california regulatory review straightforward and …/media/event...

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California Regulatory Review — Straightforward and Simple

Art Berkowitz, CPA

Learning today. Leading tomorrow.

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Notice to Readers

CalCPA Education Foundation programs and publications are designed to provide CPAs and financial professionals current, accurate information concerning the subject matter covered. However, the CalCPA Education Foundation gives no assurance that such information is comprehensive in its coverage of a subject matter or that it is suitable in dealing with specific client problems or business-related circumstances. Accordingly, information published or provided by the CalCPA Education Foundation should not be relied upon as a substitute for independent research to original sources of authority. The CalCPA Education Foundation does not render any accounting, legal or other professional advice, nor does it have any responsibility for updating or revising any programs or publications which it may present, distribute or sponsor. CPE Credit Policies Course, Conference, Onsite—The California Board of Accountancy (CBA) grants one CPE credit hour for each 50 minutes of class time. To qualify for CPE, a program must be at least 50 minutes in length. The CBA tracks CPE in 25-minute segments after the first 50 minutes. For each additional 25-minute segment completed, 0.5 CPE credit hours will be granted. To accurately track participation, registrants are required to legibly sign your name on the official sign-in sheet prior to the start of the event. If you arrive late, you must note your arrival time on the sign-in sheet. If you need to leave early, you must initial and note your departure time on the sign-in sheet to receive partial credit. The CBA requires CPE providers to closely monitor attendance during CPE. If you are not in the room during a portion of the CPE event, you will not receive credit. Your official record of attendance for the event is available via the My Events section of the website within one week. The host provider must retain the record of attendance, written educational goals and specific learning objectives, as well as a syllabus, which provides a general outline instructional objective and a summary of topics for the course for a period of five years. A copy of the educational goals, learning objectives, and course syllabus shall be made available to the CBA upon request. Webcast—For webcast participants to receive credit, three times every hour, you will be required to respond to an attendance question that appears on the screen. If viewing the webcast as part of a group, the group leader is required to answer the attendance questions on behalf of all participants. Group attendance is verified and documented by the group attendance form the day of the event. The CalCPA Education Foundation archives attendance records as required by the CBA to verify your CPE attendance in the event your CPE records are audited. Webcast are broadcast via the internet to those individuals who have registered for the webcast. The CalCPA Education Foundation takes all reasonable efforts to maintain the camera on the speaker, but does on occasion pan across the audience while following a speaker around the room. Furthermore, as the broadcast requires the use of microphones and other devices to amplify the speaker to both the live and webcast audience, an attendee’s voice may be broadcast during the webcast and, no attendee should have an expectation of privacy as to potentially being identifiable in the webcast. Self-Study—An online exam is included with your purchase. After studying the materials, to take the exam please go to www.calcpa.org/MySelfStudy. You may be asked to log in. Once you have logged in, find this product and click “Take Exam.” You will have a total of (3) attempts to take the final exam. Once you have completed the online final exam, you will be notified if you have passed or failed. To pass, you need a minimum passing grade of 70% (except for California regulatory review courses where the minimum passing grade is 90% as specified in Reg. Sec. 87.9(3)). You will be able to download your certificate of completion documenting the number of CPE credits earned for the course through your CPE Tracker at www.calcpa.org/CPE_Tracker. Please monitor the time it takes to complete the course. Record your total time and your comments about the course on the evaluation e-mailed to you. In accordance with the Standards of the National Association of State Boards of Accountancy (NASBA), one credit hour is granted for each 50 minutes of interactive self-study completed. Recommended credit hours are included in each course description. However, state boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Self-study courses must be completed by one year from date of purchase. If you have any problems or questions using your online course, please e-mail [email protected]. If you move before completing this course, please contact Member Services at (800) 922-5272 with your new address. Materials Terms and Conditions—CalCPA Education Foundation program materials, both hardcopy and electronic, are protected by U.S. copyright law. Materials are provided only for use by the participant registered for the program. You agree that you will not sell, distribute, transmit, or otherwise transfer all or any portions of the content of program materials without written permission from the author(s). Please contact the CalCPA Education Foundation course materials coordinator at [email protected] or (650) 522-3208 to obtain permission. eBook FAQs—Visit www.calcpa.org/ebooks to view frequently asked questions. Be sure to save your annotations made throughout the course. The CalCPA Education Foundation Guarantee—If any continuing education product fails to meet your expectations, or if you are not satisfied for any reason, you may return it within 30 days for an exchange or refund. (Shipping and handling fees are nonrefundable). Call Member Services at (800) 922-5272 for return instructions.

Copyright © 2016 Art Berkowitz, CPA

No copyright claimed in U.S. Government materials.

CACR _________________________________________________________________________________________________________www.calcpa.org (800) 922-5272 rev 03/2015

http://www.calcpa.org/CPE_Tracker

mailto:[email protected]?subject=Self-Study

mailto:[email protected]

http://www.calcpa.org/ebooks

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California Regulatory Review:

Straightforward and Simple

The rules and regulations of the

By Arthur L. Berkowitz, C.P.A.

Copyright February 2016

Art Berkowitz Seminars 26762 Westhaven Drive Laguna Hills, CA 92653 Tele: (949) 362-9940 E-mail: [email protected]

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©2016. These materials are copyrighted and may not be reproduced or distributed in whole or in part without permission of the author/CalCPA Education Foundation.

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About the Author Art Berkowitz, C.P.A. is a resource for continuing professional education. Using his 30+ years of experience in public accounting, he now develops practical self-study courses for accountants and financial professionals. Art also conducts customized accounting, ethics, and fraud seminars and workshops across the nations for CPA firms, associations and corporations. He has presented seminars for Jackson Hewitt, the Internal Revenue Service, the Institute of Internal Auditors, the Hearst Corporation, the California State University system, the University of Denver, National Tax Institute (NTI), Western CPE, Spidell Publishing, Practitioners Publishing Company (PPC), the American Society of Women Accountants, Meeting Professionals International, local and international CPA firms, and more than a dozen state CPA societies. Art is an experienced and noted author. He has written for numerous professional publications, including a weekly online column for The Wall Street Journal. Art also wrote a book on the Enron debacle, Enron: A Professional’s Guide to the Events, Ethical Issues, and Proposed Reforms.

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California Regulatory Review

Educational Goals The primary goal of this course is to inform CPAs of the current rules and regulations of the California Accountancy Act. The course is designed to emphasize the key issues that California CPAs may face. Each of these issues is discussed in a separate appendix. They include:

• Continuing Education

• Enforcement, Recent Litigation, and Disciplinary Cases

• Client Records

• Peer Review

• California Documentation Standards

• Additional Reference Materials

Author’s Note: For the most current text of the California Accountancy Act’s Rules and Regulations, go to: http://www.dca.ca.gov/cba/laws_and_rules/index.shtml

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http://www.dca.ca.gov/cba/laws_and_rules/index.shtml

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California Regulatory Review Learning Objectives by Section

After completing each of these sections, participants will: Chapter 1: The California Accountancy Act

• Be familiar with the format of the California Accountancy Act • Be better able to understand where to go when faced with an issue related to the

California Accountancy Act Chapter 2: Board of Accountancy Regulations

• Feel more comfortable when applying California rules and regulations to real-life situations

Appendices:

• Be able to understand and describe California’s continuing educational requirements • Specifically recognize the difference between the two California ethics requirements • Understand the Board’s enforcement procedures including citations, fines, and other

disciplinary actions • Feel comfortable with the rules related to client records • Be able to determine when peer review is required and identify key factors in

implementing peer review • Recognize the differences between California’s documentation standards and those of the

AICPA and PCAOB • Know where to go to get additional information on Accountancy Rules, Regulations, and

Board disciplinary procedures

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Table of Contents

CHAPTER 1 – The California Accountancy Act

CHAPTER 2 – Board of Accountancy Regulations

APPENDICES

Appendix A ..................................................... Continuing Education Requirements Appendix B…... ........................................... Enforcement and Disciplinary Actions

Appendix C ........................................................................................ Client Records Appendix D ........................................................................................... Peer Review Appendix E ..................................................... California Documentation Standards Appendix F.......................................................... List of Relevant Reading Material

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CHAPTER 1

CALIFORNIA ACCOUNTANCY ACT

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Chapter 1 California Accountancy Act

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 Article 4 Applications, Registrations, Permits Generally Article 5 Certificates, Information and Records Article 5.1 Practice Privileges Article 5.5 Audit Documentation Article 6 Disciplinary Proceedings Article 6.5 Administrative Penalties Article 7 Prohibitions and Offenses against the Chapter Article 8 Revenue Article 9 Accountancy Corporations

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Author’s Note: The following is a summary of each section of the California Accountancy Act with explanations and commentary provided by the author. The full text is provided as a supplement to this course.

Article 1 - Administration Section 5000 – Board of Accountancy; Members; Powers and duties;

This section establishes the number of members and the makeup of the California Board of Accountancy (CBA). The CBA consists of seven licensees and eight public members.

Section 5000.1 – Priority of board; Protection of the public

This section states that the protection of the public shall be the highest priority for the CBA.

Section 5000.5 – Requirements for public member of board

This section prohibits certain individuals from qualifying as a public board member including current or former licensees of the Board.

Section 5001 – Eligibility for appointment: Oath of office

This section establishes the qualifications for board membership.

Section 5002 – Terms; Vacancies; Removal from board

This section establishes the length of terms and provision for filling of vacancies. It also provides for the removal of members under certain circumstances.

Section 5003 – Officers of board

This section provides for a president, vice president and a secretary-treasurer.

Section 5004 – Election of officers

This section describes how the officers are elected and the length of their term.

Section 5006 - Continuance in Office

Officers continue in office until their successors are elected and qualify.

Section 5007 - Duties

In addition to normal duties for presiding at meetings the officers may be assigned such duties as the board may require.

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Section 5008 – Reports; Preparation and distribution

Twice each year, at a minimum, the board shall prepare and distribute to all licensees, a report of the activities of the board including amendments to this chapter and regulations adopted by the board, and may likewise distribute reports of other matters of interest to the public and to practitioners.

Section 5009 - Register

This section authorizes the board to compile and publish a list of all certified public accountants, CPA partnerships, public accountants, and PA partnerships whose permits are in full force and effect.

Section 5010 – Adoption, repeal and amendment of regulations

The board may adopt, repeal, or amend such regulations as may be reasonably necessary and expedient for the orderly conduct of its affairs and for the administration of this chapter. The regulations shall be adopted in accordance with the appropriate chapter(s) of the Government Code.

Section 5011 - Offices

The board may designate the location of its principal office and any established branch office in other locations.

Section 5012 - Seal

This section authorizes the use of a seal.

Section 5013 – Records; Admissibility in evidence

This section requires records to be kept of all proceedings and actions by and before the board and before its committees. It also prescribes admissibility and use of such records in legal proceedings.

Section 5014 - No title/no text

Section 5015 – Employees; Salaries and expenses

This section authorizes employment of clerks, etc., and payment of salaries and necessary expenses.

Section 5015.6 - Executive Officer

A person exempt from civil service, designated as an executive officer may be appointed to exercise the powers and perform duties delegated by the board.

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Section 5016 – Quorum; notice of meetings; Waiver

This section establishes the number of members needed for a quorum; calls for meetings not less than twice a year; establishes procedure for calling special meetings.

Section 5017 – Board meetings; Executive sessions

All regular meetings of the board are open and public but there are provisions for executive sessions that may be for the purpose of preparing, approving, grading examinations, etc.

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Section 5017.1 – Posting of board meeting minutes on Internet Web site

Within 10 days of board approval, the finalized minutes shall be posted on the Board’s Internet Web site

Section 5017.5 – Posting of live audio or video broadcast on Internet Web site of open and public meetings

Live audio or video of each public meeting shall be posted on the Board’s Internet Web site and remain there for at least three years.

Section 5018 – Rules and standards of professional conduct

"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. In addition to the requirements contained in Chapter 4 (commencing with Section 11370) of Part 1 of Division 3 of Title 2 of the Government Code, a copy of the rules shall be mailed to every holder of a license under this chapter at least 30 days prior to a date named for a public hearing held for the purpose of receiving and considering objections to any of the proposed provisions. Every licensee of the State Board of Accountancy in this state shall be governed and controlled by the rules and standards adopted by the board."

Section 5019 – Printing rules on application blanks; Subscriptions

This section requires that the rules adopted by the Board be printed on application blanks for certificates and registration.

Section 5020 – Enforcement Advisory Committee; Appointment; Authority

This section authorizes the board to appoint a committee to receive and investigate complaints. The committee shall be advisory only and cannot initiate any disciplinary actions.

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Section 5021 – Terms of office of committee members

Members serve two year terms Section 5022 – Recommendations and report of committee; Appeal; Examination by board

This section provides for the appeal process for applicants for registration

Section 5023 – Qualifications committee to examine and recommend applicants

This section authorizes the board to establish an advisory committee to assist in the handling of license applications.

Section 5024 - Other advisory committees

"The board may create and appoint other committees consisting of public accountants or certified public accountants of the State in good standing and who need not be members of the board for the purpose of making recommendations on such matters as may be specified by the board."

Section 5025.1 - Accountants as consultants and experts

This section authorizes the board to hire CPAs as consultants and experts to assist in the investigation process.

Section 5025.2 – Legislative finding; Authorization of additional expenditures

This section gives the Depart of Finance authority to authorize an additional $2 million to the Board of Accountancy for public protection.

Section 5025.3 – Contracts for litigation or enforcement; Funds encumbered

This section discusses the fiscal year that special enforcement contracts will be allocated to.

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Article 1.5 - Continuing Education Section 5026 - Continuing education requirement

"The Legislature has determined it is in the public interest to require that certified public accountants and public accountants licensed under provisions of this chapter comply with continuing education requirements adopted by the board as a prerequisite to the renewal of public accountancy licenses on and after December 31, 1974."

Section 5027 – Rules concerning continuing education; Standards established

This section establishes basic requirements for continuing education. All licensees with active licenses are required to have 80 hours of continuing education every two years. It also establishes the minimum requirement of 24 hours of qualifying continuing education for any licensee who provides services in:

(a) governmental accounting (b) audit, review, compilation or other attestation services

Those licensees who must meet either (a) or (b), must also have an additional 4 hours of continuing education in detecting and reporting on fraud in financial statements. In addition, all licensees with a valid permit are required to complete a 2-hour course continuing education course on the rules and regulations of the California Accountancy Act as well as the rules of professional conduct, within a six-year period and a 4-hour general ethics course every renewal period.

Section 5028 - Exceptions from continuing education requirements

The board is empowered to make exceptions from continuing education requirements for licensees not engaged in public practice, or for reasons of health, military service, or other good cause. However, should such licensee return to the practice of public accounting such continuing education requirements must be met as the board may determine.

Section 5029 – Creation of continuing education committee; Members

The board may appoint a committee to evaluate programs to determine whether they qualify under the regulations duly adopted by the board. Educational courses offered by professional accounting societies shall be accepted by the board as qualifying if such courses are approved by the committee as meeting the requirements of the board.

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Author’s Comments: During the past several years the continuing education requirements in California have gone through extensive changes. The following are the most recent changes. 1. The ethics education requirement. Effective January 1, 2010, all licensees will be required to take a 4-hour “general” ethics course every renewal period. This course does not have to be approved by the CBA. The course subject matter must include one or more of the following:

• 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 • Business ethics, ethical sensitivity and consumer expectations

In addition to the 4-hour general ethics course a 2-hour course specifically devoted to the California Accountancy Act and Regulations is required to be completed once every six years. This course meets that requirement. 2. The rules on the number of hours of continuing education that must be taken each year. Effective January 1, 2012, a minimum number of 20 continuing education hours must be completed EACH YEAR, 12 of which must be in the technical subject matter category. Therefore, those licensees who delay taking any continuing education courses until the last minute, (then take them all at once) will be in violation of the new rules. 3. Enforcement of the continuing education requirement. The Board has reinstituted its continuing education inspection program. Licensees need to maintain adequate records including their certificates of completion in case the records are requested by the Board of Accountancy.

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Article 2 - General Powers and Definitions

Section 5030 - Board

"Board" means the "California Board of Accountancy."

Section 5031 - Committee

"Committee" means any committee created under the provisions of Article 1 (commencing at Section 5000).

Section 5032 - State

"State" when not specifically referring to this State, means any state, territory or insular possession of the United States, or the District of Columbia.

Section 5033 - Certified public accountant

"Certified Public Accountant" means any person who has received from the board a certificate of certified public accountant and who holds a valid permit to practice under the provisions of this chapter.

Section 5033.1 – License as including certificate The term license also includes the term certificate. Section 5034 - Public accountant

"Public accountant" means any person who has registered with the board as a public accountant and who holds a valid permit for the practice of public accountancy.

Section 5035 - Person

"Person" includes individual, partnership, firm, association, or corporation, unless otherwise provided.

Section 5035.1 - Firm

"Firm" means a sole proprietorship, a corporation, or a partnership.

Section 5035.2 - Client

“Client”, as used in any context in this chapter, means any person for whom public accountancy services are performed or to whom financial products, financial services, or securities are sold or provided at the licensee's public accountancy practice or through referral to any other location or business in which the certified public accountant has a material interest.

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Section 5035.3 – Firm defined

For purposes of subdivision (b) of Section 5050 and Section 5054 and 5096.12, (practice privilege), firm includes any entity that is authorized to practice public accountancy as a firm under the laws of another state.

Section 5036 – Construction of statute requiring preparation of documents

This section states that whenever a statute requires, financial information for any department, board, agency, etc., of this state be prepared by a certified public accountant, it shall be construed to mean either CPA or PA.

Section 5037 – Statements and other records as property of accountant; Access by client

(a) “All statements, records, schedules, working papers and memoranda made by a licensee or a partner, shareholder, officer, director, or employee of a licensee, incident to, or in the course of, rendering services to a client in the practice of public accountancy, except the reports submitted by the licensee to the client and except for records which are part of the client's records, shall be and remain the property of the licensee in the absence of an express agreement between the licensee and the client to the contrary. No such statement, record, schedule, working paper or memoranda shall be sold, transferred, or bequeathed, without the consent of the client or his or her personal representative or assignee, to anyone other than one or more surviving partners or stockholders or new partners or stockholders of the licensee, or any combined or merged firm or successor in interest to the licensee.”

(b) A licensee shall furnish to his or her client or former client, upon request and

reasonable notice:

(1) A copy of the licensee's working papers, to the extent that those working papers include records that would ordinarily constitute part of the client's records and are not otherwise available to the client.

(2) Any accounting or other records belonging to, or obtained from or on behalf

of, the client which the licensee removed from the client's premises or received for the client's account. The licensee may make and retain copies of documents of the client when they form the basis for work done by him or her.

For a more detailed discussion of Section 5037, go to Appendix C, “Client Records: What They Are and What They Are Not”

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Section 5037.1 – Construction of Section 5037

A licensee’s rights, duties and obligation under Section 5037 shall not be superseded by Section 17406 of the Financial Code.

Section 5038 – Severability of provisions

This section provides that in case that any provisions or applications of provisions the remainder of the chapter will not be affected.

Section 5039 – No title/no text Section 5040 – Informing taxpayers of voluntary contributions

This section encourages tax preparers to remind their clients about the voluntary contribution check-offs that the Legislature has provided on the state income tax return.

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Article 3 - Application of Chapter Section 5050 – Public accountancy not to be practiced without permit; Temporary practice

“(a) Except as provided in subdivisions (b) and (c) of this section, in subdivision (a) of Section 5054, and in Section 5096.12, no person shall engage in the practice of public accountancy in this state unless the person is the holder of a valid permit to practice public accountancy issued by the board or a holder of a practice privilege pursuant to Article 5.1 (commencing with Section 5096).”

(b) This subdivision became inoperative on January 1, 2011.

(c) Nothing in this chapter shall prohibit a person who holds a valid and current license, registration, certificate, permit, or other authority to practice public accountancy from a foreign country, and lawfully practicing therein, from temporarily engaging in the practice of public accountancy in this state incident to an engagement in that country, provided that:

(1) The temporary practice is regulated by the foreign country and is performed under accounting or auditing standards of that country.

(2) The person does not hold himself or herself out as being the holder of a valid California permit to practice public accountancy or the holder of a practice privilege pursuant to Article 5.1 (commencing with Section 5096).

Section 5050.1 – Practice of foreign entity within state subject to jurisdiction of board This section provides that any person practicing public accountancy in California

automatically consents to the disciplinary jurisdiction of the CBA and is deemed to have appointed their home state regulatory body as the person’s agent for notices, subpoenas, or proceedings involving that person.

Section 5050.2 – Revocation, suspension or fine for foreign licensee authorized

This section provides for the discipline that the CBA may invoke against a licensee or a holder of a practice privilege. This includes the right to revoke, suspend, issue a fine, or otherwise restrict or discipline the offender.

Author’s Comments: This section has undergone extensive changes in the past few years.

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Section 5051 – Practice of public accountancy

A person is considered to be engaged in the practice of public accountancy if he or she does any of the following:

(a) Holds himself or herself out to the public in any manner as one skilled in the

knowledge, science and practice of accounting, and as qualified and ready to render professional service therein as a (public accountant for compensation).

