reserved Article 8 - Appeals Article 9 - Rules of Professional Conduct Article 10 – Fees Article 11 – Accountancy Corporations 47

Board of Accountancy Regulations, California Code of Regulations, Title 16, Division 1 - Continued

Board of Accountancy Regulations, California Code of Regulations, Title 16, Division 1 - Continued Article 12 - Continuing Education Rules u Article 12. 5 - Citations and Fines u Article 13 - Denial, Suspension, and Revocation of Certificates, Permits, or Licenses u 48

Accountancy Regulations Title 16, Div. 1, Article 1 u Section 2 – Confusing Titles

Accountancy Regulations Title 16, Div. 1, Article 1 u Section 2 – Confusing Titles n n 2. 4 = Definitions of Attest Services and Attest Reports 2. 8 = Definition of Satisfactory Evidence Section 3 - Notification of Change of Address u Section 4 – Safe Harbor Language u 49

Board of Accountancy Regulations Title 16, Div. 1, Article 2 u u u Section

Board of Accountancy Regulations Title 16, Div. 1, Article 2 u u u Section 11 – Education Required to Apply for CPA License Section 11. 1 – Accounting Study Section 12 – General Experience Required Under Business and Professions Code Sections 5092 and 5093 n n Section 12. 1 – Experience in Academia Section 12. 5 – Attest Experience Under Business and Professions Code Section 10/30/2020 5095 50

Board of Accountancy Regulations Title 16, Div. 1, Article 2. 5 u Section 15

Board of Accountancy Regulations Title 16, Div. 1, Article 2. 5 u Section 15 – Retired Status n u Effective July 1, 2014 MUST not engage in “Public Practice” Section 16 – Military Inactive n Effective January 1, 2014 MUST fill out the required Form 10/30/2020 51

Board of Accountancy Regulations Title 16, Div. 1, Article 3 u Sections 18 through

Board of Accountancy Regulations Title 16, Div. 1, Article 3 u Sections 18 through 22 of the Regulations n California Practice Privilege Handbook 10/30/2020 52

Accountancy Regulations Title 16, Division 1 - Continued u Article 5 – Registration n

Accountancy Regulations Title 16, Division 1 - Continued u Article 5 – Registration n Section 37 – Reissuance u A CPA whose certificate has been canceled, may apply within 5 years for a new certificate. Within 3 years preceding application, MUST have completed at least 48 hours of CPE in specifically identified subject areas. In lieu of meeting CPE requirements may retake CPA examination. Section 37. 5 – Fingerprinting and Disclosure Requirements u n 53

Board of Accountancy Regulations Title 16, Div. 1, Article 6 u Peer Review n

Board of Accountancy Regulations Title 16, Div. 1, Article 6 u Peer Review n Section 38 – Purpose of this Article THROUGH n Section 48. 6 – Records of Proceedings 54

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What is peer review? u Peer review is a systematic review of a firm's

What is peer review? u Peer review is a systematic review of a firm's accounting and auditing services performed by a peer reviewer who is unaffiliated with the firm being reviewed to ensure work performed conforms to professional standards. 56

Who is required to undergo peer review? u Peer review is required for all

Who is required to undergo peer review? u Peer review is required for all California-licensed firms, including sole proprietorships, that perform accounting and auditing services using the following professional standards: n n n Statements on Auditing Standards (SASs) Statements on Standards for Accounting and Review Services (SSARS) Statements on Standards on Attestation Engagements (SSAEs) Government Auditing Standards (Yellow Book) Audits of non-Security Exchange Commission (SEC) issuers performed pursuant to the standards of the Public Company Accounting Oversight Board (PCAOB) 57

Fundamental Question? u If a firm only performed one accounting and auditing engagement, will

Fundamental Question? u If a firm only performed one accounting and auditing engagement, will it still be required to undergo a peer review? n Yes. There is no exclusion from the peer review requirement based solely on the number of engagements performed. 58

Are there any exclusions from the peer review requirement? u There are two exclusions

Are there any exclusions from the peer review requirement? u There are two exclusions from the peer review requirement. 1. Any of a firm's engagements subject to inspection by the Public Company Accounting Oversight Board's inspection program. 2. A firm, which as their highest level of work, perform only compilations where no report is issued in accordance with the provisions of Statements on Standards for Accounting and Review Services (SSARS). 59

Another Important Question? u Is a sole proprietorship considered a firm in California? n

Another Important Question? u Is a sole proprietorship considered a firm in California? n Yes. Section 5035. 1 of the Business and Professions Code defines a firm to include a sole proprietorship. 60