(b) Maintains an office for the transaction of business as a public accountant.

(c) Offers to prospective clients to perform for compensation, or who does perform on

behalf of clients for compensation, professional services that involve or require an audit, examination, verification, investigation, certification, presentation, or review, of financial transactions and accounting records.

(d) Prepares or certifies for clients reports on audits or examinations of books or records

of account, balance sheets, and other financial, accounting and related schedules, exhibits, statements, or reports which are to be used for publication or for the purpose of obtaining credit or for filing with a court of law or with any governmental agency, or for any other purpose.

(e) In general or as an incident to that work, renders professional services to clients for

compensation in any or all matters related to accounting procedure and to the recording, presentation, or certification of financial information or data.

(f) Keeps books, makes trial balances, or prepares statements, makes audits, or prepares

reports, all as a part of bookkeeping operations for clients.

(g) Prepares or signs as the tax preparer, tax returns for clients.

(h) Prepares personal financial or investment plans or provides to clients products or services of others in implementation of personal financial or investment plans.

(i) Provides management consulting services to clients.

Activities set forth in subdivisions (f) to (i), inclusive, are "public accountancy" only when performed by a CPA or PA. A person is not [emphasis added] engaged in the practice of public accountancy if the only services he or she engages in are those defined by subdivisions (f) to (i), inclusive, and he or she does not hold himself/herself out, solicit, or advertise for clients using the CPA or PA designation.

A person is not holding himself/herself out, soliciting or advertising for clients solely by reason of displaying a CPA or PA certificate in his or her office or identifying himself or herself as a CPA or PA on other than signs, advertisements, letterhead, business cards, publications directed to clients or potential clients, or financial or tax documents of a client.

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Section 5052 - Exemptions

This section exempts any person who as an employee, independent contractor, or otherwise, contracts with one or more persons, organizations or entities, for the purpose of keeping books, making trial balances, statements, making audits or preparing reports, all as a part of bookkeeping operations [emphasis added], provided that those products are not issued over the name of such person as having been prepared or examined by a CPA or PA.

Section 5053 – Employee or assistant under supervision of certified public accountant or public accountant: Attorney at law

This section allows employees and assistants to CPAs and PAs to serve under the control and supervision of the licensee. No such employee or assistant is allowed to issue any statement over his or her name. This section specifically exempts Attorneys at Law in connection with their practices.

Section 5054 – Preparation of tax returns by individuals and firms licensed outside the state

This section was added with the new provisions of practice privilege. An exception from the rules of practice privilege is described for the preparation of individual tax returns and for the estates of natural persons who were clients at the time of death…provided that the individual or firm does not physically enter California, does not solicit California clients and does not assert or imply that the individual or firm is licensed or registered to practice public accountancy in California.

Section 5055 – Designation of recipient of certificate and permit as certified public accountant

"Any person who has received from the board a certificate of certified public accountant, or who is authorized to practice public accountancy in this state pursuant to Article 5.1 (commencing with Section 5096), may, subject to Section 5051, be styled and known as a “certified public accountant” and may also use the abbreviation “C.P.A.” No other person, except a firm registered under this chapter, shall assume or use that title, designation, or abbreviation or any other title, designation, sign, card, or device tending to indicate that the person using it is a certified public accountant."

Section 5056 – Designation of recipient of certificate and permit as public accountant

"Any person who has received from the board a certificate of public accountant may, subject to Section 5051, be styled and known as a ‘public accountant’ and may also use the abbreviation ‘P.A.’ No other person except a firm registered under this chapter (commencing at Section 5070) or the holder of a certificate of certified public accountant, shall assume or use that title, designation, or abbreviation or any other title, designation, sign, card or device tending to indicate that the person using it is a public accountant."

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Section 5057 – Exemption from licensure and practice privilege requirements

This section provide an exemption for licensee from other states to obtain practice privilege is ALL of the following conditions are satisfied:

• The client is located in another state • The engagement relates to work delivered in another state • The individual does not solicit California clients • The individual does not assert or imply that he or she is licensed to practice

accountancy in California • The individual’s practice of public accountancy in California is of a limited

duration

Section 5058 – Assumption or use of confusing title No person or partnership shall assume or use the title or designation ‘chartered accountant,’ ‘certified accountant,’ ‘enrolled accountant,’ ‘registered accountant’ or ‘licensed accountant,’ or any other title or designation likely to be confused with ‘certified public accountant’ or ‘public accountant,’ or any of the abbreviations ‘C.A.,’ ‘E.A.,’ R.A. or ‘L.A.’ or similar abbreviations likely to be confused with ‘C.P.A.’ or ‘P.A.,’ provided that any person qualified as a certified public accountant under this chapter who also holds a comparable title granted under the laws of another country may use such title in conjunction with the title of ‘certified public accountant’ or ‘C.P.A.’ and provided, that any person enrolled to practice before the Internal Revenue Service and recognized as an enrolled agent may use the abbreviation ‘E.A.’

Section 5058.1 – Misleading accountant designation

A person or firm may not use any title or designation that is false or misleading. The board may adopt regulations to interpret this section.

Section 5058.2 – Designation of inactive status

This section states that inactive licensees must place the term “inactive” after their designation in any correspondence or advertising media, including websites, business cards, nameplates or name plaques, etc.

Section 5058.3 – Designation of retired status

This section states that any person licensed under Section 5070.1 (retired status) shall place the term “retired” when using the CPA designation in any correspondence, Internet web sites, business cards, nameplates, or name plaques.

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Article 3.5 - Standards of Professional Conduct Section 5060 – Use of individual names

This section permits the use of fictitious names as long as they are not false or misleading. The name must be registered with the Board and the Board has the power to adopt regulations interpreting this section. Author’s note: This is a change from previous rules that were much more restrictive.

Section 5061 – Fees and commissions

(a) Except as expressly permitted by this section, a person engaged in the practice of

public accountancy shall not: (1) pay a fee or commission to obtain a client or (2) accept a fee or commission for referring a client to the products or services of a third party.

(b) A person engaged in the practice of public accountancy who is not performing any of

the services set forth in subdivision (c) and who complies with the disclosure requirements of subdivision (d) may accept a fee or commission for providing a client with the products or services of a third party where the products or services of a third party are provided in conjunction with professional services provided to the client by the person engaged in the practice of public accountancy. Nothing in this subdivision shall be construed to permit the solicitation or acceptance of any fee or commission solely for the referral of a client to a third party. (Emphasis added).

Section 5062 - Report following compilation, review, or audit of financial statements

"A licensee shall issue a report which conforms to professional standards upon completion of a compilation, review or audit of financial statements."

Section 5062.2 – Restrictions on employment with publicly traded company

Licensees who are responsible for exercising significant judgment in the audit process are prohibited from accepting positions that would allow them to exercise significant authority over the accounting and auditing functions of a publicly-traded audit client for a 12-month period following issuance of the financial statement report.

Author’s Comments: In the September 2002 Quarterly Update, the Board further explained that the only exception to this prohibition on referral fees is in conjunction with the purchase of an accounting practice. They also provided examples of violations of the prohibition on referrals. These examples included the payment of a fee to an attorney, insurance agent, or financial institution for obtaining the referral of a new client. Another example discussed the prohibition against receiving a stream of payments without providing a service that provides real value to the client.

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Section 5063 – Licensee report

Licensees are required to notify the board in writing within 30 days after the occurrence of certain events, including:

(a) The conviction of certain crimes.

(b) The cancellation, revocation, or suspension of the right to practice by any state,

foreign country or governmental body. Effective January 1, 2003 the list of self reporting convictions was expanded significantly. The additional requirements include:

• Any restatement of a financial statement by a client audited by the licensee.

• Any civil action settlement or arbitration award relating to the practice or public accounting in which the settlement or award is $30,000 or greater and when the licensee is not insured for the full amount.

• Any notice of the opening of a formal investigation of the licensee or a request for

a Wells submission from the Securities and Exchange Commission.

• Any notice of the opening of an investigation by the Public Company Accounting Oversight Board

• Any judgment entered against the licensee in any civil action alleging dishonesty,

fraud, negligence, breach of fiduciary responsibility, embezzlement, theft, or other misconduct related to the licensee’s professional practice.

Section 5063.1 – Report by court rendering certain convictions or judgments involving licensee

This section requires a conviction or judgment as described above to be reported to the CBA within 10 days.

Section 5063.2 – Reporting by insurer on certain settlements or arbitration awards involving licensee

This section requires the reporting to the CBA of any civil action payment that meets the criteria described above within 30 days.

Section 5063.3 - Disclosure of confidential information prohibited; Exceptions; Disclosure to persons and entities outside the United States

This section reminds licensees about the duty to confidentiality and lists the only exceptions when information about a client or potential client can be disclosed.

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Article 4 - Applications, Registrations, Permits Generally

Section 5070 – Permits; Fees; Certificate of registration

This section authorizes the board to issue permits to engage in the practice of public accountancy in this State and to issue suitable certifications.

Section 5070.1 – Retired status

This section describes the Board’s powers with regard to retired status. “No licensee with a license on a retired status shall engage in any activity for which a permit is required.”

Section 5070.5 - Expiration of permits; Renewal of unexpired permits

"Permits issued under this chapter expire at 12 midnight on the last day of the month of the legal birthday of the licensee during the second year of a two-year term if not renewed. To renew an unexpired permit, a certificate holder or registrant shall, before the time at which the permit would otherwise expire, apply for renewal on a form prescribed by the board, pay the renewal fee prescribed by this chapter and give evidence to the board that he or she has complied with the continuing education provisions of this chapter".

Section 5070.6 – Prerequisites to renewal of expired permits; Commencement and duration of renewal

This section provides that expired permits may be renewed at any time within five years after its expiration by:

(a) Submitting an application for renewal on a form prescribed by the board, (b) Payment of all accrued and renewal fees, and (c) Giving evidence to the board of compliance with the required continuing

education. Section 5070.7 – Cancellation of permit not renewed within statutory period; New certificate and permit; Reinstatement

"A permit which is not renewed within five years following its expiration may not be renewed, restored, or reinstated thereafter, and the certificate of the holder of the permit shall be canceled immediately upon expiration of the five-year period."

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A partnership may obtain a new certificate and permit only if it again meets the requirements relating to registration and pays the registration fee and initial permit.

A CPA whose certificate is canceled under this section may apply for and obtain a new certificate and permit:

(a) If not subject to denial under Section 480 of the Business and Professions Code,

(b) If all fees paid as would be required for initial application for certificate and

permit, and (c) If he/she takes and passes the examination that would be required when

applying for the certificate for the first time. [Emphasis added]

"The examination may be waived in any case in which the applicant establishes to the satisfaction of the board that, with due regard for the public interest, he is qualified to engage in practice as a certified public accountant."

There is also provision for the waiver or refund of all or any part of such fees in cases in which a certificate is issued without examination.

Section 5070.8 - Expiration and renewal of suspended or revoked permit; Absence of right to practice while permit suspended; Reinstatement fee

This section points out that suspended permits are subject to expiration and must be renewed in the same manner as active, valid permits - however, mere renewal does not entitle the holder, while the permit remains suspended, and until it is reinstated, to engage in the practice of accountancy, or in any other activity or conduct in violation of the order or judgment by which the permit was suspended. A revoked permit is also subject to expiration, but it may not be renewed. If it is reinstated after its expiration the extent of fees that will be required is spelled out.

Section 5071 – No title/no text

Section 5072 – Registration of partnership of certified public accountants; Requirements

This section provides the rules under which a partnership can operate. The partnership must be registered with the Board. Limited partnerships are not permitted.

Section 5073 – Application for registration of partnership as certified public accountants; Termination of registration

This section sets forth the rules regarding the application for registration by a partnership and the notification requirements to the Board for admissions and withdrawals of partners to/from the partnership.

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Section 5074 – No title/no text


Section 5076 – Peer review of registration renewal of firm providing attest services; Frequency of peer review; Definitions; Peer review oversight committee; review and report on program; Substandard peer review report; Filing requirements; Report to legislature

Section 5076.1 – Peer review oversight committee; Requests; Terms; Regulations This section describes the rules and duties of the peer review oversight committee.

“Any information obtained by the board, its representatives, or the peer review oversight committee, in conjunction with its review of peer review program providers shall not be a public record, and shall be exempt from public disclosure, provided, however, this information may be disclosed under any of the following circumstances: (1) In connection with disciplinary proceedings of the board. (2) In connection with a legal proceedings in which the board is a party. (3) In response to an official inquiry by a federal or state governmental regulatory agency. (4) In compliance with a subpoena or summons enforceable by court order (5) As otherwise specifically required by law.”


Section 5078 – Supervision by accountant required where office not under management of accountant

This section requires that any office not under the personal management of a certified public accounting or public accountant, be supervised by one.

Author’s Note: This section discusses the new requirements for mandatory peer review. In order to renew its registration, a firm must have a peer review of its accounting and auditing practice every three years. See Appendix D for a detailed discussion of the peer review requirements.

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Section 5079 - Nonlicensee owner of accounting firms Firms with nonlicensee owners are required to disclose to their clients the actual or potential involvement of nonlicensee owners in the services provided. “Notwithstanding any other provision of this chapter, any firm lawfully engaged in the practice of public accountancy in this state may have owners who are not licensed as certified public accountants or public accountants…” This section then details the specific rules for nonlicensee ownership. Nonlicensee owners must be natural persons or entities, such as partnerships, professional corporation, as long as the ultimate beneficial owner materially participating is a natural person. The material participation of the nonlicensee owner and that licensees must comprise a majority of the owners, except for firms with two owners in which case one of the owners may be a nonlicensee.

Author’s Note: Firms that add nonlicensee owners must notify the Board within 30 days of the change in conformance with requirements of Section 5073 of the Accountancy Act (for partnerships) or section 75.11 of the Accountancy Regulations (for corporations). Accountancy corporations must also comply with the security for claims provisions in Section 75.8.

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Article 5 - Certificates, Information and Records Section 5080 – To whom certificate may be granted

This section states that the board shall grant a license to any person who meets the requirements of this article and has not committed any acts or crimes that are grounds for denial.

Section 5080.1 – Personal appearance of applicant before board to determine qualifications

“The board may require an applicant for a certified public accountant license to appear in person to determine if the applicant’s qualifications are as prescribed in this chapter and in rules adopted by the board.”

Section 5081 – Requirements of applicant for admission to examination for certified public accountant certificate

This section prescribes the basic requirements for "sitting" for the CPA examination.

Section 5082 – Examination; Subjects, conduct and grading

This section states that an applicant for a certified public accountant licensee must have passed the CPA exam and that the CBA prescribe the methods for conducting, grading and determining a passing grade.

Section 5082.1 – Conduct of examination; Contract with public or private organization; Uniform system

This section establishes the rules for administering, grading, and reviewing the examination and gives the Board the right to contract with a public or private organization for preparation and/or administration of the exam.

Section 5082.2 – Right to reexamination

This section gives a CPA exam candidate the right to reexamination subject to regulations adopted by the CBA.

Section 5082.3 – Method of satisfying examination requirements

This section discusses the requirements for foreign applicants.

Section 5082.4 – Canadian examination to fulfill examination requirement

This section discusses the requirements for Canadian Chartered Accountants.

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Section 5082.5 – Credit given to candidate passing all or part of the examination in another state or territory

“The board may give credit to a candidate who has passed all or part of the examination in another state or territory, if the members of the board determine that the standards under which the examination was held are as high as the standards established for examination in this chapter.”

Section 5083 - Experience Requirements

Repealed

Section 5084 - One Year Experience Credit for Education

Repealed


Section 5086 – Individuals already certified not required to secure additional certificates

This section, added in 1945, "grandfathered" existing certificates.

Section 5087 – Reciprocity of license from another state; Waiver of examination requirements

This section establishes the basis for reciprocity. “The Board may issue a certified public accountant license to any applicant who is a holder of a valid and unrevoked certified public account license issues under the laws of any state, if the Board determines that the standard under which the applicant received the license are substantially equivalent (emphasis added) to the standards of education, examination, and experience established under this chapter….”

Section 5088 – Temporary practice of applicant

Subsequent to January 1, 2006, an individual may only practice public accountancy if he or she holds a California license or under the terms of practice privilege as discussed in Article 5.1.

Section 5090 – Compliance with specified requirements

“An applicant for the certified public accountant license shall comply with the education, examination, and experience requirements in either Section 5092 or 5093.”


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Section 5092 – Requirements to qualify for license under this section (Pathway 1)

Effective January 1, 2016, the provision of this section expired. Section 5093 – Conditions to qualify for license under this section (Pathway 2)

Under this pathway (UAA), the applicant needs only one year of experience and must have a baccalaureate degree and completed at least 150 semester units of college education for licensure.

Section 5094 – Standards for qualifying education

This section includes standards for colleges and universities in order for the educational requirements to be met. It also provides rules for foreign universities.

Section 5094.3 – Ethics study requirements

This section describes the rules which will become effective January 1, 2014 and beyond for the study of ethics in order to apply for licensure as a certified public accountant.

Section 5094.6 – Ethics study guidelines: Considerations; Hearing on report regarding Uniform Accountancy’ Act’s 150-hour rule; Definitions

This sections discusses the advisory committee’s and board’s consideration of ethics study guidelines.

Section 5095 – Minimum number of attest services hours; Attest experience

In order to sign a review or audit report, an applicant must complete 500 hours of attest experience.

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Article 5.1 – Practice Privileges

Section 5096 – Requirements of out-of-state practitioners; Responsibilities of individual with practice privilege; Expiration

(a) An individual whose principal place of business is not in this state and who has a valid and current license, certificate or permit to practice public accountancy from another state may, subject to the conditions and limitations in this article, engage in the practice of public accountancy in this state under a practice privilege without obtaining a certificate or license under this chapter if the individual satisfies one of the following:

(1) The individual has continually practiced public accountancy as a certified

public accountant under a valid license issued by any state for at least four of the last ten years.

(2) The individual has a license, certificate, or permit from a state which has been

determined by the board to have education, examination, and experience qualifications for licensure substantially equivalent to this state's qualifications under Section 5093.

(3)The individual possesses education, examination, and experience qualifications

for licensure which have been determined by the board to be substantially equivalent to this state's qualifications under Section 5093.

(b) The board may designate states as substantially equivalent under paragraph (2) of

subdivision (a) and may accept individual qualification evaluations or appraisals conducted by designated entities, as satisfying the requirements of paragraph (3) of subdivision (a).

(c) To obtain a practice privilege under this section, an individual who meets the

requirements of subdivision (a), shall do the following: (1) In the manner prescribed by board regulation, notify the board of the

individual's intent to practice. (2) Pay a fee as provided in Article 8 (commencing with Section 5130).

(d) Except as otherwise provided by this article or by board regulation, the practice

privilege commences when the individual notifies the board, provided the fee is received by the board within 30 days of that date. The board shall permit the notification to be provided electronically.

Author’s Note: Because of the interest (and confusion) regarding practice privilege, this section has been included in its entirety

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(e) An individual who holds a practice privilege under this article:

(1) Is subject to the personal and subject matter jurisdiction and disciplinary authority of the board and the courts of this state.

(2) Shall comply with the provisions of this chapter, board regulations, and other

laws, regulations, and professional standards applicable to the practice of public accountancy by the licensees of this state and to any other laws and regulations applicable to individuals practicing under practice privileges in this state except the individual is deemed, solely for the purpose of this article, to have met the continuing education requirements and ethics examination requirements of this state when such individual has met the examination and continuing education requirements of the state in which the individual holds the valid license, certificate, or permit on which the substantial equivalency is based.

(3) Shall not provide public accountancy services in this state from any office

located in this state, except as an employee of a firm registered in this state. This paragraph does not apply to public accountancy services provided to a client at the client's place of business or residence.

(4) Is deemed to have appointed the regulatory agency of the state that issued the

individual's certificate, license, or permit upon which substantial equivalency is based as the individual's agent on whom notices, subpoenas or other process may be served in any action or proceeding by the board against the individual.

(5) Shall cooperate with any board investigation or inquiry and shall timely

respond to a board investigation, inquiry, request, notice, demand or subpoena for information or documents and timely provide to the board the identified information and documents.

(f) A practice privilege expires one year from the date of the notice, unless a shorter

period is set by board regulation. (g) (1) No individual may practice under a practice privilege without prior approval of

the board if the individual has, or acquires at any time during the term of the practice privilege, any disqualifying condition under paragraph (2) of this subdivision.

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(2) Disqualifying conditions include: (A) Conviction of any crime other than a minor traffic violation. (B) Revocation, suspension, denial, surrender or other discipline or sanctions

involving any license, permit, registration, certificate or other authority to practice any profession in this or any other state or foreign country or to practice before any state, federal, or local court or agency, or the Public Company Accounting Oversight Board.

(C) Pendency of any investigation, inquiry or proceeding by or before any state, federal or local court or agency, including, but not limited to, the Public Company Accounting Oversight Board, involving the professional conduct of the individual.

(D) Any judgment or arbitration award against the individual involving the professional conduct of the individual in the amount of thirty thousand dollars ($30,000) or greater.

(E) Any other conditions as specified by the board in regulation.

(3) The board may adopt regulations exempting specified minor occurrences of the conditions listed in subparagraph (B) of paragraph (2) from being disqualifying conditions under this subdivision.

Section 5096.1 – Individuals practicing without privilege; Prospective denial

(a) Any individual, not a licensee of this state, who is engaged in any act which is the practice of public accountancy in this state, and who has not given notice of intent to practice under practice privileges and paid the fee required pursuant to the provisions of this article, and who has a license, certificate or other authority to engage in the practice of public accountancy in any other state, regardless of whether active, inactive, suspended, or subject to renewal on payment of a fee or completion of an educational or ethics requirement, is:

(1) Deemed to be practicing public accountancy unlawfully in this state. (2) Subject to the personal and subject matter jurisdiction and disciplinary

authority of the board and the courts of this state to the same extent as a holder of a valid practice privilege.

(3) Deemed to have appointed the regulatory agency of the state that issued the

individual's certificate or license as the individual's agent on whom notice, subpoenas, or other process may be served in any action or proceeding by the board against the individual.

(b) The board may prospectively deny a practice privilege to any individual who has

violated this section or implementing regulations or committed any act which would be grounds for discipline against the holder of a practice privilege.

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Section 5096.2 – Denial

(a) Practice privileges may be denied for failure to qualify under or comply with the provisions of this article or implementing regulations, or for any act that if committed by an applicant for licensure would be grounds for denial of a license under Section 480 or if committed by a licensee would be grounds for discipline under Section 5100, or for any act committed outside of this state that would be a violation if committed within this state.

(b) The board may deny practice privileges using either of the following procedures:

(1) Notifying the individual in writing of all of the following:

(A) That the practice privilege is denied. (B) The reasons for denial. (C) The earliest date on which the individual is eligible for a practice

privilege. (D) That the individual has a right to appeal the notice and request a

hearing under the provisions of the Administrative Procedure Act if a written notice of appeal and request for hearing is made within 60 days.

(E) That, if the individual does not submit a notice of appeal and request for hearing within 60 days, the board's action set forth in the notice shall become final.

(2) Filing a statement of issues under the Administrative Procedure Act.

(c) An individual who had been denied a practice privilege may apply for a new practice privilege not less than one year after the effective date of the notice or decision denying the practice privilege unless a longer time period, not to exceed three years, is specified in the notice or decision denying the practice privilege.

Section 5096.3 – Revocation, suspension, fines and other disciplinary sanctions; Time period; Costs; Applying after revocation; Applicability of administrative procedures act

(a) Practice privileges are subject to revocation, suspension, fines or other disciplinary sanctions for any conduct that would be grounds for discipline against a licensee of the board or for any conduct in violation of this article or regulations implementing this article.

(b) Practice privileges are subject to discipline during any time period in which they are

valid, under administrative suspension, or expired. (c) The board may recover its costs pursuant to Section 5107 as part of any disciplinary

proceeding against the holder of a practice privilege.

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(d) An individual whose practice privilege has been revoked may apply for a new practice privilege not less than one year after the effective date of the board's decision revoking the individual's practice privilege unless a longer time period, not to exceed three years, is specified in the board's decision revoking the practice privilege.

(e) The provisions of the Administrative Procedure Act, including, but not limited to, the

commencement of a disciplinary proceeding by the filing of an accusation by the board shall apply under this article.

Section 5096.4 – Administrative Suspension

(a) The right of an individual to practice in this state under a practice privilege may be administratively suspended at any time by an order issued by the board or its executive officer, without prior notice or hearing, for the purpose of conducting a disciplinary investigation, proceeding, or inquiry concerning the representations made in the notice, the individual's competence or qualifications to practice under practice privileges, failure to timely respond to a board inquiry or request for information or documents, or under other conditions and circumstances provided for by board regulation.

(b) The administrative suspension order is immediately effective when mailed to the

individual's address of record or agent for notice and service as provided for in this article.

(c) The administrative suspension order shall contain the following:

(1) The reason for the suspension. (2) A statement that the individual has the right, within 30 days, to appeal the

administrative suspension order and request a hearing. (3) A statement that any appeal hearing will be conducted under the provisions of

the Administrative Procedure Act applicable to individuals who are denied licensure, including the filing of a statement of issues by the board setting forth the reasons for the administrative suspension of practice privileges and specifying the statutes and rules with which the individual must show compliance by producing proof at the hearing and in addition any particular matters that have come to the attention of the board and that would authorize the administrative suspension, or the denial of practice privileges.

(d) The burden is on the holder of the suspended practice privilege to establish both

qualification and fitness to practice under practice privileges.

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(e) The administrative suspension shall continue in effect until terminated by an order of the board or the executive officer or expiration of the practice privilege under administrative suspension.

(f) Administrative suspension is not discipline and shall not preclude any individual from

applying for a license to practice public accountancy in this state or from applying for a new practice privilege upon expiration of the one under administrative suspension, except that the new practice privilege shall not be effective until approved by the board.

(g) Notwithstanding any administrative suspension, a practice privilege expires one year

from the date of notice unless a shorter period is set by board regulation.

(h) Proceedings to appeal an administrative suspension order may be combined or coordinated with proceedings for denial or discipline of a practice privilege.

Section 5096.5 – Experience and education requirements for signing attest reports Notwithstanding any other provision of this article, an individual may not sign any attest report pursuant to a practice privilege unless the individual meets the experience requirements of Section 5095 and completes any continuing education or other conditions required by the board regulations implementing this article. Section 5096.6 – Delegation of authority to executive officer In addition to the authority otherwise provided for by this code, the board may delegate to the executive officer the authority to issue any notice or order provided for in this article and to act on behalf of the board, including, but not limited to, issuing a notice of denial of a practice privilege and an interim suspension order, subject to the right of the individual to timely appeal and request a hearing as provided for in this article. Section 5096.7 - Definitions Except as otherwise provided in this article, the following definitions apply:

(a) Anywhere the term "license," "licensee," "permit," or "certificate" is used in this chapter or Division 1.5 (commencing with Section 475), it shall include persons holding practice privileges under this article, unless otherwise inconsistent with the provisions of the article.

(b) Any notice of practice privileges under this article and supporting documents is

deemed an application for licensure for purposes of the provisions of this code, including, but not limited to, the provisions of this chapter and the provisions of Division 1.5 (commencing with Section 475) related to the denial, suspension and revocation of licenses.

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(c) Anywhere the term "employee" is used in this article it shall include, but is not limited to, partners, shareholders, and other owners.

Section 5096.8 – Additional authority applicable to investigations and implementing regulations

In addition to the authority otherwise provided by this code, all investigative powers of the board, including those delegated to the executive officer, shall apply to investigations concerning compliance with, or actual or potential violations of, the provisions of this article or implementing regulations, including, but not limited to, the power to conduct investigations and hearings by the executive officer under Section 5103 and to issuance of subpoenas under Section 5108. Section 5096.9 – Authority to adopt regulations The board is authorized to adopt regulations to implement, interpret, or make specific the provisions of this article. Section 5096.10 – Operation of article dependent on appropriation The provisions of this article shall only be operative if commencing July 1, 2005, and continuing during the period provided in Section 5096.11, there is an appropriation from the Accountancy Fund in the annual Budget Act to fund the activities in the article and sufficient hiring authority is granted pursuant to a budget change proposal to the board to provide staffing to implement this article. Section 5096.12 – Practice of public accountancy by firm from another state

(a) A certified public accounting firm that is authorized to practice in another state and that does not have an office in this state may engage in the practice of public accountancy in this state through the holder of a practice privilege provided that:

(1) The practice of public accountancy by the firm is limited to authorized practice by the holder of the practice privilege.

(2) A firm that engages in practice under this section is deemed to consent to the personal, subject matter, and disciplinary jurisdiction of the board with respect to any practice under this section.

(b) The board may revoke, suspend, issue a fine pursuant to Article 6.5 (commencing

with Section 5116), or otherwise restrict or discipline the firm for any act that would be grounds for discipline against a holder of a practice privilege through which the firm practices.

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Section 5096.13 – Contents of application to practice by out-of-state practitioners The notification of intent to practice under a practice privilege pursuant to Section 5096 shall include the name of the firm, its address and telephone number, and its federal taxpayer identification number. Section 5096.14 – Safe harbor period (a) An individual shall not be deemed to be in violation of this article solely because he or she begins the practice of public accounting in California prior to notifying the board as indicated in subdivision (c) of Section 5096, provided the notice is given within five business days of the date practice begins. An individual who properly notifies the board within the five-day period provided for in this section shall be deemed to have a practice privilege from the first day of practice in California unless the individual fails to timely submit the required fee pursuant to subdivision (c) of Section 5096. (b) Subdivision (a) does not apply in those instances in which prior approval by the board is required pursuant to subdivision (g) of Section 5096. (c) In addition to any other applicable sanction, the board may issue a fine pursuant to Section 5096.3 for notifying the board more than five business days after beginning practice in California. Section 5096.15 – Adoption of fees for out-of-state practitioner who do not sign attest reports for California clients It is the intent of the Legislature that the board adopt regulations providing for a lower fee or no fee for out-of-state accountants who do not sign attest reports for California clients under the practice privilege. These regulations shall ensure that the practice privilege program is adequately funded. These regulations shall be adopted as emergency regulations in accordance with Chapter 3.5 (commencing with Section 11340 of Part I of Division 3 of Title 2 of the Government Code and, for purposes of that chapter, the adoption of the regulations shall be considered by the Office of Administrative Law to be necessary for the immediate preservation of public peace, health, and safety, and general welfare.

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Article 5.5 – Audit Documentation

Section 5097 – Contents; Presumptions raised by improper documentation; Retention and destruction of documentation

Effective January 1, 2003 licensees are required to meet new documentation standards for audits. These new requirements apply to all audits, not just publicly-traded companies. This section defines audit documentation and states that it must be sufficiently complete to permit a knowledgeable reviewer to understand the audit procedures that were performed. The burden of proof has been shifted to the licensee. If the work is not documented, it is presumed that the work was not done. Audit documentation must be retained for a minimum of seven years. Licensees are required to have written policies for documentation retention and destruction.

Section 5098 – Adoption of regulations be board

See Appendix E for a detailed discussion of California’s documentation standards.

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Article 6 - Disciplinary Proceedings

Section 5100 – Revocation or suspension of permit or certificate; refusal to renew; censure of holder; Grounds

This section specifies the causes for which the board may revoke, suspend or refuse to renew any permit or certificate. Effective January 1, 2003 discipline standards were lowered from gross negligence to include repeated acts of negligence. Section 5100 (c) has been amended to read: Dishonesty, fraud, gross negligence, or repeated negligent acts committed in the same or different engagement, for the same or different clients, or any combination of engagement or clients, each resulting in a violation of applicable professional standards that indicate a lack of competency in the practice of public accountancy or in the performance of the bookkeeping operations described in Section 5052.

Section 5101 – Revocation, suspension or refusal to renew permit of partnership; Censure; Grounds

This section specifies the causes for which the board may revoke a partnership’s registration and permit to practice.

Section 5102 – Conduct of proceedings; Powers of Board

This section cites the authority under which the board may conduct proceedings.

Section 5103 – Authority of Board to investigate complaints This section discusses the investigative powers of the Board

Section 5103.5 – Notice of formal accusations posted on Internet Web site; Statement that accusations are not final determination of wrongdoing

This section requires the Board to post on its Internet Web site a notice of all formal accusations. The notice must also include a link to where any person may request and have sent to him or her a copy of the accusation and the basis for the accusation. Accompanying the accusation must be a statement informing the person requesting a copy of the formal accusation that the allegations in involved in the accusation are not a final determination of wrongdoing.

Section 5104 - Relinquishment of revoked, etc., certificate or permit; Return of certificate or permit on expiration of period of suspension

This section establishes the terms under which a certificate or permit must be relinquished and how it may be returned.

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Section 5105 – Relinquishment of certificate and permit where payment of renewal fee delinquent; Reissuance; Conditions

"Any certified public accountant or public accountant who is delinquent in the payment of his renewal fee shall upon request of the board relinquish his certificate and permit; provided, however, the board shall reissue any certificate and permit which has been relinquished for nonpayment of renewal fees if the permit is renewed as provided in Section 5070.6."

Section 5106 – Plea or verdict of guilty or conviction following plea of nolo contendere as conviction within meaning of article; Effect of record of conviction; Suspension or revocation of certificate or permit; Declining to issue certificate or permit

“A plea or verdict of guilty or a conviction following a plea of nolo contendere is deemed to be a conviction within the meaning of this article…”

Section 5107 - Payment to board of costs of investigation and prosecution of certain disciplinary cases This section details the authority for assessment and collection of costs of investigation and prosecution of cases in which a guilty verdict is rendered.

Section 5108 – Authority of Board to issue subpoenas

This section gives the Board the power to issue subpoenas to witnesses and for the production of documents material to its investigations or hearings.

Section 5109 – Jurisdiction of Board not affected by change in status of licensee

This section allows the Board to continue an investigation or disciplinary action even after the license is no longer active.

Section 5110 – Acts constituting cause for Board’s denial of exam application or admission, voidance or grades, or denial of license application or registration; Powers of Board

This section describes the broad powers of the Board in denying an application, voiding a grade or denying admission to an examination to any individual who makes false statements or cheats on an exam.

Author’s Note: The Board has become much more aggressive in assessing and collecting costs.

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Section 5111 – Acts constituting cheating, subverting or attempting to subvert licensing examination

This section defines cheating for purposes of Section 5110. Section 5112 – Procedures for denial of exam application or admittance, or voidance of grades; Notice

This section describes the individual’s rights when accused of false statements or cheating under Section 5110. These rights include proper notification, a statement as to the reasons for the action, and the individual’s rights to a hearing.

Section 5113 – Rights after denial of admission to licensing examination

This section describes the terms under which an individual denied admission to the licensing examination by the Board can apply for readmission to the CPA exam.

Section 5114 – No title/no text Section 5115 – Revocation or surrender of license

This section details the rules for reinstating a license or reducing a penalty issued by the Board.

See Appendix B for a detailed discussion of Enforcement and Disciplinary Actions.

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Article 6.5 – Administrative Penalties

Section 5116 – Notice and hearing opportunity required; penalties assessed under more than one section of article; regulations; Penalties additional to other sanctions; Money to be deposited into Accountancy Fund

This section describes the administrative penalties that the Board may assess, the limits to those penalties, and where the funds collected should be deposited.

Section 5116.1 – Penalty amounts for violation of provisions of chapter

Except as described below, administrative penalties are limited to $5,000 for a first offense and $10,000 for each subsequent offense.

Section 5116.2 – Penalty amounts for violation of specified subdivision of 5100

Violations of Section 5100 subdivision (a), (c), (i), (j) or (k) may be assessed an administrative penalty up to $1 million for a first offense and $5 million for any subsequent offenses, except that the penalty for a licensee who is a natural person may not exceed $50,000 for a first offense and $100,000 for any subsequent offenses.

Section 5116.3 – Penalty amounts for specified prohibited acts

Penalties for violations related to cheating or subverting to cheat a licensing examination are limited to $5,000 for a first offense and $10,000 for any subsequent offense.

Section 5116.4 – Penalties in conjunction with disciplinary proceedings or notice

This section gives authority to the Board’s executive officer to request assessment of administrative penalties.

Section 5116.5 – Where judgment obtainable

This section gives the Board the authority to obtain a judgment for the payment of administrative penalties.

Section 5116.6 – Licensee This section defines the term licensee.

Author’s Note: This article details the rules covering administrative penalties. These penalties are in addition to other penalties that may be imposed on the licensee. Depending on the type of offense, the administrative penalties can range as high as $50,000 for a first offense and $100,000 for a subsequent offense for an individual and $1 million for a first offense and $5 million for a subsequent violation for a firm.

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Article 7 - Prohibitions and Offenses Against the Chapter Generally

Section 5120 – Misdemeanors; Punishment’ certification of facts to enforcement officer; Proceedings

Licensees who commit violations against Article 3 (commencing with Section 5050) are deemed guilty of a misdemeanor and subject to imprisonment and/or fine. Terms are spelled out in this section.

Section 5121 – Use of words certified public accountants; Evidentiary effect; Evidence of singe act

This section discusses evidence of improper use of the designation CPA or PA by those not holding a valid permit to practice accountancy in California.

The commission of a single act is sufficient to justify conviction without evidence of a general course of conduct.

Section 5122 – Application for order enjoining illegal acts or practices

This section gives authority to the Board to apply for an injunction, restraining order, or other appropriate court order against anyone who has violated or appears about to violate the provisions of this chapter.

See Appendix B for an detailed discussion of Enforcement and Disciplinary Actions.

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Article 8 - Revenue

Section 5130 – Applicant’s fees; Return

This section authorizes the Board to charge and collect a fee from each applicant for the certificate of certified public accountant.

Section 5131 – Application fee and examination fee

This section authorizes the board to charge and collect a fee from each applicant to take the examination for the CPA certificate.

Section 5132 - Disposition of moneys received by the Board

This section directs the board how to account and report for moneys collected by the Board.

Section 5133 – Appropriation of money in Accountancy Fund; Per diem and expenses of members

This section provides for compensation for per diems and expenses of Board members.

Section 5134 – Schedule of fees

This section establishes maximum fees for the various charges authorized to be assessed by the Board.

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Article 9 - Accountancy Corporations

Section 5150 - Accountancy Corporation; Right to practice accountancy; California Board Accountancy as governmental agency under Moscone-Knox Professional Corporation Act

This section defines an accountancy corporation as a corporation registered with the Board under the Moscone-Knox Professional Corporation Act.

Section 5151 - Application for registration; Documents and information required; Form

This section describes the procedures for applicants to register with the Board. Section 5152 – Reports by corporations Signature and verification

This section gives the Board authority to request a written report pertaining to qualifications of the corporation.

Section 5152.1 – Renewal by corporations; Signature and verification

“Each accountancy corporation shall renew its permit to practice biennially and shall pay the renewal fee fixed by the Board in accordance with Section 5134.”


Section 5154 - Directors, shareholders and officers; License requirements

“Except as provided in Section 5079 of this code and in Section 13403 of the Corporations Code, each director, shareholder, and officer of an accountancy corporation shall be a licensed person as defined in the Moscone-Knox Professional Corporation Act, or a person licensed to render the same professional services in the jurisdiction or jurisdictions in which the person practices.”

Section 5155 – Prohibition against accrual of income to benefit disqualified shareholders

This section states that a shareholder who is disqualified as defined in the Moscone-Knox Professional Corporation Act shall not receive any income during the period of disqualification.

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Section 5156 – Prohibition against unprofessional conduct; Binding effect of statutes, rules, and regulations; provisions governing disciplinary proceedings

The Board shall have the same authority over an accountancy corporation as they do against individual licensees.

Section 5157 - Rules and regulations; Formulation and enforcement; Provisions authorized

This section gives the Board the authority to formulate and enforce rules and regulations regarding how corporations provide adequate security to their clients arising from claims against them.

Section 5158 – Management of accountancy corporation

“Each office of an accountancy corporation engaged in the practice of public accountancy in this state shall be managed by a certified public accountant or public accountant.”

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CHAPTER 2

CALIFORNIA BOARD OF ACCOUNTANCY

REGULATIONS

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CHAPTER 2 - BOARD OF ACCOUNTANCY REGULATIONS

__________________________________________________________ Author’s Note: The Board of Accountancy regulations interpret and explain the Accountancy rules. They are divided into 13 articles. The following is a summary of the most commonly used regulations. The entire text is included as a supplement to this course. Article 1 - General

This article includes the definitions of certain terms included in the Accountancy Act. Section 4, regarding reports by non licensees is reprinted below: Section 4. Safe Harbor Language. A person who is not licensed by the California Board of Accountancy, and who prepares a financial report in a form substantially the same as that set forth in subsection (a) or (b) below, shall not be deemed to be engaged in the practice of public accountancy as defined in Section 5051 of the Business and Professions Code. (a) “I [we] have prepared the accompanying financial statements of [name of entity] as of [time period] for the [period] then ended. This presentation is limited to preparing in the form of financial statements information that is the representation of management [owners]. I [we] have not audited or reviewed the accompanying financial statements and accordingly do not express an opinion or any other form of assurance on them.” I (We) am (are) not licensed, nor required to be licensed by the California Board of Accountancy for the preparation of these financial statement. if compiled, reviewed, or audited financial statements are desired, the services of someone licensed by the California Board of Accountancy would be required.” (b) “We [I] have prepared the accompanying statement of assets, liabilities and equity for [name of company] as of [month-day-year], together with the related statements of revenue, expense, [and cash flow] for the year [or month] then ended on the income tax basis of accounting. The preparation of financial statements on the income tax basis of accounting is limited to presenting information that is the representation of management [the owners]. We [I] have not audited nor reviewed the accompanying statements. Accordingly, we [I] do not express an opinion or any other form of assurance on them.

Author’s Note: The paragraphs in Section 4 typed in bold became effective October 7, 2012.