When does a firm have to report peer review information? u Firms were phased

When does a firm have to report peer review information? u Firms were phased into the reporting requirement over a three-year period. The following schedule was used for the phase-in period: n n n u u Firms with a license number ending in 01 -33 needed to submit peer review information no later than July 1, 2011. Firms with a license number ending in 34 -66 needed to submit peer review information no later than July 1, 2012. Firms with a license number ending in 67 -00 needed to submit peer review information no later than July 1, 2013. Firms are required to report peer review information every three years thereafter. For licensees that operate as a sole proprietorship, the firm number is the last two digits of your individual CPA license number 61

Does a firm need to submit its peer review report? u u A firm

Does a firm need to submit its peer review report? u u A firm that receives a peer review rating of pass or pass with deficiencies is not required to submit the peer review report. The firm will only need to complete the Peer Review Reporting Form and submit it to the California Board of Accountancy. A firm that receive a substandard peer review rating is required to submit the peer review report, along with any materials documenting prescription of remedial or corrective actions, within 45 days after the report is accepted by the Boardrecognized peer review program provider. 62

What are Board-recognized peer review program providers? u A Board-recognized peer review program provider

What are Board-recognized peer review program providers? u A Board-recognized peer review program provider is an organization that is recognized to administer peer reviews in California. Board-recognized peer review program providers will work with firms to ensure peer reviews are completed timely, firms select peer reviewers with a currency of knowledge of the professional standards to the type of practice to be reviewed, and review and accept the peer review report. 63

What organizations are presently recognized by the California Board of Accountancy (CBA) to perform

What organizations are presently recognized by the California Board of Accountancy (CBA) to perform peer reviews? u Presently, only the American Institute of Certified Public Accountants (AICPA) is recognized by the CBA to perform peer reviews. The AICPA uses several administering entities nationally, usually state certified public accountant societies, to administer its peer review program. 64

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How does a firm select a peer reviewer? u A firm is required to

How does a firm select a peer reviewer? u A firm is required to enroll in a Board-recognized peer review provider's program. Once enrolled, a recognized provider will assist in a firm's selection of a qualified peer reviewer to ensure that the peer reviewer has a currency of knowledge of the professional standards related to the type of practice to be reviewed. 68

How can a firm receive an extension of time to undergo a peer review?

How can a firm receive an extension of time to undergo a peer review? u Should an extension of time be needed to have a peer review report accepted by a Boardrecognized peer review program, the firm shall submit the request to the Board-recognized peer review program provider with which the firm is enrolled. If the extension granted extends past the firm's reporting date, the firm shall notify the California Board of Accountancy of the extension and provide proof of the extension. n The firm shall then report the results of the peer review to the CBA within 45 days of the peer review report being accepted by the Board-recognized peer review program. 69

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Accountancy Regulations Title 16, Div. 1, Article 9 u u Section 50 – Client

Accountancy Regulations Title 16, Div. 1, Article 9 u u Section 50 – Client Notification Section 50. 1 – Attest Client Notification Regarding Composition of Firm Ownership Section 51 – Firms with Non. Licensee Owners Section 51. 1 – Notification of Non-licensee Ownership 71

Article 9 – Rules of Professional Conduct - Continued u u u Section 52

Article 9 – Rules of Professional Conduct - Continued u u u Section 52 – Response to Board Inquiry Section 53 – Discrimination Prohibited Section 54 – Confidential Information Defined, Exception Section 54. 1 – Disclosure of Confidential Information Prohibited Section 54. 2 – Recipients of Confidential Information 10/30/2020 72

Article 9 – Rules of Professional Conduct Continued u u u Section 56 –

Article 9 – Rules of Professional Conduct Continued u u u Section 56 – Commissions-Basic Disclosure Requirements Section 56. 1 – Commissions-Professional Services Provided to the Client Section 56. 2 – Commissions-Disclosure Requirements and Other Rules of Professional Conduct Section 56. 3 – Commissions-Definitions Section 56. 4 – “Officer” and “Director” 10/30/2020 73

Accountancy Regulations Title 16, Div. 1, Article 9 Continued u Section 57 – Incompatible

Accountancy Regulations Title 16, Div. 1, Article 9 Continued u Section 57 – Incompatible Occupations Conflict of Interest n u Shall not engage in any other occupation which impairs independence, objectivity or creates a conflict of interest Section 58 – Compliance with Standards n Shall comply with all applicable professional standards, including GAAP and GAAS 74

Accountancy Regulations Title 16, Div. 1, Article 9 Continued u Section 59 – Reporting