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Management has [The owners have] elected to omit substantially all of the disclosures ordinarily included in financial statements prepared on the income tax basis of accounting. If the omitted disclosures were included in the financial statements, they might influence the user’s conclusions about the company’s assets, liabilities, equity, revenues, expenses [and cash flow]. Accordingly, these financial statements are not designed for those who are not informed about such matters.” I (We) am (are) not required to be licensed by the California Board of Accountancy for the preparation of these financial statements.”

Section 5.5. Substantial Equivalency. (a) The Board has determined that the following states require education, examination, and experience qualifications for licensure, when issuing a certified public accountant license to practice public accountancy, substantially equivalent to this state’s qualifications: Alabama, Alaska, Arizona, Arkansas, Commonwealth of the Northern Mariana Islands, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Guam, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming. (b) Individuals who have not continually practiced public accountancy as a certified public accountant under a valid license issued by any state for at least four of the last 10 years, and who do not hold a license issued by a state that is listed in subdivision (a), shall meet the following requirements in order for their education, examination, and experience qualifications to be considered substantially equivalent to this state’s qualifications: (1) Obtain an individual qualification evaluation of substantial equivalency by the National Association of State Boards of Accountancy's (NASBA) CredentialNet. Prior to practicing in pay the required fee, and obtain the required substantial equivalency determination. (2) The individual shall retain the NASBA file number, present it to the Board upon request, and authorize the Board to review the NASBA file upon request.

Author’s Note: Section 5.5 was added effective July 1, 2013

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Article 2 - Examination

This article details the rules for taking and passing the Uniform CPA examination. It mandates that the board abide by the accommodations required by the Americans with Disabilities Act. Many of the sections deal with the new computer-based testing. Section 12 gives a detailed explanation of the general experience requirements under Sections 5092 and 5093.

Section 11.1 Accounting Study (a) For an applicant to satisfy the accounting study requirement described in Section 11(a)(3), he or she shall meet either of the following requirements: (1) conferral of a Master of Accounting, Master of Taxation, or Master of Laws in Taxation degree, or; (2) completion of 20 semester units, or the equivalent in quarter units, that satisfy the following requirements: (A) a minimum of six semester units, or the equivalent in quarter units, shall be completed in accounting subjects as described in Section 9.2(b), (B) a maximum of 14 semester units, or the equivalent in quarter units, may be completed in business-related subjects as described in Section 9.2(c), (C) a maximum of nine semester units, or the equivalent in quarter units, may be completed in other academic work relevant to accounting and business; and (D) a maximum of four semester units, or the equivalent in quarter units, may come from internships or independent studies courses which meet the subject matter requirements of Section 11.1(a)(2)(A) or (B). (b) For the purposes of this section, "other academic work relevant to accounting and business" means: (1) a maximum of three semester units, or the equivalent in quarter units, in courses that increase an applicant's oral, verbal, written, and presentation skills, as well as increase his or her ability to gather, critically analyze and assess, and reach conclusions. Courses counted towards this requirement shall be completed in any of the following disciplines: English, Communications, Journalism, or the Physical, Life, Natural, and Social Science;

NOTE: New Section 11.1 became effective November 24, 2012

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(2) a maximum of three semester units, or the equivalent in quarter units, in courses in foreign languages, which may include sign language, or in courses containing the word "culture," "cultural," or; ethnic" in the course title; and, (3) a maximum of three semester units, or the equivalent in quarter units, in courses that provide applicants with information on the business, economic, or financial market within which a particular industry operates. Courses shall either include the word "industry" or "administration" in the course title, or be completed in one of the following disciplines: Engineering, Architecture, or Real Estate.

Article 2.5 – Retired Status Beginning July 1, 2014 a new Article 2.5 was adopted. It states that a licensee may have his or her license placed in a retired status. Section 15.1 - Retired Status To be eligible for a license in a retired status, a licensee must submit an application to the Board and must meet certain minimum requirements. Article 3 – Practice Privileges (operative July 1, 2013 – December 31, 2018)

Section 18. Purpose of this Article and Definitions (a) This article implements Article 5.1 of Chapter 1 of Division 3 of the Business and Professions Code related to practice privileges. This article shall become operative on July 1, 2013, and shall become inoperative on January 1, 2019. (b) For the purposes of this article and Article 5.1 of Chapter 1 of Division 3 of the Business and Professions Code, the following definitions shall apply: (1) “Minor traffic violation” shall mean traffic infractions under $1000 not involving alcohol, dangerous drugs, or controlled substances.

Author’s Note; This article became effective July 1, 2013 and is the basis for the implementation of the rules related to out-of-state individuals and firms practicing accounting in California. Because of the substantial changes which took place, the entire section is reprinted in its entirety.

Author’s Note: Article 2.5 and Section 15 related to retired status became effective July 1, 2014.

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(2) “Principal place of business” shall mean the office location designated by the licensee for the purposes of practice privilege. Section 19. Practice Privilege Forms for Individuals (a) An individual who is required to provide notification to the Board pursuant to Section 5096(i)(1) of the Business and Professions Code shall do so on the Practice Privilege Pre-Notification of Listed Events Form (PP-10 (1/13)), which is hereby incorporated by reference. (b) An individual who is required to provide notification to the Board pursuant to Section 5096(f) of the Business and Professions Code shall do so on the Notification of Cessation of Practice Privilege Form (PP-11 (1/13)), which is hereby incorporated by reference. (c) An individual applying for reinstatement of a practice privilege under Section 5096.2(c) of the Business and Professions Code shall do so on the Application for Reinstatement of Practice Privilege (PP-12 ( 1 /13)), which is hereby incorporated by reference. Section 20. Registration Forms for Out-of-State Accounting Firms (a) An out-of-state accounting firm organized and authorized to practice public accountancy under the laws of another state, as specified in Business and Professions Code Sections 5070 and 5035.3, that performs services pursuant to Business and Professions Code Section 5096(d), which require the accounting firm to register with the Board, shall do so on the Out-of-State Accounting Firm Registration Form (PP-13 (1/13)), which is hereby incorporated by reference. (b) (1) An out-of-state accounting firm registered by the Board pursuant to subdivision (a) shall renew its registration on the last day of the month in which the registration was initially approved by the Board every second year. (2) The out-of-state accounting firm shall provide the following information at the time of renewal: (A) Current contact information; (B) Current license information from all states in which the firm is licensed including license number, expiration date and any enforcement actions taken against the license including the following: (i) Pending disciplinary action such as an accusation filed; (ii) Revocation or suspension, including stayed revocation or stayed suspension; (iii) Probation or other limitation on practice ordered by a state board of accountancy including any interim suspension order; (iv) Temporary restraining order or other restriction on practice ordered by a court; (v) Public letter of reprimand issued;

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(vi) Infraction, citation, or fine imposed; or, (vii) any other enforcement related orders of a state board of accountancy; and (C) An update of the ownership information that was originally reported on the Out- of-State Accounting Firm Registration Form (PP-13 (1/13)). (3) An expired registration may be renewed at any time within five years after its expiration upon providing the information required in paragraph (2). A registration that is not renewed within five years following its expiration may not be renewed, and the registration shall be canceled immediately upon expiration of the five-year period. An out-of-state accounting firm with a registration that has cancelled pursuant to this paragraph may re-register pursuant to subdivision (a). (c) (1) Each registered out-of-state accounting firm shall notify the Board of any change in its address of record within 30 days after the change. If the address of record is a post office box or mail drop, the change of address notification shall include the street address of the firm. (2) Each registered out-of-state accounting firm shall notify the Board of any change in its ownership, as reported on the Out-of-State Accounting Firm Registration Form (PP-13 (1/13)), within 30 days after the change. (3) For purposes of this section "registered firm" includes any firm registered by the Board pursuant to this section even if the registration is suspended or otherwise subject to disciplinary action, provided the registration is not expired, canceled or revoked. (4) All notifications required under this subdivision shall be in writing and shall be signed by an individual authorized by the registered firm to submit such notifications along with the individual's printed name and title, and a certification that the information is true and correct to the best of the individual's knowledge. Section 21. Appeals. (a) Any individual practicing or wanting to practice under a practice privilege who wishes to contest an action taken by the Board or the Executive Officer under Section 5096(g), 5096(h), or 5096(i) of the Business and Professions Code may appeal such action to the Board. The appeal shall be filed within 15 days of the date of the action or written notification of the action from the Board. Two signed copies of the appeal shall be mailed or delivered to the office of the California Board of Accountancy. The appeal shall contain the following information: (1) The name, business address, residence address, and state of licensure of the out-of-state licensee making the appeal. (2) The action being appealed and the date of the action or written notification of the action from the Board.

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(3) A summary of the basis for the appeal, including any information which the out-of-state licensee believes was not given adequate consideration by the Board or the Executive Officer. (b) If the action taken under Section 5096(g), 5096(h), or 5096(i) of the Business and Professions Code was taken by the Executive Officer, the Board will consider only appeals based on information previously considered by the Executive Officer. If the individual wishes to submit for consideration additional evidence or information not previously submitted to the Executive Officer, such additional information should be submitted with the request for appeal. An appeal based on evidence or information not previously submitted to the Executive Officer will be referred by the Board to the Executive Officer for further consideration. (c) The out-of-state licensee shall comply with any action or order of the Board until such time as the appeal is acted upon. Section 22. Notice of Intent to Administratively Suspend. (a) Prior to the issuance of an Administrative Suspension Order pursuant to Business and Professions Code Section 5096.4, the Executive Officer may issue a Notice of Intent to Administratively Suspend. The Notice of Intent to Administratively Suspend shall be in writing and shall be mailed to a state board of accountancy with which the practice privilege holder is licensed. (b) The Notice of Intent to Administratively Suspend shall include a description of the contents of the Administrative Suspension Order pursuant to subdivision (c) of Section 5096.4. (c) The Notice of Intent to Administratively Suspend shall provide the practice privilege holder with 30 days from the date of mailing in which to respond in writing by showing cause to the Executive Officer why the Administrative Suspension Order should not be issued. (d) The Executive Officer shall determine whether or not the Administrative Suspension Order shall be issued and shall so inform the practice privilege holder in writing. Article 4 – Practice Privilege (inoperative as of July 1, 2013)

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Article 5 - Registration

Section 37.5 Fingerprinting and Disclosure Requirements (a) A licensee applying for renewal as a certified public accountant or public accountant who has not previously submitted fingerprints as a condition of licensure or for whom an electronic record of the licensee's fingerprints does not exist in the Department of Justice's criminal offender record identification database shall successfully complete a state and federal level criminal offender record information search conducted through the Department of Justice by the licensee's renewal date that occurs after December 31, 2013. (1) A licensee shall retain for at least three years as evidence of having complied with subdivision (a) either a receipt showing that he or she has electronically transmitted his or her fingerprint images to the Department of Justice or, for those who did not use an electronic fingerprint system, a receipt evidencing that his or her fingerprints were recorded and submitted to the board. (2) An applicant for renewal shall pay the actual cost of compliance with subdivision (a). (3) As a condition of petitioning the board for reinstatement of a revoked or surrendered license, an applicant shall have complied with subdivision (a). (4) The board shall waive the requirements of this section if the license is renewed in an inactive or retired status or if the licensee is actively serving in the United States military. The board shall not return a license to active status until the licensee has complied with subdivision (a). (b) As a condition of renewal, a certified public accountant or public accountant licensee shall disclose on the renewal form whether he or she has submitted a record of fingerprints in compliance with subdivision (a).

NOTE: This article explains the rules for reissuance of a license that has been canceled and the following new regulation went into effect on January 17, 2013 related to fingerprinting.

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(c) As a condition of renewal, an applicant for renewal as a certified public accountant or public accountant shall disclose on the renewal form whether he or she has been convicted, as defined in Section 490 of the Business and Professions Code, of any violation of the law in this or any other state, the United States, or other country, omitting traffic infractions under $1000 not involving alcohol, dangerous drugs, or controlled substances. (d) As a condition of renewal, an applicant for renewal as a certified public accountant or public accountant shall disclose on the renewal form whether he or she has experienced the cancellation, revocation, or suspension of a certificate or right to practice by any other state or foreign body. (e) Failure to provide all of the information required by this section renders an application for renewal incomplete and the license will not be renewed until the licensee demonstrates compliance with all requirements.

Article 6 – See Appendix D for a discussion of peer review Article 7 - No title/no text Article 8 - Appeals

This article details the rules for appealing any action of a board committee or staff. Article 9 - Rules of Professional Conduct

This is the most voluminous of the regulations. Shown below are summaries of section most often misunderstood or violated: Section 50 – Client Notification requires all licensees, including licensed firms, to notify their clients that they are licensed by the California Board of Accountancy. A number of options are permitted including displaying the certificate of licensure in the office or reception area. Section 51.1 – Notification of Nonlicensee Ownership These regulation describe the alternative methods firms may use in meeting the requirements for notifying their clients that a nonlicensee owner may participate on their engagement. Note that this notification applies whether or not the nonlicensee owner participates on the engagement during that year. (a) Any firm with a nonlicensee owner or owners that has one or more offices located in California shall notify each client served by an office located in California of the actual or potential involvement of a nonlicensee owner or owners in any service to be provided to the client by the firm. Notice shall be provided by any of the following methods:

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1. Providing a statement to each client served by a California office to be signed and

dated by the client and retained in the firm’s records that states that the client understands that services will or may be provided by a nonlicensee owner of the firm.

2. Including a statement that the firm has a nonlicensee owner or owners who may provide client services in any contract for services, proposal letter, or engagement letter with the client served by a California office

(b) A copy of the statement, contract, engagement letter or proposal letter containing this

notice shall be maintained by the public accounting firm in the client’s files for a minimum of five years form the date of the notice.

Section 52 – Response to Board Inquiry sets forth the requirements that inquiries by the Board must by responded to within 30 days and that all files, working papers, and other documents requested must be made available. It also clarifies that a failure to appear or comply with a written notice from the Board is a violation under Section 5100(f) of the Accountancy Act.

Section 53 – Discrimination Prohibited states that no licensee shall engage in any conduct or practice that discriminates in employment. Section 54 – Confidential Information Defined, Exception details the rules of confidentiality and what steps must be taken when information will not be treated as confidential. Section 56 – Commissions-Basic Disclosure Requirements contains the regulations related to commissions. Section 57 – Incompatible Occupations/Conflicts of Interest. With the recent media coverage of these problems and the passage of the federal Sarbanes-Oxley Act, this issue has taken on new importance. Section 58 – Compliance with Standards states that accountant’s reports must be in compliance with applicable professional standards including, but not limited to, GAAP and GAAS. Previously there were detailed descriptions of compliance for each of the various services. It has now been replaced with a more basic reference to the professional standards. Section 59 - Reporting of Restatements. (a) To comply with the requirements of paragraph (1) of subdivision (b) of Business and Professions Code Section 5063, a licensee who issues a report on a client’s restated financial statement shall report to the Board:

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1. Any restatement of a financial statement reporting the correction of any error in a previously issued financial statement of a client that is:

A. a publicly traded company that is required to file a tax return with the California Franchise Tax Board; or

B. a government agency located in California, when the financial statement(s)

exceeds the planning materiality used by the licensee in conjunction with the current year audit. For purposes of this paragraph, planning materiality means the level of misstatements, individually or in aggregate, that would cause the financial statements to not be presented fairly, in all material respects, in conformity with generally accepted accounting principles.

2. Any restatement of a financial statement of a charitable organization registered

by the Office of the Attorney General’s Registry of Charitable Trusts which is issued for purposes of correcting any error in a previously issued financial statement and which has resulted in the filing of an amended or superseded Internal Revenue Form 990 or 990PF.

(b) The report required by subsection (a) shall be made by the licensee issuing the report on the restatement even if the licensee did not perform the original audit. The report required by subsection (a) shall be provided to the Board within 30 days of issuance of the restatement, shall be signed by the licensee, and shall set forth the facts which constitute the reportable event including an explanation of the reason for the restatement. The report made under paragraph (a)(1) of this section shall include copies of the original and the restated financial statements. The report made under paragraph (a)(2) of this section shall include only those portions of the original and the amended Forms 990 or 990PF related to the reissued financial statement. Section 60 contains the regulations related to the reporting of investigations by the SEC and PCAOB. (a) For purposes of reporting pursuant to Section 5063(b)(5), notice of the opening or initiation of an investigation by the Public Accounting Oversight Board shall include any notice by the Public Accounting Oversight Board that it is initiating an investigation of the licensee. (b) Reports received by the Board pursuant to the requirements of subsection (a) of this section or of paragraphs (3), (4) or (5) of subdivision (b) of Business and Professions Code 5063 shall not be publicly disclosed other than (1) in the course of any disciplinary proceeding by the Board after the filing of a formal accusation; (2) in the course of any legal action to which the Board is a party; (3) in response to an official inquiry from a state or federal agency; (4) in response to a subpoena or summons enforceable by order of a court; or (5) when otherwise specifically required by law.

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Section 61 - The Reporting of Settlement, Arbitration Awards, and Judgments (a) To meet the reporting requirements of paragraph (b)(2) of Section 5063, licensees shall report settlements and arbitration awards consistent with that provision that are the result of actions brought by persons located, residing, or doing business in California. (b) Reports of judgments in civil actions alleging negligent conduct (but not dishonesty, fraud, or gross negligence) by a licensee pursuant to paragraph (c)(1) of Section 5063shall be limited to those judgments in which a person located, residing in or doing business in California is a named party to the action or where the alleged conduct relates to the practice of public accountancy in California. Nothing in this subsection limits a licensee’s responsibility to report under any other paragraph of subdivision (c) of Section 5063. (c) Reports received by the Board pursuant to the requirements of subsection (a) of this section shall not be publicly disclosed other than (1) in the course of any disciplinary proceeding by the Board after the filing of a formal accusation; (2) in the course of any legal action to which the Board is a party; (3) in response to an official inquiry from a state or federal agency; (4) in response to a subpoena or summons enforceable by order of a court; or (5) when otherwise specifically required by law. Section 62- Contingent Fees contains an explanation of the restrictions related to contingent fees. It states that “…fees are not regarded as being contingent if fixed by courts or governmental entities acting in a judicial capacity or regulatory capacity, or in tax matters if determined based upon the results of judicial proceedings or the findings of governmental agencies acting in a judicial or regulatory capacity or there is a reasonable expectation of substantive review by a taxing authority.” Section 63 - Advertising is the authority for prohibiting advertising that is false, fraudulent or misleading. Section 65 - Independence refers to professional standards for compliance with the rules of independence. Section 67- Approval of Use of Fictitious Names requires sole practitioners to use the name on their permit to practice unless the name has been registered with the CBA. Section 68 – Retention of Client’s records is the source for the definition of working papers and the rules for retention of client’s records. The rules regarding the retention of working papers were strengthened in June 2002. In addition, effective January 1, 2003, the legislature enacted a new law that establishes specific audit documentation standards. New regulations to meet the requirements of the new legislation were adopted in January 2004 and amended in 2006 and again in 2007 (See Appendix C for a complete discussion of this topic).

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Section 69 – Certification of Applicant’s Experience describes the rules for certifying an applicant’s experience and the board’s authority for substantiating that certification.

Article 10 - Fees

This article details the fees to be charged to applicants and licensees for certificates, renewals, and examinations. Section 70 - The fees have been temporarily reduced for the CPA Examination and for licensure.

Article 11 - Accountancy Corporation Rules

This article details the rules for accountancy corporations. Article 12 - Continuing Education Rules

This article includes detailed regulations regarding continuing education requirements, including standards for this course on the rules and regulations of the profession. (See Appendix A for a complete discussion of this topic). This article also is the authority for the board’s review of continuing education records of licensees. Section 89.1 is the authority for a special program in which the board selects and reviews financial statements of licensees. “The financial report or reports to be submitted shall be selected by the responding licensee and shall reflect the highest level of service rendered by such licensee… Willful failure or refusal to comply with the Board’s written request for a copy of financial report(s), within 30 calendar days of the licensee’s receipt of that request, constitutes a violation of Section 5100(f) of the Accountancy Act.”

Article 12.5 - Citations and Fines

This article is the authority for the board to issue citations and fines in lieu of seeking suspension or revocation of a licensee’s certificate or permit. Included here is a listing of the fines and the amounts that the board can assess. If the licensee wants to contest the assessment, he or she must request a hearing within 30 calendar days of the issuance of the citation or assessment. In 2008, the executive officer of the Board was given expanded authority to issue a citation, rather than a fine or suspension. (For a more extensive discussion of Board discipline and enforcement, see Appendix B)

Article 13 - Denial, Suspension, and Revocation of Certificates, Permits, or Licenses

This article details the criteria that should be considered when determining whether a certificate of permit should be denied, suspended or revoked.

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Section 98 – Disciplinary Guidelines states that the “Board shall consider the disciplinary guidelines entitled ‘A Manual of Disciplinary Guidelines and Model Disciplinary Order’”. Thus it behooves a practitioner who must appear before the Board to carefully review these guidelines together with his/her legal counsel. The Board is permitted, however, to deviate from the guidelines when “the facts of a particular case warrant such a deviation.” Section 98.1 – Mediation Guidelines sets out the guidelines for when a particular case is referred to mediation. Section 99 – Substantial Relationship Criteria defines when an act of a practitioner is substantially related to the qualifications, functions, or duties of a certified public accountant or public accountant.” Section 99.1 – Rehabilitation Criteria for Denials, Suspensions, Revocations, Restorations, Reductions of Penalty etc. sets out the criteria that the Board shall consider when determining the various punishments to be meted out.

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APPENDICES

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Because the Rules and Regulations of the Board are, at times, difficult to read and seem to be subject to interpretation there are many questions that come to mind and are the subject of telephone calls to the Board. Among these HOT TOPICS are those addressed in this series of appendices. INDEX

Appendix A ..................................................... Continuing Education Requirements Appendix B………………………………..Enforcement and Disciplinary Actions

Appendix C ........................................................................................ Client Records Appendix D ........................................................................................... Peer Review Appendix E ..................................................... California Documentation Standards Appendix F.......................................................... List of Relevant Reading Material

These topics are not the only ones that deserve special attention but they are certainly among the ones that get it.

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Appendix A - Continuing Education Requirements Section 80. Inactive License Status. (a) Upon application, a licensee may have his/her license placed in an inactive status. (b) The holder of a license in an inactive status shall not engage in the practice of public accountancy as defined in Section 5051 of the Business and Professions Code. This section does not prohibit a holder of a license in an inactive status from receiving a share of the net profits from a public accounting firm or other compensation from a public accounting firm, provided that the licensee does not otherwise engage in the practice of public accountancy. (c) A license in an inactive status shall be renewed during the same time period in which a license in an active status is renewed. The renewal fee for a license in an inactive status shall be the same as the renewal fee for a license in an active status. (d) The continuing education requirements described in Section 87 are not applicable at the time of renewal for a licensee renewing a license in an inactive status. (e) At the time of renewal, the holder of a license in an inactive status may convert his/her license to an active status by paying the renewal fee and complying with the continuing education requirements as described in Section 87, with the exception of Section 87 (a)(1). A minimum of 20 hours of continuing education shall be completed in the one-year period immediately preceding the time of renewal, 12 hours of which must be in technical subject areas described in Section 87(a)(2). (f) The holder of a license in an inactive status may convert to an active status prior to the next renewal by meeting the continuing education requirements as described in Section 80.1. Section 80.1 Conversion to Active Status Prior to Renewal. (a) A licensee who has renewed his or her license in an inactive status may convert the license to an active status prior to the next license expiration date by performing the following: (1) Within the 24-month period prior to converting to an active status, complete 80 hours of continuing education credit as described in Section 87(a)(2) and (a)(3), including the Ethics Continuing Education Requirement described in Section 87(b). A minimum of 20 hours shall be completed in the one-year period immediately preceding conversion to an active status, with a minimum of 12 hours of the 20 required hours in technical subject areas described in Section 87(a)(2);

Author’s Note: Since there have been substantial changes to Sections 80 and 81 which became effective on January 1, 2014 these two sections have been reproduced in their entirety.

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(2) complete the regulatory review course described in Section 87.8 if more than six years have elapsed since the licensee last completed the course; (3) apply to the Board in writing requesting to convert the license to an active status; and (4) complete any continuing education that is required pursuant to subsection (k) of Section 89. (b) A licensee with a license in an inactive status may not practice public accountancy until the Board approves the application for conversion, or restoration, of the license to an active status. (c) A licensee who, during the 24 months prior to converting his/her license to an active status, planned, directed, or conducted substantial portions of field work, or reported on financial or compliance audits of a governmental agency shall complete 24 hours of continuing education in governmental auditing as described in Section 87(c) as part of the 80 hours of continuing education required to convert his/her license to an active status under subsection (a). A licensee who meets the requirements of this subsection shall be deemed to have met the requirements of subsection (d). (d) A licensee who, during the 24 months prior to converting his/her license to an active status, planned, directed, or performed substantial portions of the work or reported on an audit, review, compilation, or attestation service shall complete 24 hours of continuing education in accounting and auditing as described in Section 87(d) as part of the 80 hours of continuing education required to convert his/her license to an active status under subsection (a). (e) A licensee who must complete continuing education pursuant to subsections (c) and/or (d) shall also complete an additional four hours of continuing education specifically related to the prevention, detection, and/or reporting of fraud affecting financial statements as described in Section 87(e). This continuing education shall be part of the 80 hours of continuing education required by subsection (a), but shall not be part of the continuing education required by subsections (c) or (d). Section 80.2. Continuing Education Requirements Following Conversion to Active Status During the Renewal Period. (a) All continuing education required by this section must be completed on or after the date of conversion to active status. (b) Once a license is converted to an active status, the licensee must complete 20 hours of continuing education as described in Section 87(a)(2) and (a)(3) for each full six month period from the date of license status conversion to the next license expiration date in order to fulfill the continuing education requirement for license renewal. If the time period between the date of license status conversion and the next license expiration date is less than six full months, no continuing education is required for license renewal.

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(c) Once a license is converted to an active status, a licensee who engages in financial or compliance auditing of a governmental agency at any time between the date of license status conversion and the next license expiration date shall complete six hours of governmental auditing continuing education as part of each 20 hours of continuing education required under subsection (b). Continuing education in the areas of governmental accounting and auditing shall meet the requirements of Section 87(c). A licensee who meets the requirements of this subsection shall be deemed to have met the requirements of subsection (d) Once a license is converted to an active status, a licensee who engages in audit, review, compilation, or attestation services at any time between the date of license status conversion and the license expiration date shall complete six hours of continuing education in accounting and auditing as part of each 20 hours of continuing education required under subsection (b). Continuing education in the areas of accounting and auditing shall meet the requirements of Section 87(d). (e) If a license expired as defined in Section 81(b)(2) after the expiration date immediately following conversion to active status, the licensee must complete an additional 20 hours of continuing education as described in Section 87(a)(2) and (a)(3) for each full six month period from the date of license expiration to the date on which the licensee applies for license renewal, up to a total of 80 hours of continuing education in order to renew. If the time period between the date the license expired and the date on which the licensee applies for license renewal is less than six full months, no additional continuing education is required for license renewal. (1) All continuing education required by this section shall be completed in the two-year period immediately preceding the date on which the licensee applies for license renewal. If the date the licensee applies for license renewal is less than two years from the date of license status conversion, all continuing education must be completed on or after the date of license status conversion. (2) A licensee who is required to complete a total of 80 hours of continuing education pursuant to this subsection shall also complete, as a part of the 80 hours, the following: (A) Four hours of ethics education pursuant to Section 87(b). (B) If the licensee is subject to the continuing education requirements of subsection (c) or (d), four hours of continuing education specifically related to the prevention, detection, and/or reporting of fraud affecting financial statements. This continuing education shall not be part of the continuing education required by subsection (c) or (d). (f) Failure to Comply. A licensee's willful failure to comply with the requirements of this section shall constitute cause for disciplinary action pursuant to Section 5100(g) of the Accountancy Act.

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Section 81. Continuing Education Requirements for Renewing an Expired License. (a) As a condition for renewing a license in an active status, a licensee renewing an expired license shall adhere to the basic requirements described in Section 87 in the two-year period immediately preceding the date on which the licensee applies for license renewal. No carryover of continuing education is permitted from one license renewal period to another. (b) For the purpose of this section, the following definitions shall apply: (1) “Date of on which the licensee applies for license renewal” shall mean the date the license application, including the applicable renewal and delinquency fee, is postmarked on the envelope. (2) "Expired" license shall mean delinquent, lapsed, or a late renewal that is postmarked after the licensee's last or most recent license expiration date, up to five years.

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Section 87 - Basic Requirements Section 87(a) – 80 Hours A licensee shall complete 80 hours of continuing education in the two year period immediately preceding license expiration; a minimum of 20 hours of continuing education must be completed in each year of the renewal period and a minimum of 12 hours of that 20 must be in technical areas (i.e.. accounting, auditing, fraud, taxation, consulting, financial planning, ethics as defined in Section 87(b), regulatory review as defined in Section 87.8, computer and information technology (except for word processing), and specialized industry or government practices that focus primarily upon the maintenance and/or enhancement of the public accounting skills and knowledge needed to competently practice public accounting). Licensees must meet a 50/50 continuing education requirement. Active CPAs must complete a minimum of 50% of the CE hours in technical areas. These include:

• Accounting • Auditing • Taxation • Consulting • Financial Planning • Board–approved professional conduct and ethics course • Computer and information technology (except for word processing) • Specialized industry or government practices that focus primarily upon the

maintenance and/or enhancement of the public accounting skills and knowledge needed to competently practice public accounting.

Author’s Note: Certified Public Accountants and Public Accountants provide the public with professional services not otherwise available. As licensed professionals, they occupy a unique position of public trust. Having been licensed, CPAs and PAs are subject to the provisions of the continuing education statutes and the regulations relating to those statutes as adopted by the Board. These requirements are detailed in Article 1.5 of the Accountancy Act and Article 12, Sections 87-89 of the California Board of Accountancy Regulations. It is the licensee's primary responsibility to make certain that the requirements are fulfilled.

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The remainder of the hours can be completed in technical or non-technical subject areas. Non-technical subject areas (must be 50% or less of required CE) include:

• Communications skills • Word processing • Sales • Marketing • Motivational techniques • Negotiation skills • Office management • Practice management • Personal management

Programs in the following areas are not acceptable for continuing education credit:

• Personal growth • Self-realization • Spirituality • Personal health and/or fitness • Sports and recreation • Foreign languages and cultures • Other subject which will not contribute directly to the professional competence of

the licensee

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Section 87 (b) – Ethics Continuing Education The rules related to the ethics educational requirements were totally revised effective January 1, 2010. The new rules: Require that a 4-hour general ethics course be completed during each two-year renewal period. This course does not need to be Board-approved, but must meet one or more of the following criteria: a. A review of nationally recognized doses of conduct emphasizing how the codes relate to professional responsibilities; b. Case-based instruction focusing on real-life situational learning; c. Ethical dilemmas facing the accounting profession; d. Business ethics, ethical sensitivity, and consumer expectations. Programs in the following subject area are not acceptable toward meeting this requirement: sexual harassment, workplace harassment or workplace violence. In addition a new 2-hour Regulatory Review course is required to be completed every 6 years - (See Section 87.8.) Section 87(c) - Governmental Continuing Education State law requires that a licensee who plans, directs or conducts substantial portions of field work of any financial or compliance audit on any governmental agency be required to complete 24 hours of continuing education in the area of governmental accounting and auditing or related subjects. In addition to courses on governmental accounting and auditing, courses which improve a licensee’s knowledge of governmental operations, laws, regulations, reporting or other special requirements applicable to the environment in which government agencies operate will also satisfy the governmental continuing education requirement. Section 87(d) - Accounting & Auditing Continuing Education Licensees who compile, review, audit, or provide other attestation services are required to complete 24 hour of accounting and auditing continuing education. The A&A requirement applies to any licensee who plans, directs or performs substantial portions of even one financial statement engagement. Courses must pertain to financial statement preparation or related subjects. The Board has issued a warning that software courses do not generally qualify as A&A; however they do typically qualify as general CE in the technical subject area as computer and information technology, except for word-processing, which qualifies as non-technical CE.

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Section 87(e) - Detection and Reporting of Fraud in Financial Statements A licensee who must complete continuing education pursuant to subsections (c) and/or (d) of this section (governmental or accounting and auditing) shall also complete an additional four hours of continuing education specifically related to the prevention, detection and/or reporting of fraud affecting financial statements. This continuing education shall be part of the 80 hours of continuing education required by subsection (a), but shall not be part of the continuing education required by subsection (c) or (d). 87.8 – Regulatory Review Course A 2-hour course on the provisions of the California Accountancy Act and the California Board of Accountancy regulations must be completed every six years. The course will include an overview of historic and recent disciplinary actions taken by the Board. The two hours can be counted towards the 80 hour requirement. 87.9 – Offering a Regulatory Review Course This course must be Board approved. There are several specific requirements including a restriction on using true/false type questions. A self-study course requires a 90 percent passing score. 88. – Programs Which Qualify The overall consideration in determining whether a specific program qualifies is that it be a

formal program of learning which contributes directly to the professional competence of a licensee in public practice.

Live Presentations (50 minutes constitutes one credit hour) such as the following may qualify if

they meet the requirements of Rules 88, 88.1 and 88.2 of the CBA Regulations.

a. Professional development programs of national and state accounting organizations.

b. Technical sessions at meetings of national and state accounting organizations and their chapters that are designed as educational programs.

Author’s Note: Course Approval for Continuing Education Except for the 2-hour course on the California Accountancy Act and Regulations (and the prior 8-hour Professional Conduct and Ethics course), advance acceptance of educational programs is not required. It is the licensee's responsibility to establish that a CE program contributes directly to his/her professional competence as a CPA/PA. CE can be claimed for any formal program of learning that meets the requirements of Rule 88, 88.1 and 88.2 of the Board (California Code of Regulations, Title 16, Chapter 1).

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c. University or college courses. Each semester hour credit shall equal 15 hours toward the requirement. Each quarter hour credit shall equal 10 hours. Audited courses or non-credit courses equal one qualifying hour per each classroom hour. Group Internet-Based Programs (Webcast) In order to qualify as acceptable continuing education under Section 88 (c), the provider of the group Internet-Based program (Webcast) must be in compliance with requirements below: (1) Require and monitor attendance throughout the program by using attendance-monitoring devices such as polling, questions, or surveys. The program shall include a minimum of two monitoring events each half hour, at least one of which occurs at an irregular interval. (2) Have a live instructor while the program is being presented and a feature allowing participants to send questions/comments directly to the instructor and receive answers during the program. (3) Retain for a period of six years a record of attendance that accurately assigns the appropriate number of participation hours for participants. (4) Retain for a period of six years written educational goals and specific leaning objectives, as well as a syllabus, which provides a general outline, instructional objectives, and a summary of topics for the course. A copy of the educational goals, learning objectives, and course syllabus shall be made available to the California Board of Accountancy upon request. (5) Issue a certificate of completion to each licensee upon satisfactory completion of the course. Satisfactory completion at a minimum require responding to at least 75 percent of the monitoring events described in section 88.1(b)(1) during the period for which continuing education credit is being granted. Retain records of licensees receiving certificates of completion for a period of six years. The amount of credit shall be displayed on the certificate of completion and shall be calculated in accordance with Section 88.2(b). (6) Have a written policy to address rescheduling and the granting of partial credit in the event of a technology failure, and make that policy available to the Board upon request. Self-Study In order to qualify as acceptable continuing education under Section 88 (d), any self-study course completed whether in electronic or paper text format must: (1) Grant continuing education credit equal to the average completion time if the self-study course is designed to use learning methodologies that simulate a classroom learning process by employing significant ongoing interactive feedback to the participant regarding his or her learning process. These courses clearly define lesson objectives and manage the participant through the learning process by (A) requiring frequent participant response to questions that test for understanding of the material presented. (B) provide evaluated feedback to incorrectly

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answered questions, and (C) reinforcement feedback to correctly answered questions. Evaluated feedback means a response specific to each incorrect answer to the study questions that explains why the particular answer is wrong, as each one is likely to be wrong for a different reason. Reinforcement feedback means a response to the correct answer of the study questions that restates and explains why the answer selected was correct. (2) Require a passing score on a test given at the conclusion of the course. (3) Meet the provider requirements for self-study under Section 88.1 (c). Credit as an instructor, discussion leader or speaker will be allowed for any course which meets the requirements of Rule 88. The amount of credit is determined on the basis of actual presentation hours, plus up to two additional hours for actual preparation time for each hour taught. The maximum credit allowed as an instructor may not exceed 50% of the renewal period requirement. Credit for other activities. Credit may be allowed for published articles and books, writing instructional materials for a CE course and for writing questions for the Uniform CPA examination. The maximum credit may not exceed 25% of the renewal period requirement. 89. Record Retention and Reporting Every two years, upon renewal, the licensee is required to provide a written statement certifying that the required number of hours has been taken and providing a listing of the courses completed. In general, records must be retained for a period of four years after renewal of the certificate. (An exception is the Regulatory Review course for which records must be kept for six years.) The Board may solicit and verify such information. If a licensee is found to have a deficiency, the licensee shall be so notified and. shall be required to provide copies of the documentation required by this section.

Author’s Note: From the Spring 2009 issue of the Board of Accountancy Update: “The Board’s Renewal and Continuing Competency (RCC) Unit is presently reinstating the Continuing Education Audit Program to ensure that licensees are complying with requirements for continuing education (CE) as specified in the Board of Accountancy Regulations. Licensees will be randomly pre-selected during the license renewal process and notified approximately 90 days prior to their license expiration date. If renewing a license in an active status, licensees will be instructed to submit documents (i.e. certificates of completion) substantiating completion of a minimum of 80 hours of CE reported at the time of renewal, which will be verified against the CE Reporting Worksheet accompanying the renewal application.”

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From the California Board of Accountancy’s Sunset Review Report Continuing Education – June 2014

a. How does the board verify CE or other competency requirements? CE Review and CE Verification are the two programs employed by the CBA to verify the completion of CE and other competency requirements. The CE Review program is completed during staff’s review of all license renewal applications. It requires CBA staff to examine each license renewal application in order to ensure that the CE reported and self-certified by the licensee on the CE Reporting Worksheet complied with all regulations and requirements. Under the CE Verification program, which occurs subsequent to CE Review, licensees are randomly selected to submit documentation substantiating the completion of appropriate CE as reported and self-certified on the license renewal application. Once all of the required documentation is received, CBA staff confirms that the CE was accurately reported, completed, and conformed to all laws and rules. b. Does the board conduct CE audits of licensees? Describe the board’s policy on CE audits. Yes. The CBA conducts CE audits of licensees through two programs – the CE Review program and the CE Verification program. CBA CE AUDIT POLICY The CE Review program is completed as a part of the license renewal process for each licensee. During review of each license renewal application, CBA staff screen for the completion of required CE. The amount and the category of CE required is dependent upon the type of accounting services each licensee self-certified to have performed within the last two years. The CE Review process is performed on 100 percent of all license renewal applications. The CE Verification is conducted subsequent to CE Review. On a monthly basis, the CBA randomly selects 75 licensees to undergo the CE Verification process. Licensees selected for this verification are required to submit documentation to substantiate the completion of the CE as reported and self-certified on his or her license renewal application. Once received, CBA staff conducts a thorough review of all document submissions and verify that all CE units were accurately reported and completed. c. What are consequences for failing a CE audit? Licensees who fail to respond or rectify any outstanding deficiency are referred to the Enforcement Division for further investigation. Licensees can be issued a citation and assessed an administrative fine ranging from $100 to $5,000. In some cases the CBA may seek formal discipline up to and including revocation.

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Staff work collaboratively to assist licensees in complying with all necessary CE requirements. If any deficiencies are identified, staff notify licensees to obtain compliance. As part of the notification process, licensees are granted a specified period of time to resolve any identified deficiencies. d. How many CE audits were conducted in the past four fiscal years? How many fails? What is the percentage of CE failure? NUMBER OF AUDITS COMPLETED In the past four fiscal years, the CBA has conducted a review of CE for 153,982 licensees via the CE Review and CE Verification programs. NUMBER OF AUDITS FAILED AND PERCENTAGE RATE The CBA identified 23,092 deficiencies, amounting to a 15 percent deficiency rate. Working collaboratively with licensees, only 324 licensees remained deficient, which resulted in referral to the Enforcement Division. e. What is the board’s course approval policy? The CBA does not pre-approve CE courses (with exception of the Regulatory Review course prescribed in CBA Regulations section 87.8). Licensees are obligated to select appropriate CE courses/programs that are consistent with the requirements as outlined in the CBA Regulations. As licensees are located not only in California but also throughout the country and the world, this allows licensees the ability to select CE based on their specific needs and area of practice. Licensees have the ability to select CE from a wide range of providers, which include private institutions; national, state, and local accounting organizations; universities and colleges; and professional development courses offered by a licensee’s accounting firm. Organizations seeking to offer acceptable CE to California licensees, the CBA has added to its website a section for CE providers with links (including a list of frequently asked questions) to aid organizations in establishing courses/programs consistent with the CBA Regulations. Organizations seeking to offer a Regulatory Review course must submit an application for approval. Along with the application, the course provider must submit various supporting documentation as required by CBA Regulations section 87.9. Upon approval, the course provider must renew the course biennially with the CBA. This is to ensure that the course providers are reviewing the CBA Regulations on a recurring basis and are familiar with the ongoing changes associated with the CBA. The course is approved and/or renewed based upon the requirements outlined in section 87.9 of the CBA Regulations.