Accountancy Regulations Title 16, Div. 1, Article 9 Continued u Section 59 – Reporting of Restatements n A licensee who issues a report on a client’s restated financial statements the correction of any error where the client is: u A publicly traded company required to file a California tax return u A governmental agency when the restatement exceeds the planning materiality u A registered charitable organization 75

Accountancy Regulations Title 16, Div. 1, Article 9 - Continued u u Section 60

Accountancy Regulations Title 16, Div. 1, Article 9 - Continued u u Section 60 – Reporting of Investigations by the Securities and Exchange Commission pursuant to Section 5063(b)(3); Reporting of Notices of Requests for Wells Submissions pursuant to Section 5063 (b)(4); and Reporting of Investigations by the Public Company Accounting Oversight Board pursuant to Section 5063(b)(5) Section 61 – The Reporting of Settlements, Arbitration Awards, and Judgments 76

Article 9 – Rules of Professional Conduct - Continued u Section 65 – Independence

Article 9 – Rules of Professional Conduct - Continued u Section 65 – Independence n A licensee shall be independent in the performance of services in accordance with professional standards 77

Accountancy Regulations Title 16, Div. 1, Article 9 - Continued u u u Section

Accountancy Regulations Title 16, Div. 1, Article 9 - Continued u u u Section 68. 1 – Working Papers Defined; Retention Section 68. 2 – Identification of Audit Documentation Section 68. 3 – Retention Period for Audit Documentation Section 68. 4 – Changes in Audit Documentation After Issuance of the Report Section 68. 5 – Audit Documentation Retention and Destruction Policy 78

Section 68 – Retention of Client’s Records u A licensee, after demand by or

Section 68 – Retention of Client’s Records u A licensee, after demand by or on behalf of a client, for books, records or other data, whether in written or machine sensible form, that are the client's records shall not retain such records. n Unpaid fees do not constitute justification for retention of client records. 10/30/2020 79

Section 68. 1 – Working Papers Defined; Retention u Working papers are the licensee's

Section 68. 1 – Working Papers Defined; Retention u Working papers are the licensee's records of the procedures applied, the tests performed, the information obtained and the pertinent conclusions reached in an audit, review, compilation, tax, special report or other engagement. 10/30/2020 80

Section 68. 2 – Identification of Audit Documentation u u u Shall include an

Section 68. 2 – Identification of Audit Documentation u u u Shall include an index, which identifies the components of the audit documentation. Shall provide the date the document was completed and shall include the identity of the preparer(s) and any reviewer(s). Shall include both the report date and the date of issuance of the report. 10/30/2020 81

Section 68. 3 – Retention Period for Audit Documentation u u u The retention

Section 68. 3 – Retention Period for Audit Documentation u u u The retention period mandated shall be measured from the date of issuance of the report. If required to be kept for longer than seven years because of a pending Board investigation or disciplinary action, shall not be destroyed. Shall be maintained in accessible form. Shall be retained whether or not the documentation supports the auditor's final conclusions. Shall also include all documentation of consultations on, or resolutions of, any differences of opinion regarding the exercise of professional judgment. 10/30/2020 82

Section 68. 4 – Changes in Audit Documentation After Issuance of the Report u

Section 68. 4 – Changes in Audit Documentation After Issuance of the Report u u u Audit documentation that is not completed prior to the date of issuance of the report shall be completed during the document assembly period. n The document assembly period is the 60 -day period following the date of issuance. After the end of the document assembly period, any, removal, deletion, substitution, or editing, is prohibited. In addition to audit documentation after the end of the document assembly period shall include the following: 1) the reason for the addition, 2) the identity of the persons preparing and approving the addition, and 3) the date of the addition. 10/30/2020 83

Section 68. 5 – Audit Documentation Retention and Destruction Policy These policy shall, at

Section 68. 5 – Audit Documentation Retention and Destruction Policy These policy shall, at a minimum, include the following: (1) Procedures for the maintenance of back-up copies of electronic audit documentation at secure locations, (2) Procedures for maintaining the audit documentation, (3) Procedures for approving any changes to audit documentation, and (4) Procedures for approving the destruction of documentation when no longer required to be 10/30/2020 maintained. 84 u

Article 9 – Rules of Professional Conduct - Continued u Section 69 – Certification

Article 9 – Rules of Professional Conduct - Continued u Section 69 – Certification of Applicant’s Experience n Any licensee who has been requested to prepare and submit the certification and shall refuse, may face a Rule 69 Committee Hearing 85