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f. Who approves CE providers? Who approves CE courses? If the board approves them, what is the board application review process? APPROVAL OF CE PROVIDER/COURSES The CBA does not pre-approve or register CE providers or CE courses other than the two-hour Regulatory Review course. It is the responsibility of each licensee to select acceptable CE courses, which fulfill all requirements provided in the CBA Regulations sections 88, 88.1, 88.2, and 89. CE PROVIDER/COURSES APPLICATION REVIEW PROCESS CE providers interested in offering the two-hour Regulatory Review course must meet the requirements outlined in section 87.9 of CBA Regulations and complete a Regulatory Review Course Initial Application Package (CE-RR-1), both of which are available on the CBA website. Upon receipt of the completed CE-RR-1 packet, CBA staff reviews the submission in its entirety to ensure compliance with all requirements and works collaboratively with CE providers to rectify any deficiencies. g. How many applications for CE providers and CE courses were received? How many were approved? NUMBER OF CE PROVIDERS/COURSES APPLICATIONS RECEIVED Since July 2011, the CBA has received 16 Regulatory Review courses from course providers for review. NUMBER OF CE PROVIDERS/COURSES APPROVED The CBA has approved eight of the 16 Regulatory Review courses received. For the remaining eight courses, the provider is either continuing to work through the outstanding deficiencies or has elected not to resubmit the course for reconsideration. h. Does the board audit CE providers? If so, describe the board’s policy and process. To date the CBA has not had to audit a Regulatory Review course provider. With the renewal of the course occurring on a biennial basis, the CBA has an opportunity to review the course without significant time having lapsed. However, should the CBA elect to audit the records of a CE provider to ensure compliance with section 87.9 of CBA Regulations, the provider must provide all materials requested by the CBA within 15 days of receipt of written notification. The CBA may cancel its approval of a two-hour Regulatory Review course if it is found not to be in compliance.

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i. Describe the board’s effort, if any, to review its CE policy for purpose of moving toward performance based assessments of the licensee’s continuing competence. The CBA has a long history of evaluating its regulations related to CE to ensure that overall outcome is meaningful education that contributes to licensees’ ability to practice public accountancy. As it relates to performance-based assessments (i.e. re-testing, CE providers testing, practice monitoring), over the years the CBA has eliminated non-interactive self-study programs, enhanced requirements related to interactive self-study CE, pioneered regulations related to CE offered via webcast, and instituted mandatory peer review for accounting firms providing accounting and auditing services. For well over a decade now, the CBA has not accepted non-interactive CE, and has required that self-study modules not only be interactive, but also require individuals to pass a test at the conclusion of the course. The interactive component must include frequent participant response to questions that test for understanding throughout the course, and provide evaluated feedback for incorrectly answered questions and reinforcement feedback for correctly answered questions. As for the final test, industry standards generally require a passing score of 70 percent to obtain CE credit. Additionally, in 2013, the CBA promulgated regulations that no longer allow for true/false questions on the final test. As for CE given via webcast, California was one of, if not the first state, to enact regulations related to monitoring webcast CE. Recognizing the need to balance the convenience to participants of completing CE via a webcast method, and the overall purpose of CE to increase or maintain professionals’ currency of knowledge so as to protect consumers, the CBA created a method to require constant attendance monitoring throughout the event, as well as require CE providers to allow for an interactive method so that participants can ask questions and receive real-time responses.

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Case Study for Continuing Education Requirements

Sarah Burnhart, CPA is due for license renewal on November 30, 2016. According to her records and those of the Board of Accountancy, this is also her year for renewal of her regulatory review requirement as it has been six years since she last completed her PC&E course. Sarah’s accounting practice consists of tax, management services, monthly write-up, and one compilation without disclosures. She is trying to take into account all of the new CPE requirements so that she will be able to renew her license on time. After reviewing Chapter 1 – Article 1.5 and Appendix A, Sarah realizes she needs to have completed:

• 80 total hours of CPE of which at least 40 hours must be in technical areas

• 24 hours of A&A courses – since even one compilation requires the completion of these courses

• 4 hours of fraud because she is subject to the A&A requirement

• 4 hours of “general ethics”

• 2 hours of California’s new Regulatory Review course

Issues for discussion:

• Sarah has been extremely busy with all of her new clients so she has taken off the month of June to catch up on all of her CPE.

• Sarah needs to consider whether continuing to service her one compilation client is cost effective because of the additional A&A and fraud requirements. What are her alternatives?

• Sarah finds that she has several options with regard to the 2-hour Regulatory Review course. What are the advantages and disadvantages of taking the course live, through a webcast, or via self-study?

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Appendix B - Enforcement and Disciplinary Actions

Enforcement The rules governing today’s licensees are proscribed by several different organizations including the AICPA, the International Federation of Accountants (IFAC), the California Society of CPAs, and the California Board of Accountancy. Of all the rules, the latter is the most important because it is the Board of Accountancy which issues our license to practice. Article 6 of The Accountancy Act lays out the CBA’s rules for disciplinary proceedings. Articles 12.5 and 13 of the California Code of Regulations further defines how they are enforced. The following discussion integrates the Rules and Regulations to assist practitioners with the practical aspects of enforcement and discipline. The Board has the power to revoke, suspend or impose probation on a licensee, or it can issue citations and fines. In extreme cases the Board can also obtain an injunction, restraining order, or other court order when an immediate public need is present.

After a Complaint is Filed When the CBA receives a complaint, an investigation is conducted. Information regarding a complaint generally is gathered by an investigator and is often accompanied by a licensee’s appearance before the CBA’s Enforcement Advisory Committee. In some cases, information is gathered by the Department of Consumer Affairs’ Division of Investigation. Complaints over which the Board lacks authority, such as fee disputes, are closed without further investigation. Both the complainant and the licensee may be contacted to provide additional information. Usually the licensee is requested to provide a written response to the complaint within 30 days. Most complaints are closed at this stage. If the case is closed, the complainant is notified in writing of the action and the reason for the closure. The fact that a case is closed does not necessarily mean that the act was not committed - only that the available evidence is not sufficient to provide the “clear and convincing” standard required to support a violation of the Accountancy Act. An investigation may result in:

1. Closure of the case with no violation of the Accountancy Act or CBA Regulations 2. Requirement that the license take prescribed continuing education 3. Issuance of a citation and fine 4. Referral of the case to the Attorney General’s Office for disciplinary action.

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Author’s Note: Many practitioners are not aware that the CBA issues more citations than formal disciplinary orders. The most common areas for citations are: practicing without a valid permit, continuing education violations, using an unregistered firm name, or failing to respond to CBA inquiries. Article 12.5 Citations and Fines Section 95 – Citations (a) The executive officer of the board, in lieu of filing an accusation seeking the suspension or revocation of any permit or certificate or the censure of the holder of any such permit or certificate pursuant to Sections 5100, 5101 and 5156 of the Business and Professions Code, may issue a citation to any person as defined in Section 5035 of the Business and Professions Code who holds a permit or certificate from the board for a violation of any provision of the Accountancy Act or any regulation adopted by the board. (b) In his or her discretion, the Board's executive officer may issue a citation under this section to a licensee for a violation of a term or condition contained in a decision placing that licensee on probation. Section 95.1 - Citation Format Each citation: (a) shall be in writing; (b) shall describe with particularity the nature of the violation, including specific reference to the provision of law determined to have been violated; (c) may contain an assessment of an administrative fine, an order of correction or abatement fixing a reasonable period of time for correction or abatement of the violation, or both an administrative fine and an order of correction or abatement; (d) shall be served in accordance with the provisions of Section 11505 (c) of the Government Code; (e) shall inform the cited person that if he or she desires a hearing to contest the finding of a violation, that hearing shall be requested by written notice to the board within 30 calendar days of the issuance of the citation or assessment. Section 95.2 - Fines. The amount of the administrative fine assessed by the executive officer pursuant to this article shall not be less than $100 or more than $5,000 for each investigation.

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Section 95.3 - Citation Factors. In assessing an administrative fine or issuing an order of correction or abatement, the executive officer of the board shall give due consideration to the following factors: (a) The gravity of the violation. (b) The good or bad faith of the cited person or entity. (c) The history of previous violations. (d) Evidence that the violation was or was not willful. (e) The extent to which the cited person or entity has cooperated with the board's investigation. (f) The extent to which the cited person or entity has mitigated or attempted to mitigate any damage or injury caused by the violation.

Section 95.4 - Failure to Comply with Citation. The failure of a licensee to comply with a citation containing an assessment of administrative fine, an order of correction or abatement or both an administrative fine and an order of correction or abatement after this citation is final and has been served in accordance with the provisions of Section 11505(c) of the Government Code shall constitute a ground for revocation or suspension of the license or permit. Section 95.5 - Appeals. Any person or entity served with a citation pursuant to this Article and Sections 125.9 and 148 of the Business and Professions Code may contest the citation by appealing to the board in writing within 30 calendar days of the issuance of the citation. The cited person or entity may contest any or all of the following aspects of the citation: (a) The occurrence of a violation of the Accountancy Act or a regulation adopted by the board. (b) The reasonableness of the order of correction or abatement. (c) The period of time allowed for correction in the order of correction or abatement. (d) The amount of the administrative fine. If the cited person or entity fails to notify the Board of his/her/its intent to contest the citation, the citation shall be deemed a final order of the Board and shall not be subject to administrative review. If a cited person or entity notifies the Board that he/she/it intends to contest a citation, the Board shall afford an opportunity for a hearing. The Board shall thereafter issue a decision, based on

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findings of fact, affirming, modifying or vacating the citation or penalty or both, or directing other appropriate relief. The proceedings under this Section shall be conducted in accordance with the provisions of Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code (the California Administrative Procedure Act). The failure of a cited person or entity who has appealed to the Board to appear at the time and place of the hearing shall be deemed a withdrawal of his, her or its appeal, and the citation shall constitute a final order of the Board and shall not be subject to administrative review.

Disciplinary Definitions Accusation – A formal document that notifies a licensee of the agency’s charges against the licensee. Cost Recovery – The licensee is ordered to pay the Board certain costs of investigation and prosecution including, but not limited to, attorney fees. Default Decision – The licensee failed to file a Notice of Defense or has otherwise failed to request a hearing, object, or otherwise contest the accusation. The Board takes action without a hearing based on the accusation and documentary evidence on file. Effective Date – The date the disciplinary decision becomes operative. Probation – The licensee may continue to engage in activities for which licensure is required, under specific terms and conditions. Reinstatement – A revoked license that is restored, not sooner than one year from the date of revocation, to a clear or inactive status after petition to and approval by the CBA. Reinstatement may include probation and/or terms and conditions. Revocation – The individual, partnership, or corporation is no longer licensed as a result of a disciplinary action. Stayed - The action does not immediately take place and may not take place if the licensee complies with other conditions (such as a probation term). Stipulation – The action is negotiated and settled without going to hearing. Surrendered – The licensee has surrendered the license. The individual, partnership, or corporation no longer is licensed. The CBA, however, may impose discipline against a surrendered license in certain circumstances. Surrender also may require certain condition be met should the former licensee ever choose to reapply for licensure. Suspension – The licensee is prohibited for a specific period of time from engaging in activities for which licensure is required.

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Terms of Probation

The standard terms of probation state that the respondent must:

• Obey all Federal, state, and local laws including those rules relating to the practice of public accountancy in California

• Submit within 10 days of the end of each quarter, written reports to the CBA on a form

provided by the CBA

• Submit such other reports declarations and verifications of actions as required by the CBA

• Appear in person at interviews or at meetings as directed by the CBA

• Comply with the terms and conditions of the probation

• Be subject to a “practice investigation”

• Comply with all final orders of the CBA

• Not leave California to reside or practice accounting without notifying the CBA

If respondent violates probation in any respect, the CBA may revoke probation and carry out any enforcement order that was stayed. Upon successful completion of probation, respondent’s license will be fully restored.

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Historic and Recent Disciplinary Actions During 2011, the Department of Consumer Affairs launched a new initiative to overhaul the enforcement processes called the Consumer Protection Enforcement Initiative (CPEI). As part of the process, they established eight performance measures:

• Number of complaints received

• Average number of days to complete complaint intake

• Average number of days to complete investigations NOT resulting in formal discipline

• Average number of days to complete investigations resulting in formal discipline

• Average cost of intake and investigation of complaints

• Consumer satisfaction with the services rendered

• Average number of days from the date a probation monitor is assigned to the date the

monitor makes contact

• Average number of days from the time a violation is reported to the program to the time

the probation monitor responds

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Some recent disciplinary examples from the Fall 2015 issue of the Update:

Enforcement Actions

APPLEWHITE, JEFFERY DESHON Inglewood, CA (CPA 41024) CBA Actions: Revocation of CPA License, via default decision. Effective August 29, 2015 Cause for Discipline: Accusation No. AC-2013-6 contains the following allegations: Mr. Applewhite is subject to disciplinary action in that he was convicted on April 28, 2014, of 20 felony counts of aiding and assisting preparation and presentation of false and fraudulent federal tax returns from on or about April 10, 2006, to on or about March 14, 2011. Mr. Applewhite was sentenced to serve 36 months in federal prison. He was also ordered to be on supervised release with standard and special conditions of supervision for one year upon release from imprisonment. Grounds exist to revoke Mr. Applewhite’s probation in that he did not comply with the following terms and conditions of his probation: • Obey all laws • Cost reimbursement • Submit written reports • Comply with probation Violations Charged: Business and Professions Code, Division 1.5, Chapter 2, § 490; Division 3, Chapter 1, § 5100(a), (i) and (j).

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CRAWFORD, SCOTT MCNEIL Oakland, CA (CPA 34934) CBA Actions: Revocation of CPA License, via default decision. Effective August 29, 2015 Cause for Discipline: Accusation No. AC-2015-27 contains the following allegations: Mr. Crawford is subject to disciplinary action in that he failed to furnish records to clients upon request and reasonable notice. Mr. Crawford is subject to disciplinary action in that he engaged in the practice of public accountancy without holding a valid permit issued by the CBA. Mr. Crawford is subject to disciplinary action in that he failed to notify the CBA of a change in his address of record within 30 days after the change. Mr. Crawford is subject to disciplinary action in that he failed to respond to numerous CBA inquiries. Mr. Crawford is subject to disciplinary action in that he advertised and/or used other forms of solicitation in a false, fraudulent, and/or misleading manner. Mr. Crawford is subject to disciplinary action in that he failed to comply with two citations issued by the CBA. Violations Charged: Business and Professions Code, Division 3, Chapter 1, §§ 5037 (b)(1), (b)(2), 5050 (a) and 5100 (g). California Code of Regulations, Title 16, Division 1, §§ 3 (a)(1), 52 (a), 63, 68, and 95.4.

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HRADOWY, EDWARD JOHN San Ramon, CA (CPA 15661) CBA Actions: Revocation of CPA License, via default decision. Effective July 5, 2015 Cause for Discipline: Accusation No. AC-2015-45 contains the following allegations: Mr. Hradowy is subject to disciplinary action in that he willfully failed to respond to multiple CBA inquiries. Mr. Hradowy is subject to disciplinary action in that he failed to comply with a final citation. Violations Charged: Business and Professions Code, Division 3, Chapter 1, § 5100 (g). California Code of Regulations, Title 16, Division 1, §§ 52 and 95.4.

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MALONEY, KENT PAUL Diamond Springs, CA (CPA 19229) CBA Actions: Revocation of CPA License, via default decision. Effective August 29, 2015 Cause for Discipline: Accusation No. AC-2015-36 contains the following allegations: Mr. Maloney is subject to disciplinary action in that on or contest to violating California Penal Code (PC) section503, embezzlement, a felony, with the enhancement of PC section 12022.6 (a)(2) for embezzling an amount in excess of $200,000. Mr. Maloney is subject to disciplinary action for unprofessional conduct in that he willfully violated Code section 5063 by failing to report his felony conviction to the CBA within 30 days of the conviction. Mr. Maloney is subject to disciplinary action in that he converted, stole, diverted, misappropriated, or embezzled money, property, or other valuable consideration by illegal conduct, fraudulent means, or false pretenses. Mr. Maloney is subject to disciplinary action in that his actions and conduct were dishonest and a breach of his fiduciary obligation to a charity. Violations Charged: Business and Professions Code, Division 1.5, Chapter 2, § 490; Division 3, Chapter 1, §§ 5063, 5100 (a), (g), (i), and (k). California Code of Regulations, Title 16, Division 1, § 99(a).

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MCKINNEY, GORDON ALAN La Habra, CA (CPA 28037) CBA Actions: Revocation of CPA License, via default decision. Effective August 29, 2015 Cause for Discipline: Accusation No. AC-2015-13 contains the following allegations: Mr. McKinney is subject to disciplinary action in that his firm “McKinney & McPeak CPAs” is not registered with the CBA. Mr. McKinney is subject to disciplinary action in that he failed to respond to the CBA’s multiple inquiries and requests for information regarding the status of his peer review, and unregistered firm name. In a prior disciplinary action entitled In the Matter of the Accusation Against Gordon Alan McKinney, filed on March 5, 2009, case number AC-2009-10, the CBA alleged that Mr. McKinney was subject to discipline for several violations, including, willfully violating Code section 5060 (b) by practicing under the name of McKinney & McPeak CPAs, from approximately 1984 through at least November 2007, without being registered or licensed with the CBA. In the prior disciplinary action effective June 25, 2009, Mr. McKinney’s CPA License No. 28037 was revoked, the revocation was stayed, and Mr. McKinney was placed on probation for a period of three years with certain terms and conditions, including a suspension for 180 days. Violations Charged: Business and Professions Code, Division 3, Chapter 1, §§ 5100 (g) and 5060. California Code of Regulations, Title 16, Division 1, § 52 (a).

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MCPEAK, RICK L. Fullerton, CA (CPA 102506) CBA Actions: Revocation of CPA License, via default decision. Effective August 29, 2015 Cause for Discipline: Accusation No. AC-2015-12 contains the following allegations: Mr. McPeak is subject to disciplinary action in that his CPA license expired on January 31, 2013, and he continued to practice public accountancy without a valid CPA certificate. Mr. McPeak is subject to disciplinary action in that he failed to comply with a citation order issued to him on February 3, 2012 (CT-2012-107). Mr. McPeak is subject to disciplinary action in that his firm “McKinney & McPeak CPA’s” is not registered with the CBA. Mr. McPeak is subject to disciplinary action in that he failed to respond to the CBA’s multiple inquiries and requests for information regarding the status of his peer review, compliance with citation order CT-2012-107, and the unregistered firm name. On March 19, 2008, the CBA issued Citation Order No. CT-2008-12 to Mr. McPeak as a result of him having engaged in the practice of public accountancy in California without a valid permit during the period from April 2005 to at least November 2007. Mr. McPeak complied with the Citation Order and paid the administrative fine. Violations Charged: Business and Professions Code, Division 1, Chapter 1, § 125.9 (b)(5); Division 3, Chapter 1, §§ 5050 (a), 5060 and 5100 (g). California Code of Regulations, Title 16, Division 1, §§ 52 (a) and 95.4.

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MEYER, CHRISTINE N. San Diego, CA (CPA 80336) CBA Actions: Revocation of CPA License, via default decision. Effective August 29, 2015 Cause for Discipline: Accusation No. AC-2015-34 contains the following allegations: Ms. Meyer is subject to disciplinary action in that on or about September 17, 2014, she was convicted on a plea of guilty to one count of Penal Code (PC) section 487 (a) (grand theft), with an enhancement charge under PC section 186.11 (a)(2) for committing a pattern of theft or embezzlement exceeding $500,000, and two counts of violating PC section 470 (d) (forgery), all felonies. As a result of the conviction, Ms. Meyer was sentenced on December 29, 2014, to a total term of five years in State prison, and ordered to pay restitution in the amount of $892,860.48 to her victim, as well as to comply with other terms, fees, and fines. At the time of her sentencing, Ms. Meyer made a partial payment of restitution to her victim in the amount of $300,000. Ms. Meyer is subject to disciplinary action in that she engaged in conduct constituting fraud and dishonesty towards her client and his businesses. Ms. Meyer is subject to disciplinary action in that she engaged in conduct constituting fiscal dishonesty or breach of fiduciary responsibility towards her client and his businesses. Ms. Meyer is subject to disciplinary action in that she engaged in conduct constituting embezzlement, theft, misappropriation of funds or property, or obtaining money, property, or other valuable consideration by fraudulent means or false pretenses. Violations Charged: Business and Professions Code, Division 1.5, Chapter 2, § 490; Division 3, Chapter 1, § 5100 (a), (c), (i) and (k).

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SHERB, STEVEN J. Mutton Town, NY (CPA 71385) CBA Actions: Revocation of CPA License, via default decision. Effective July 5, 2015 Cause for Discipline: Accusation No. AC-2014-70 contains the following allegations: Mr. Sherb is subject to disciplinary action in that his right to practice before the United States Securities and Exchange Commission (SEC) was suspended and Mr. Sherb was disciplined by the SEC. On or about November 6, 2013, Mr. Sherb was denied the privilege of appearing or practicing before the SEC as an accountant. After five years from that date, Mr. Sherb is eligible to apply to resume appearing or practicing before the SEC as an independent accountant. Mr. Sherb is subject to disciplinary action in that he failed to comply with a citation containing an assessment of an administrative fine. On or about November 12, 2013, the CBA imposed an administrative fine of $250 on Mr. Sherb for failure to respond to multiple CBA inquiries. Mr. Sherb did not comply with the citation or pay the fine. Violations Charged: Business and Professions Code, Division 3, Chapter 1, § 5100 (g), (h) and (l). California Code of Regulations, Title 16, Division 1, § 95.4.

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AYLWARD, WILLIAM KEVIN Cherry Valley, CA (CPA 47025) CBA Actions: Revocation stayed with three years’ probation, via stipulated settlement. Mr. Aylward shall reimburse the CBA $3,000.25 for its investigation and prosecution costs. Mr. Aylward shall be prohibited from providing audit, review, and compilation services until he provides proof that a peer review has been accepted by a Board recognized peer review program provider. Mr. Aylward shall complete four hours of continuing education (CE) in ethics. The course hours shall be completed by September 30, 2015, and are in addition to the CE hours required for relicensing. Mr. Aylward shall complete a CBA-approved Regulatory Review course. The course hours shall be completed by September 30, 2015, and are in addition to the CE hours required for relicensing. During the period of probation, all audit, review, and compilations reports and work papers shall be subject to peer review by a Board-recognized peer review program provider at Mr. Aylward’s expense. The peer review shall be completed by September 30, 2015. Mr. Aylward shall complete and provide proper documentation of 16 hours of CE in accounting and auditing subject matter each year he is on probation for a total of 48 hours of CE during the three years of probation. The 16 hours of CE shall be completed by December 31st of each year of probation, and are in addition to CE hours for relicensing. During the period of probation, if Mr. Aylward undertakes an audit, review, or compilation engagement, he shall submit to the CBA as an attachment to the required quarterly report a listing of the same. The CBA or its designee may select one or more from each category and the resulting report and financial statement and all related working papers must be submitted to the CBA or its designee upon request. Maintain an active status license. Other standard terms of probation. Effective July 5, 2015 Cause for Discipline: Accusation No. AC-2014-55 contains the following allegations: Mr. Aylward is subject to disciplinary action in that he renewed his certified public accountant certificate for the renewal period that ended on January 31, 2013, knowing that he had not completed the mandatory peer review.

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Mr. Aylward is also subject to disciplinary action in that he failed to comply with CBA laws and regulations, which required him to obtain a peer review no later than July 1, 2011, prior to the renewal of his CPA certificate. Mr. Aylward is subject to disciplinary action in that he failed to respond to the CBA’s multiple requests for information regarding the status of his peer review. Violations Charged: Business and Professions Code, Division 1.5, Chapter 5, § 498; Division 3, Chapter 1, §§ 5076, 5100 (b) and (g). California Code of Regulations, Title 16, Division 1, §§ 40, 41, 45 and 52.

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BALDWIN, BRADLEE YEATS San Marcos, CA (CPA 127309) CBA Actions: Upon meeting all pre-licensure requirements, a certified public accountant license will be issued to Mr. Baldwin and immediately revoked. The revocation will be stayed and Mr. Baldwin is placed on five years’ probation with the following terms and conditions: Mr. Baldwin shall complete four hours of CE in ethics within the first 12 months of probation. Mr. Baldwin shall at all times maintain an active license status with the CBA, including during any period of suspension. Other standard terms of probation. Effective July 5, 2015: All pre-licensure requirements were met and a license was issued on July 31, 2015. Cause for Denial: Statement of Issues No. SI-2015-40 contains the following allegations: Mr. Baldwin is subject to disciplinary action in that he was convicted of crimes that are substantially related to the qualifications, duties, and functions of a certified public accountant. Other Enforcement Actions Through August 29, 2015: On or about November 30, 2001, Mr. Baldwin pled guilty to violating Health and Safety Code section 11550 (a), under the influence of a controlled substance, a misdemeanor. Mr. Baldwin’s probation was revoked on April 9, 2003, and a bench warrant was issued. On or about December 21, 2001, Mr. Baldwin was convicted on his plea of nolo contendere to violating Penal Code (PC) section 484 (a), theft, a misdemeanor. On or about January 11, 2002, Mr. Baldwin was convicted on his plea of guilty to violating PC section 12020 (a)(4), possession of a dirk/dagger, a misdemeanor. On or about June 13, 2003, Mr. Baldwin was convicted on his plea of guilty to violating PC section 243 (b), battery upon an officer and emergency personnel, a misdemeanor. On or about January 6, 2004, Mr. Baldwin was convicted on his plea of guilty to violating PC section 484/490.5, petty theft with a prior theft conviction, a misdemeanor. Mr. Baldwin’s application is subject to denial in that he was twice convicted of theft, a crime that involves dishonesty, fraud, or deceit, with the intent to substantially benefit himself, or substantially injure another. Violations Charged: Business and Professions Code, Division 1.5, Chapter 5, §§ 480 (a)(1); (a)(3)(A); and (a)(2); Division 3, Chapter 1, § 5100 (a).

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BARAK, RICHTER & DROR, CPAs Los Angeles, CA (PAR 6812) CBA Actions: Revocation stayed with three years’ probation, via stipulated settlement. Respondent shall reimburse the CBA $4,840.23 for its investigation and prosecution costs. The payment shall be made within 90 days of the effective date of the CBA’s decision. Respondent shall be prohibited from providing audit, review, and compilation services until Respondent provides proof that a peer review has been accepted by a Board recognized peer review program provider. During the period of probation, all audit, review, and compilation reports and work papers shall be subject to peer review by a Board-recognized peer review program provider at Respondent’s expense. The peer review shall be completed by August 31, 2015. Other Enforcement Actions Through August 29, 2015 During the period of probation, if the Respondent undertakes an audit, review, or compilation engagement, the Respondent shall submit to the CBA an attachment to the required quarterly report a listing of the same. The CBA or its designee may select one or more from each category and the resulting report and financial statement, and all related working papers, must be submitted to the CBA or its designee upon request. Respondent shall pay to the CBA an administrative penalty in the amount of $5,000. The payment shall be made within 90 days of the effective date of the CBA’s decision. Maintain an active status license. Other standard terms of probation. Effective July 5, 2015 Cause for Discipline: Accusation No. AC-2014-44 contains the following allegations: Respondent is subject to disciplinary action in that Respondent failed to submit to the CBA a completed Peer Review Reporting Form and failed to complete a peer review by a Board-recognized peer review program within 18 months of completing accounting and/or auditing services. Respondent is subject to disciplinary action in that Respondent engaged in unprofessional conduct by failing to comply with the order of correction on a citation issued by the CBA. Respondent is subject to disciplinary action in that Respondent engaged in unprofessional conduct by failing to completely respond to an inquiry by the CBA within 30 days and/or by failing to provide true and accurate information in response to CBA’s questions or other requests for information.

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VIOLATION(S) CHARGED: Business and Professions Code, Division 3, Chapter 1, §§ 5076 (a) and 5100 (g). California Code of Regulations, Title 16, Division 1, §§ 40 (c), 41, 45 (c), 52 and 95.4. BARNA, CHRISTOPHER LEE AKA CHRIS BARNA Manteca, CA (CPA 116544) CBA Actions: Surrender of CPA license, via stipulated settlement. Mr. Barna shall pay the CBA for its costs of investigation and prosecution in the amount of $3,392.82 prior to issuance of a new or reinstated license. Effective July 5, 2015 Cause for Discipline: Accusation No. AC-2015-31 contains the following allegations: Mr. Barna is subject to disciplinary action on grounds of unprofessional conduct based on a criminal conviction. On or about May 30, 2013, Mr. Barna pled guilty to violating 18 U.S.C. section 1344 (bank fraud), a class B felony, a crime substantially related to the qualifications, functions, and duties of a certified public accountant. On or about December 12, 2013, Mr. Barna was sentenced to prison for 41 months followed by parole for 36 months. Mr. Barna’s sentence includes payment of restitution in the amount $1,016,505.90, and to forfeit to the United States all right, title, and interest to any and all assets subject to forfeiture pursuant to 18 U.S.C. section 982, subdivision (a)(2)(A), including, but not limited to, the real property located at 744 Monte Rosa Lane, Manteca, California. Mr. Barna failed to report his felony conviction to the CBA within 30 days of the conviction. Other Enforcement Actions Through August 29, 2015 Mr. Barna is subject to disciplinary action, in that he converted, stole, diverted, misappropriated, or embezzled money, property, or other valuable consideration by illegal conduct, fraudulent means, or false pretenses. Violations Charged: Business and Professions Code, Division 1.5, Chapter 2, § 490; Division 3, Chapter 1, §§ 5063, 5100 (a), (g) and (k).

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Some examples of disciplinary actions with historical importance: ERNST & YOUNG LLP Los Angeles, CA (PAR 5413) CBA Actions: 30-day suspension stayed with 18 months’ probation, via stipulated settlement. Ernst & Young LLP shall comply with all requirements imposed by the Public Company Accounting Oversight Board (PCAOB) in its February 8, 2012, Order and report such compliance in its quarterly written reports submitted to the CBA. Ernst & Young LLP shall comply with all requirements imposed by the Securities and Exchange Commission (SEC) in its July 14, 2014, Order and report such compliance in its quarterly written reports submitted to the CBA. Maintain an active license. Within 15 days of the effective date of the CBA’s order, Ernst & Young LLP shall disseminate the Stipulated Settlement and Disciplinary Order to all of its professional personnel officed in California, and shall confirm such dissemination in writing to the CBA. Ernst & Young LLP shall pay an administrative penalty in the amount of $600,000. Payment shall be made to the CBA within 60 days of the effective date of the order. Ernst & Young LLP shall reimburse the CBA a sum not to exceed $100,000 for its investigation and prosecution costs, including those costs associated with probation monitoring. The CBA will periodically present Ernst & Young LLP with a certified statement of costs to date, including additional costs incurred during probation, and Ernst & Young LLP shall pay those costs to the CBA within 30 days thereafter. If costs are billed after the completion of the probationary period, the obligation to pay the costs shall continue, but the probation shall not be extended thereby. Other standard terms of probation. Effective August 29, 2015 Cause for Discipline: Accusation No. AC-2014-22 contains the following allegations: Ernst & Young LLP is subject to disciplinary action in that on or about February 8, 2012, the PCAOB imposed disciplinary sanctions against Ernst & Young LLP. Specifically, the PCAOB ordered, in pertinent part, that Ernst & Young LLP was censured. Additionally, the PCAOB imposed a civil money penalty in the amount of $2,000,000. The PCAOB imposed sanctions on Ernst & Young LLP on the basis of finding that Ernst & Young LLP violated PCAOB rules and auditing standards related to the Ernst & Young LLP’s audits of the December 31, 2005, 2006, and 2007 financial statements of Medicis Pharmaceutica

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Corporation (Company), as well as consultation concerning the Company’s accounting for product returns stemming from Ernst & Young LLP’s Audit Quality Review of the December 31, 2005, audit in 2006 (the 2006 AQR) for the Company. Ernst & Young LLP is subject to disciplinary action in that on or about July 14, 2014, the SEC imposed disciplinary sanctions against Ernst & Young LLP. The SEC ordered that Ernst & Young LLP shall cease and desist from committing or causing any violations and any future violations of Rule 2-02 (b)(1) of Regulations S-X, Section 13 (a) of the Exchange Act, and Rule 13a-1 promulgated thereunder; Ernst & Young LLP was censured; and Ernst & Young LLP shall, within 10 days of the issuance of its order, pay disgorgement of $1,240,000, together with prejudgment interest thereon of $351,925.98, and a civil money penalty of $2,480,000, for a total of $4,071,925.98 to the U.S. Treasury. Violations Charged: Business and Professions Code, Division 3, Chapter 1, § 5100 (l).

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MOSS ADAMS LLP Seattle, WA (PAR 4524) Effective August 25, 2006 CBA Actions: Suspension of PAR license for 30 days stayed, with 18 months’ probation, via stipulated settlement. Moss Adams LLP’s attest personnel licensed in California are required to complete a minimum of four hours of continuing education in the area of engagement coordination and documentation to be completed by March 1, 2007. Moss Adams LLP shall provide certification of completion of this requirement by April 1, 2007. Within 30 days from the adoption of the stipulated settlement, Moss Adams LLP shall disseminate a copy of the stipulated settlement to Moss Adams LLP’s professional personnel officed in California and shall confirm such dissemination in writing to the Board. Moss Adams LLP is required to reimburse the Board $35,000 for its investigation and prosecution costs. Cause for Discipline : Accusation AC-2006-5 contains allegations that Moss Adams LLP is subject to discipline for unprofessional conduct including gross negligence, repeated negligent acts, failure to comply with professional standards, and issuing review reports that did not comply with professional standards. The charges are based on Moss Adams LLP’s engagements to review the financial statements for Lanico, Inc. as of and for the years ended December 31, 1998 and 1999. The Board’s charges include allegations that Moss Adams LLP failed to properly perform the review engagements and failed to exercise due professional care. Allegations also include Moss Adams LLP’s failures to modify its accountant’s reports and to properly date the reports in accordance with professional standards. For purposes of settlement, Moss Adams LLP agrees that the Board could establish a factual basis for the charges and if proven at a hearing constitute cause for discipline upon its license. Violations Charged: Business and Professions Code, Division 3, Chapter 1, §§ 5062 and 5100 (c). California Code of Regulations, Title 16, Division 1, § 58.

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KPMG LLP Los Angeles, CA (PAR 157) Effective January 18, 2008 CBA Actions: Suspension of CPA Partnership for one year stayed, with three years’ probation, via stipulated settlement. Probation terms include:

• Administrative sanction of $1,000,000.

• Cost reimbursement to the Board for its costs of investigating and prosecuting this and related tax shelter cases.

• Dissemination of the Stipulated Settlement within 30 days to all KPMG professional personnel

located in California offices.

• Cooperation with the Board in its ongoing investigation and prosecution of other Board licensees regarding KPMG tax shelters.

• Other standard terms and conditions.

Cause for Discipline: On or about August 26, 2005, the United States Attorney’s Office for the Southern District of New York and KPMG entered into a Deferred Prosecution Agreement (DPA) along with an accompanying Statement of Facts. KPMG consented to the filing of a one-count Information (which was dismissed upon KPMG’s successful compliance with the DPA). This Information charged KPMG with participating in a conspiracy to defraud the United States and its agency the Internal Revenue Service to commit tax evasion, to make and subscribe false and fraudulent tax returns, and to aid and assist in the preparation and filing of said tax returns. Within the DPA and the associated Statement of Facts, KPMG accepted responsibility for violations of law. KPMG admitted, through the conduct of certain KPMG tax leaders, partners, and employees, KPMG had assisted high net worth United States citizens to evade United States individual income taxes on billions of dollars in capital gain and ordinary income by developing, promoting and implementing unregistered and fraudulent tax shelters. Accusation No. AC-2006-28 incorporated the facts admitted by KPMG in the DPA and its associated Statement of Facts. Causes for discipline within the accusation include: _ Fraud in the practice of public accountancy. _ Gross negligence in the practice of public accountancy. _ Dishonesty in the practice of public accountancy. _ Knowing preparation of false, fraudulent or materially misleading information. _ Willful failure to observe professional standards, and _ Conspiracy with unlicensed persons to violate the Accountancy Act. Violations Charged: Business and Professions Code, Division 3, Chapter 1, §§ 125, 5100, 5100 (c), (g), and (j).

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DELOITTE & TOUCHE LLP Los Angeles, CA (PAR 6515) Effective August 21, 2011 CBA Actions: Suspension of partnership certificate for 30 days via stipulated settlement. However, the suspension is stayed and 18 months probation is imposed with the following terms and conditions: Respondent shall comply with all the requirements imposed by the PCAOB Order and report such compliance to the CBA. Respondent shall provide to the CBA copies of its Leadership Oversight Committee minutes within 30 days of preparation. Respondent shall pay an administrative penalty of $300,000. Respondent shall disseminate the Stipulated Settlement and Disciplinary Order to all of its professional personnel offices in California within 15 days of the effective date of the order and shall confirm such dissemination in writing to the CBA. Respondent is required to reimburse the CBA a sum not to exceed $200,000 for its investigation and prosecution costs, including costs of probation monitoring. Other standard terms of probation. Cause for Discipline Respondent admits the truth of each and every charge and allegation in Accusation No. AC-2008-20. The accusation contains the following allegations: On or about December 10, 2007, the Public Company Accounting Oversight Board (PCAOB) imposed disciplinary sanctions against Respondent based on violations of PCAOB auditing standards. Without admitting or denying the findings in the order, Respondent consented to the order that censured Respondent; imposed a $1,000,000 civil penalty; and required Respondent to maintain records in sufficient detail to describe its quality control policies and procedures regarding deployment of its audit partners. In its order the PCAOB found that Respondent failed to appropriately staff its 2003 Ligand Pharmaceuticals, Inc. audit engagement; failed to exercise due professional care in the performance of the audit; and failed to obtain sufficient competent evidential matter to support the opinion expressed in the audit report. Ligand Pharmaceuticals subsequently restated its 2003 financial statements recognizing approximately $59 million less in revenues from product sales (a decrease of approximately 52 percent), and reporting a net loss more than 2.5 times the net loss originally recognized in the audited financial statements. Violation(s) Charged: Business and Professions Code, Division 3, Chapter 1, § 5100 (l).

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Arthur Andersen related cases: Arthur Andersen LLP; Baptist Foundation of Arizona v. (Ariz. Super. Ct., Maricopa Cnty.), 153; 224; 295 Arthur Andersen’s role in Baptist Foundation of Arizona fraud case. Securities and Exchange Commission v. Arthur Andersen LLP, Robert E. Allgyer, Walter Cercavschi, and Edward G. Maier, Civil Action No. 1:01CV01348 (J.R.) (D.D.C. June 19, 2001) Settlement between Arthur Andersen and the SEC in Waste Management case. This as the case where Arthur Andersen was put on probation and led to the “death sentence” after Enron. UNITED STATES OF AMERICA against ARTHUR ANDERSEN, LLP (Title 18, U.S.C. CR H-02-121 §1512(b)(2) and 3551 et.seq.) Criminal charges for obstruction of justice against Arthur Andersen in Enron case.

Accountants may be liable in various situations: Board of Trustees of Community College Dist. No. 508 v. Coopers & Lybrand, --- N.E. --- (2002 WL 1751311, App. Ct., Ill., 2002) An accountant may be held liable for investment losses caused by a treasurer's bad behavior. Potts v. Securities and Exchange Comm., 1998 WL 436864 (---F.3d---, 8th Cir.) A concurring partner may be held responsible for audit errors. The U.S. Department of Justice separated the frauds they were pursuing into three parts:

• Accounting fraud • Self Dealing by Corporate Insiders • Obstructive Conduct

Securities and Exchange Commission v. ConAgra Foods, Inc. (http://www.sec.gov/news/press/2007/2007-142.htm)

Author’s Note: In addition to Arthur Andersen, several other accounting firms have been implicated in accounting and tax shelter related frauds. These include KPMG, Ernst & Young, and BDO Seidman.

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July, 2007 settlement between ConAgra and SEC regarding manipulation of earnings using reserves.

Securities and Exchange Commission v. McAafee (http://www.sec.gov/news/press/2007/2007-142.htm) 2007 case related to improper sales and channel stuffing Securities and Exchange Commission v. Nortel (http://www.sec.gov/news/press/2007/2007-39.htm) 2007 case where management manipulated earnings in order to declare large bonuses

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Case Study on Enforcement and Disciplinary Actions

Sammy Shortcut, CPA performed reviews and audits of financial institutions, not-for profit entities, and governmental entities. He wanted to be one of the biggest and most profitable sole practitioners in California. In order to do that, Sammy took shortcuts in performing his audit and review procedures. He also failed to keep up with his continuing education requirements and failed to register the name of his firm, Shortcut & Associates. Since Sammy did not have any associates he also was using a misleading and illegal professional name. Results of her Misdeeds: Unfortunately for Sammy, one of his clients had financial problems and the entire house of cards collapsed. Sammy was called before the Board of Accountancy and agreed to a stipulated settlement. He was put on three years’ probation, agreed to have all his attestation engagements reviewed prior to issuance, forced to take extra continuing education courses in ethics and in accounting and auditing, and pay nearly $20,000 in costs to the CBA to cover its cost of investigation and prosecution. Discussion Question: Do you believe this is a fair decision by the Board? What other punishments could the Board administer?

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Appendix C – Client Records One of the areas of complaints most commonly cited by the California Board of Accountancy is when clients are denied access to their records. Perhaps what makes this area so confusing is that the rules related to this access are not consistent from state-to-state or between states and the AICPA. Since these complaints are so common and since the Board of Accountancy has taken a very strong position with regard to this issue, I felt it would be helpful to discuss this issue from various perspectives. The California Accountancy Act: Section 5037 – Statements and other records as property of accountant; Access by client

(b) “All statements, records, schedules, working papers and memoranda made by a licensee or a partner, shareholder, officer, director, or employee of a licensee, incident to, or in the course of, rendering services to a client in the practice of public accountancy, except the reports submitted by the licensee to the client and except for records which are part of the client's records, shall be and remain the property of the licensee in the absence of an express agreement between the licensee and the client to the contrary. No such statement, record, schedule, working paper or memoranda shall be sold, transferred, or bequeathed, without the consent of the client or his or her personal representative or assignee, to anyone other than one or more surviving partners or stockholders or new partners or stockholders of the licensee, or any combined or merged firm or successor in interest to the licensee.”

(c) A licensee shall furnish to his or her client or former client, upon request and

reasonable notice:

(2) A copy of the licensee's working papers, to the extent that those working papers include records that would ordinarily constitute part of the client's records and are not otherwise available to the client.