Accountancy Regulations Title 16, Div. 1, Article 10 u u Section 70 – Fees

Accountancy Regulations Title 16, Div. 1, Article 10 u u Section 70 – Fees Section 71 – Abandonment of Application 86

Accountancy Regulations Title 16, Div. 1, Article 12 u u u u u Section

Accountancy Regulations Title 16, Div. 1, Article 12 u u u u u Section 87 – Basic Requirements Section 87. 1 – Conversion to Active Status Prior to Renewal Section 87. 5 – Additional Requirements Section 88 – Programs Which Qualify Section 88. 1 – Provider Requirements Section 88. 2 – Program Measurements Section 89 – Control and Reporting Section 89. 1 – Reports Section 90 – Exceptions and Extensions 87

License Renewals After January 1, 2010 u Two-hour regulatory review course every six years

License Renewals After January 1, 2010 u Two-hour regulatory review course every six years covering California Accountancy Act, plus Board of Accountancy Regulations, and enforcement actions. n u MUST be Board Approved. Four hours of ethics continuing education every renewal period. n Does not require Board approval. 88

Two-hour Board Approved Course • MUST include: – – A review of the current

Two-hour Board Approved Course • MUST include: – – A review of the current California Accountancy Act, and specific articles identified by the Board. A review of the current California Board of Accountancy Regulations, and specific articles identified by the Board. Recent disciplinary actions taken by the Board, highlighting the misconduct which led to licensees being disciplined. 89

Four-hour Ethics Course • MUST include: – – A review of nationally recognized codes

Four-hour Ethics Course • MUST include: – – A review of nationally recognized codes of conduct emphasizing how the codes relate to professional responsibilities. Case-based instruction focusing on real-life situational learning. Ethical dilemmas facing the accounting profession. Or business ethics, ethical sensitivity, and consumer expectations. 90

Board of Accountancy Regulations Title 16, Div. 1, Article 12. 5 u Citations and

Board of Accountancy Regulations Title 16, Div. 1, Article 12. 5 u Citations and Fines n n n n Section 95 – Citations Section 95. 1 – Citation Format Section 95. 2 – Fines Section 95. 3 – Citation Factors Section 95. 4 – Failure to Comply with Citation Section 95. 5 – Appeals Section 95. 6 – Unlicensed, Unregulated Practice 91

Board of Accountancy Regulations, California Code of Regulations, Title 16, Division 1 - Continued

Board of Accountancy Regulations, California Code of Regulations, Title 16, Division 1 - Continued u Article 13 – Denial, Suspension, and Revocation of Certificates, Permits, or Licenses n Section 98 – Disciplinary Guidelines n Section 98. 1 – Mediation Guidelines n Section 99 – Substantial Relationship Criteria 92

So, what is on the horizon for CPAs in California? 10/30/2020 93

So, what is on the horizon for CPAs in California? 10/30/2020 93

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Proposed Legislation u For proposed California legislation, enter bill number here: n u www.

Proposed Legislation u For proposed California legislation, enter bill number here: n u www. leginfo. ca. gov/bilinfo For proposed Federal legislation, enter bill number here: n www. thomas. loc. gov/home/c 110 query 10/30/2020 96

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Newly Enacted Regulations u CBA Practice Privilege Program – Effective January 1, 2019 n

Newly Enacted Regulations u CBA Practice Privilege Program – Effective January 1, 2019 n u Eliminates the January 1, 2019 sunset of Article 5. 1 CBA Mailing Address Update to Forms Incorporated by Reference – Effective April 1, 2018 n Updates the date of Forms and changes the Board’s address 98

Additional State Professional Accounting Requirements u u u California Business and Professions Code (Relevant

Additional State Professional Accounting Requirements u u u California Business and Professions Code (Relevant Provisions) California Corporations Code (Relevant Provisions) California Government Code (Relevant Provisions) California Family Code (Relevant Provisions) California Civil Code (Relevant Provisions) 99

California Business and Professions Code (Relevant Provisions) u u u Section 30 – Social

California Business and Professions Code (Relevant Provisions) u u u Section 30 – Social Security Numbers Section 119 - Licensure Offenses Section 123 – Subversion of the Licensing Examination Section 125. 6 - Unprofessional Conduct--Discrimination Section 136 - Change of Address Notification 100

California Business and Professions Code (Relevant Provisions) Continued Section 450. 5 – Conflicting Pursuits

California Business and Professions Code (Relevant Provisions) Continued Section 450. 5 – Conflicting Pursuits u Section 17200 - Unfair Competition; Law Governing u Section 17208 - Statute of Limitations u Section 17500 - False or Misleading Advertising u 101

California Government Code (Relevant Provisions) u California Public Records Act, Title 1, Division 7,

California Government Code (Relevant Provisions) u California Public Records Act, Title 1, Division 7, Chapter 3. 5 Section 6253 (a). Public records are open to inspection at all times during the office hours of the state or local agency and every person has a right to inspect any public record, except as hereafter provided. 102

California Government Code (Relevant Provisions) u Bagley-Keene Open Meetings Act n Section 11123: Effective

California Government Code (Relevant Provisions) u Bagley-Keene Open Meetings Act n Section 11123: Effective January 1, 2015 all State bodies (and their committees) shall report any action taken and the vote or abstention on that action of each member present for the action. 10/30/2020 103

California Family Code (Relevant Provisions) u Division 17 – Support Services, Chapter 2 –

California Family Code (Relevant Provisions) u Division 17 – Support Services, Chapter 2 – Child Support Enforcement, Article 2 – Collections and Enforcement n Section 17520 – Non-compliance with Child Support Order 104

California Civil Code (Relevant Provisions) Section 1798. 80 – Client (Customer) Records – Definitions

California Civil Code (Relevant Provisions) Section 1798. 80 – Client (Customer) Records – Definitions u Section 1798. 81 – Destruction of Records u Section 1798. 84 – Violations of the Title u 105

Formal Investigations Closed Type of Violation 98 -99 99 -00 00 -01 01 -02

Formal Investigations Closed Type of Violation 98 -99 99 -00 00 -01 01 -02 Fraud Other 5 9 11 9 3 11 2 11 Personal Conduct 4 2 4 0 Product Quality 1 4 1 1 90 48 53 24 Unlic. /Unreg. /Delinq. 8 25 21 20 Competence/Negleg. 37 28 23 22 154 127 116 Unprofessional Conduct Total 106 80

Statistical Summary of Investigations by the CBA Description 20122013201420152016 Investigations Open at Start of

Statistical Summary of Investigations by the CBA Description 20122013201420152016 Investigations Open at Start of Period 439 522 894 1, 074 Add: Investigation Opened During Period 2, 951 2, 969 1, 953 2, 040 Less: Investigations Closed During Period Investigations Open at End of Period 10/30/2020 (2, 870) (2, 595) ? 522? ? 896? (1, 773) (2, 150) 1, 074 964 107

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California Government Code (Relevant Provisions) u California Public Records Act, Title 1, Division 7,

California Government Code (Relevant Provisions) u California Public Records Act, Title 1, Division 7, Chapter 3. 5 n Section 6253 (a). Public records are open to inspection at all times during the office hours of the state or local agency and every person has a right to inspect any public record, except as hereafter provided. 10/30/2020 110

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Court Cases on Professional Conduct and Ethics for the Accounting Profession u u u

Court Cases on Professional Conduct and Ethics for the Accounting Profession u u u Bonnie Moore v. California Board of Accountancy Johnson v. California Board of Accountancy Ibanez v. Florida Board of Accountancy Stephen M. Miller and American Express Tax and Business Services, Inc. v. George Stuart, et al Texas State Board of Public Accountancy v. American Express Tax and Business Services, Inc. 116

Some significant recent examples of stepping over the line u Big Five n u

Some significant recent examples of stepping over the line u Big Five n u Arthur Andersen/Enron Big Four KPMG - Orange County/Xerox n Price. Waterhouse/Coopers – Pinnacle Holdings/Avon n Ernst & Young – People. Soft n Deloitte & Touché – Normandy n 117

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Four Types of Ethical Dilemmas 1. Individual versus Community 2. Short-term versus Long-term 3.

Four Types of Ethical Dilemmas 1. Individual versus Community 2. Short-term versus Long-term 3. Justice versus Mercy 4. Truth versus Loyalty 124

Three Principles for Resolving Ethical Dilemmas 1. Rules-based thinking – follow your highest sense

Three Principles for Resolving Ethical Dilemmas 1. Rules-based thinking – follow your highest sense of principle. 2. End-based thinking – do what’s good for the greatest number of people. 3. Care-based thinking – do what you want other to do to you. 125

Checklist for Decision Making 1. 2. 3. 4. 5. 6. 7. 8. 9. Recognize

Checklist for Decision Making 1. 2. 3. 4. 5. 6. 7. 8. 9. Recognize that it is a ethical issue. Determine the players. Gather the relevant facts. Test for right vs. right issues. Test for right vs. wrong issues. Apply the resolution principles. Investigate the options. Make a decision Revisit and reflect on the decision. 126