(3) Any accounting or other records belonging to, or obtained from or on behalf

of, the client which the licensee removed from the client's premises or received for the client's account. The licensee may make and retain copies of documents of the client when they form the basis for work done by him or her.

Section 5037.1 – Construction of Section 5037

A licensee’s rights, duties and obligation under Section 5037 shall not be superseded by Section 17406 of the Financial Code.

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Board of Accountancy Regulations:

Section 68: Retention of Client's Records.

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. Unpaid fees do not constitute justification for retention of client records. Although, in general the accountant's working papers are the property of the licensee, if such working papers include records which would ordinarily constitute part of the client's books and records and are not otherwise available to the client, then the information on those working papers must be treated the same as if it were part of the client's books and records.

Section 68.1 Working Papers Defined; Retention.

(a) 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. They include, but are not limited to, audit of other programs, analyses, memoranda, letters of confirmation and representations, abstracts of company documents and schedules or commentaries prepared or obtained by the licensee. The form of working papers may be handwriting, typewriting, printing, photocopying, photographing, computer, data, or any other letters, words, pictures, sounds, or symbols or combinations thereof. (b) Licensees shall adopt reasonable procedures for the safe custody of working papers and shall retain working papers for a period sufficient to meet the needs of the licensee's practice and to satisfy applicable professional standards and pertinent legal requirements for record retention. (c) Licensees shall retain working papers during the tendency of any Board investigation, disciplinary action, or other legal action involving the licensee. Licensees shall not dispose of such working papers until notified in writing by the Board of the closure of the investigation or until final disposition of the legal action or proceeding if no Board investigation is pending.

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[Adapted from an article appearing in the California State Board of Accountancy UPDATE, Fall 1993]

Client Records: What They Are and What They Are Not

by Charles Chazen, CPA Reporting Standards Committee Chair Picture this scenario: the licensee completes the engagement, sends the client the financial statements and income tax returns, and follows up with a bill. The client, incensed at the amount of the bill, calls the licensee and shouts, “How did you come up with a fee that high? You must be crazy! You're fired! Return my records!" The licensee, in a fit of rage, responds, “You get nothing back until you pay my bill." As a licensee of the California State Board of Accountancy, he/she has just violated one of its rules and exposed himself/herself to a citation, fine or worse. Failure to return records is not an uncommon client complaint, nor an uncommon licensee violation. The Board's rule regarding retention of client records is often abused by licensees, with resulting punitive action by the Board. The problem is compounded by confusion over what are considered to be client records. Rule 68 of the State Board of Accountancy's Rules and Regulations under the California Accountancy Act, captioned “Retention of Client's Records," is clear and succinct with respect to unpaid fees. The definition of client's records, however, is not quite so clear and is often misinterpreted. The first paragraph of Rule 68 reads as follows:

"A licensee of the Board, 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. Unpaid fees do not constitute justification for retention of client records."

Thus, it is obvious that the intention of the Board is that licensees not be permitted to refuse to return client's records after the client asks for their return. The problem facing the licensee is what constitutes client records. Certain records unquestionably belong to the client. A client's journals, ledgers and other original books and records which are maintained by the licensee or otherwise come into the licensee’s possession obviously are client records. The client's bank statements, canceled checks, checkbooks, deposit slips, purchase invoices, creditor statements, original customer and creditor correspondence with the client, executed leases and contracts and other original client documents also fall into the category of client records. The ownership of other records in the licensee's possession may not be so obvious. The second paragraph of Rule 68 describes the status of accountant's working papers:

Although, in general the accountant's working papers are the property of the licensee. if such working papers include records which would ordinarily constitute part of the client's books and records and are not otherwise available to the client, then the information on those working papers must be treated the same as if they were part of the client's books and records.

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Some examples of what "ordinarily constitute part of the client's books and records and are not otherwise available to the client" are bank reconciliations, schedules of fixed assets, depreciation, insurance in force, unexpired insurance, and similar schedules prepared by the licensee which do not duplicate records already in the client's possession. Adjusting and closing journal entries (together with the supporting data) prepared by the licensee are considered the client's since their entry is required to complete the client's records. On the other hand, the licensee's working trial balances (unless they comprise the client's general ledger), account analyses, consolidating working papers, audit and other work programs, checklists supporting various accounting and auditing procedures, narratives and other notes made during the engagement, schedules of confirmation results and related correspondence, inventory procedures and tests are considered proprietary and the property of the licensee. If a licensee processes the client's transactions on his/her computer or by means of a service bureau, the resulting products are considered to be client records. Interim computer runs, such as “edits", are also client records unless and until they are updated or processed into final products. Copies of financial statements or tax returns for prior periods, not prepared by the licensee, which have been submitted to the licensee by the client (e.g., when there is a change in accountants) are client records. Invoices, contracts, client prepared schedules and other documents submitted to the licensee by the client for purposes of income tax or other tax return preparation remain the client's records. While it is customary for licensees to retain such material in the client's tax file to support positions taken or otherwise document the tax returns, they are subject to the client's demand for the return. The licensee, of course, may first make whatever copies he/she needs for his/her own files. Before the licensee completes the engagement a problem may arise with the client. For example, in the course of the preparation of an income tax return or financial statements, or even after they are completed but not yet released, a dispute may arise between the licensee and the client. The client may demand that the licensee submit the tax return or statement, whether completed or not, under the theory that since he/she has paid fees for their preparation, they are his/her records. Such licensees' work products are the property of the licensee, not client records, and thus do not fall under Rule 68. So when a client calls and asks for the return of his/her records, for whatever reason, don't insist that he/she first remit unpaid fees or impose any other conditions before they are returned. The licensee has the right to insist that the demand be made in writing by the client or his/her legal representative, but generally has no recourse other than to return the records. Prudence dictates that upon furnishing the documents to the client, the licensee appropriately document his/her files accordingly. If there is a court order or other legal impediment that might prevent their return, the licensee should consult his/her attorney. Today practitioners face a myriad of problems in pursuit of the rewards of practice. Failure to follow rules of the state Board is an avoidable risk. Licensees should have the good sense to read these rules, understand them, and abide by them, or be prepared to suffer what could be grave consequences.

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Case Study for Discussion of Client Records

Franzella, Sheldon and Werner, a California partnership of CPAs, has received a request from a former client for the return of workpapers. The firm has not had any contact with the client for over three years and suddenly they received this request. All the workpapers have now been put into storage and the partner and manager from the engagement are no longer with the firm. After retrieving the files, they realize that this was a client that came to them because of a merger. The partners are wondering why they received this request now. They are concerned that this may be the first steps to potential litigation. While reviewing the files, they discover a note that says that copies of the trial balance and adjusting entries were provided to the client upon termination. Werner says to his partners that they have no obligation to provide any workpapers to the client because they have already been provided once. Sheldon feels that they have a moral obligation to provide their clients with appropriate records, but is worried about possible litigation. Franzella isn’t sure about the requirements but wonders if this might not be a good opportunity to enhance relations with the former client and perhaps interest them in becoming a current client. Discussion Question: Who is right? What are the legal, ethical, and practical issues involved?

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Appendix D - California’s Mandatory Peer Review Program

Effective January 1, 2010, mandatory peer review took effect in California. All firms in California will be affected by the new reporting requirement. However, for those already participating in the AICPA Peer Review Program, there will be few, if any, changes. Reporting All firms must complete a form and submit it to the CBA prior to their renewal date. Firms that are not subject to peer review will merely check the appropriate box and submit it to the CBA. The forms will be available online and via hard copy. Eligibility All firms performing accounting and auditing services using generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS) are subject to peer review. Section 5035.1 defines a firm as a sole proprietorship, partnership or corporation. There is no exemption for small firms or sole practitioners. Each firm must undergo a peer review by a Board-recognized peer review program provider. Currently the only recognized program provider is the AICPA Peer Review Program. That program is administered by the California Society of CPAs. Phase-in The peer review program will be phased in over a three-year period based on the last two digits of the firm’s license number or, for a sole practitioner, the last two digits of his/her CPA license number. License numbers ending in 01-33 first became subject to peer review by July 1, 2011 (now they are coming around for a second time); license numbers ending in 34-66 became due by July 1, 2012; and license numbers ending in 67-00 became due by July 1, 2013. Peer Review Rules Because of its importance, the entire section of the Accountancy Act related to peer review has been reprinted below. Sec. 5076. (a) In order to renew its registration, a firm, as defined in Section 5035.1, shall have a peer review report of its accounting and auditing practice accepted by a board-recognized peer review program no less frequently than every three years. (b) For purposes of this article, the following definitions apply:

(1) "Peer review" means a study, appraisal, or review conducted in accordance with professional standards of the professional work of a firm and may include an evaluation of other factors in accordance with requirements specified by the board in regulations. The peer review report shall be issued by an individual who has a

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valid and current license, certificate, or permit to practice public accountancy form this state or another state and is unaffiliated with the firm being reviewed.

(2) "Accounting and auditing practice" includes any services that are performed using professional standards defined by the board in regulations.

(c) The board shall adopt regulations as necessary to implement, interpret, and make specific the peer review requirements in this section, including, but not limited to, regulations specifying the requirements for board recognition of a peer review program, standards for administering a peer review, extensions of time for fulfilling the peer review requirement, exclusions from the peer review program, and document submission.

(d) The board shall adopt emergency regulations in accordance with the Administrative Procedure Act (Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code) to establish policies, guidelines, and procedures as outlined in subdivision (c). The adoption of the regulations shall be considered by the Office of Administrative Law to be necessary for the immediate preservation of the public peace, health and safety, or general welfare. The emergency regulations shall be submitted to the Office of Administrative Law for filing with the Secretary of State and publication in the California Code of Regulations, and shall be replaced in accordance with the Administrative Procedure Act.

(e) Nothing in this section shall prohibit the board from initiating an investigation and imposing discipline against a firm or licensee, either as the result of a complaint that alleges violations of statutes, rules, or regulations, or from information contained in a peer review report received by the board.

(f) A firm issued a substandard peer review report, as defined by the board in regulation, shall submit a copy of that report to the board. The board shall establish in regulation the time period that a firm must submit the report to the board. This period shall not exceed 60 days from the time the report is accepted by a board-recognized peer review program provider to the date the report is submitted to the board.

(g) (1) A board-recognized peer review program provider shall file a copy with the board of all substandard peer review reports issued to California-licensed firms. The board shall establish in regulation the time period that a board-recognized peer review program provider shall file the report with the board. This period shall not exceed 60 days from the time the report is accepted by a board-recognized peer review program provider to the date the report is filed with the board. These reports may be filed with the board electronically.

(2) Nothing in this subdivision shall require a board-recognized peer review program provider, when administering peer reviews in another state, to violate the laws of that state.

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(h) The board shall, by January 1, 2010, define a substandard peer review report in regulation.

(i) Any requirements imposed by a board-recognized peer review program on a firm in conjunction with the completion of a peer review shall be separate from, and in addition to, any action by the board pursuant to this section.

(j) Any report of a substandard peer review submitted to the board in conjunction with this section shall be collected for investigatory purposes.

(k) Nothing in this section affects the discovery or admissibility of evidence in a civil or criminal action.

(l) Nothing in this section requires any firm to become a member of any professional organization.

(m) A peer reviewer shall not disclose information concerning licensees or their clients obtained during a peer review, unless specifically authorized pursuant to this section, Section 5076.1, or regulations prescribed by the board.

(n) (1) By January 1, 2015, the board shall provide the Legislature and Governor with a report regarding the peer review requirements of this section that includes, without limitation:

(A) The number of peer review reports completed to date and the number of reports which were submitted to the board as required in subdivision (f). (B) The number of enforcement actions that were initiated as a result of an investigation conducted pursuant to subdivision (j). (C) The number of firms that were recommended to take corrective actions to improve their practice through the mandatory peer review process, and the number of firms that took corrective actions to improve their practice following recommendations resulting from the mandatory peer review process. (D) The extent to which mandatory peer review of accounting firms enhances consumer protection. (E) The cost impact on firms undergoing mandatory peer review and the cost impact of mandatory peer review on the firm’s clients. (F) A recommendation as to whether the mandatory peer review program should continue.

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(G) The extent to which mandatory peer review of small firms or sole practitioners that prepare nondisclosure compiled financial statements on an other comprehensive basis of accounting enhances consumer protection. (H) The impact of peer review required by this section on small firms and sole practitioners that prepare nondisclosure compiled financial statements on an other comprehensive basis of accounting. (I) The impact of peer review required by this section on small businesses, nonprofit corporations, and other entities that utilize small firms or sole practitioners for the purposes of nondisclosure compiled financial statements prepared on an other comprehensive basis of accounting.

(J) A recommendation as to whether the preparation of nondisclosure compiled financial statements on an other comprehensive basis of accounting should continue to be a part of the mandatory peer review program.

(2) A report to the Legislature pursuant to this section shall be submitted in compliance with Section 9795 of the Government Code.

Sec. 5076.1. (a) The board shall appoint a peer review oversight committee of certified public accountants of this state who maintain a license in good standing and who are authorized to practice public accountancy to provide recommendations to the board on any matter upon which it is authorized to act to ensure the effectiveness of mandatory peer review.

(b) The committee may request any information from a board-recognized peer review program provider deemed necessary to ensure the provider is administering peer reviews in accordance with the standards adopted by the board in regulations. Failure of a board-recognized peer review program provider to respond to the committee shall result in referral by the committee of the provider to the board for further action. Any information obtained by the board, its representatives, or the peer review oversight committee in conjunction with its review of peer review program providers shall not be a public record, and shall be exempt from public disclosure, provided, however, this information may be disclosed under any of the following circumstances:

(1) In connection with disciplinary proceedings of the board.

(2) In connection with legal proceedings in which the board is a party.

(3) In response to an official inquiry by a federal or state governmental regulatory agency.

(4) In compliance with a subpoena or summons enforceable by court order.

(5) As otherwise specifically required by law.

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(c) The members of the committee shall be appointed to two-year terms and may serve a maximum of four consecutive terms.

(d) The board may adopt, as necessary, regulations further defining the minimum qualifications for appointment as a committee member and additional administrative elements designed to ensure the effectiveness of mandatory peer review.

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Case Study on Peer Review

Seth McFarland, CPA is a sole practitioner who recently opened up his own practice. Seth performs compilations and reviews for his clients. He is not a member of the AICPA and has never been a part of the peer review program. After attending a continuing education program, he realizes that he must have a peer review because of the mandatory California peer review program. Seth wonders who he should select as his peer reviewer and what he should do to prepare. Issues to consider: Due date - First of all Seth needs to determine when his due date under the peer review program will begin. Since Seth’s license number ends with number 76, he was not subject to the peer review requirements until July 1, 2013; but because he has just opened his practice, he is still not sure when his first peer review will be. In any case, after speaking with other practitioners and attending his annual A&A Update class, he realizes that waiting until just before the due date is not a wise choice. Trial practice review - The speaker suggested that he go through a trial run and hire someone to be his practice reviewer. He also suggested that he obtain the peer reviewers’ checklist and select one or two of his engagements and complete the checklist. According to the speaker, it is important that the peer reviewer have experience with his size practice and preferably the industries that Seth works on. Peer reviewer – Seth knows that he cannot use the same person to perform his trial practice review and his peer review. So Seth decided to get some references from fellow practitioners for both his trial practice review and his peer review. He can also ask his practice reviewer to recommend a peer reviewer. Discussion Question: Do you agree with Seth’s conclusions? Are there any other issues that need to be considered before embarking on his peer review?

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Appendix E - Audit Documentation

Business and Professions Code Section 5097 established documentation standards for all audits performed by California licensees. This applies not only to publicly-traded companies, but to all audits. These requirements are in addition to the documentation standards adopted in SAS 96. The new standards:

• Define audit documentation

• Require that the documentation be understandable by a knowledgeable person having no previous connection with the audit engagement

• Include a presumption that work that is not so documented was not performed

• Retained for a minimum of seven years

• Requires licensee to have written policies for retention and destruction of audit

workpapers.

Definition of Audit Documentation – Section 5097 (a) Audit documentation is defined as a licensee’s records of the procedures applied, the tests performed, the evidence obtained and relevant conclusions reached. It includes, but is not limited to, programs, analyses, memoranda, letters of confirmations and representation, copies or abstracts of company documents, and schedules or commentaries prepared or obtained by the licensee.

Author’s Comments: The engagements in which I most often noted this problem of documentation deficiency were not audits, but financial statement reviews. The SSARS specifically requires certain procedures to be performed – inquiry and analytical procedures. Yet far too often the evidence supporting these procedures was in the accountant’s head rather than on paper. While Section 5097 does not address engagements other than audits, do not be surprised if the standard is applied to other engagements. Try justifying why your requirement to comply with accounting standards is less important to the users in a compilation, review, or consulting engagement (banks, bonding companies, limited partners, etc.) than for users of your audited statements.

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Sufficient Documentation – Section 5097 (b) The standard of requiring that a knowledgeable person, not familiar with the client, be able to understand the workpapers is not new to accounting theory. However, having it embedded in accounting legislation is one that may give pause to many in the profession. Specifically the rule requires that a reviewer with relevant knowledge and experience, having no previous connection with the audit engagement, be able to understand the nature, timing, extent, and results of the auditing or other procedures performed. That person should also be able to identify the persons who performed and reviewed the work. Many firms have used a similar standard for second partner reviews. They want a person who has not been involved in the day-to-day activities of the audit to take a fresh look at the big picture. Sometimes those reviews only included the financial statements and did not include the workpapers. In order to comply with the new California requirements, firms may need to take a look at what responsibilities the second partner may need to assume. Alternatively, another supervisory person could be assigned the task of reviewing the workpapers with Section 5097 in mind. In addition, training classes for those who prepare and review workpapers will have to place renewed emphasis on the need for workpapers to stand on their own. Presumption that Work Was Not Performed – Section 5097 (c) The test here is clear. The burden of proof will shift to the auditor if documentation is not present. However the burden may still be met by the preponderance of evidence. The rule states: Failure of the audit documentation to document the procedures applied, tests performed, evidence obtained, and relevant conclusions reached in an engagement shall raise a presumption that the procedures were not applied, tests were not performed, information was not obtained, and relevant conclusions were not reached. The significance of this issue can not be overstated. A large percentage of comments from peer reviews center on “lack of documentation”. My own experience in performing dozens of peer reviews is that I have often needed to consider if an accountant had obtained sufficient knowledge in order to draw the conclusions reached because the workpapers, as provided, did not provide that assurance. How the Board of Accountancy or a jury might reach such a conclusion may be very different under a confrontational setting and with an attorney asking the questions. Section 5097 (c) goes on to say that this presumption shall be a rebuttable presumption affecting the burden of proof relative to those portions of the audit that are not documented as required in subdivision (b). The burden may be met by a preponderance of the evidence.

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Documentation Retention – Section 5097 (d) and (e) While retention standards for tax workpapers have been clearly established in both federal and state statutes, there has been no definitive requirement for the retention of audit workpapers. Sarbanes-Oxley established standards on a national level. Section 5097 (d) and (e) adopts standards for California licensees. This section requires audit documentation to be retained for a minimum of seven years. This requirement is automatically extended during the pendency of any board investigation, disciplinary action, or legal action involving the licensee or the licensee’s firm. It also includes a reference for future changes to accounting standards that may be adopted by regulators or the profession. Retention of audit documentation should be sufficient to satisfy professional standards and to comply with applicable laws and regulations. Written Retention and Destruction Policies – Section 5097 (f) All firms that perform audits are required to have a written policy regarding their documentation retention and destruction policy. Note that there is no size exception. Therefore, even sole practitioners that perform audits would have to put their policy in writing. Licensees shall maintain a written documentation retention and destruction policy that shall set forth the licensee’s practices and procedures complying with this article. Regulations on Documentation The regulations include:

• A requirement for an index or guide to the audit workpapers

• A requirement that workpapers retained because of a pending Board investigation or disciplinary action cannot be destroyed until written notification from the Board has been received

• Rules describing what would be considered to be alterations of the workpapers after

issuance of the report

• What information should be included in the licensee’s retention and destruction policy.

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Section 68.2. Components of Audit Documentation. (a) To provide for the identification of audit documentation, audit documentation shall include an index or guide to the audit documentation which identifies the components of the audit documentation. (b) In addition to the requirements of Business and Professions Code Section 5097(b), audit documentation shall provide the date the document or working paper was completed by the preparer(s) and any reviewer(s), and shall include the identity of the preparer(s) and any reviewer(s). (c) Audit documentation shall include both the report date and the date of issuance of the report. Note: Authority cited: Section 5010, 5018, and 5098, Business and Professions Code. Reference: Sections 5097 and 5098, Business and Professions Code. Section 68.3. Retention Period for Audit Documentation. (a) The retention period mandated by Business and Professions Code Section 5097 shall be measured from the report date. (b) If audit documentation is required to be kept for longer than seven years because of a pending Board investigation or disciplinary action, audit documentation shall not be destroyed until the licensee has been notified in writing by the Board of the closure of a Board investigation or disciplinary proceeding. (c) Any documents required to be maintained by Business and Professions Code Section 5097 or these regulations shall be maintained in accessible form. (d) Audit documentation shall be retained whether or not the documentation supports the auditor’s final conclusions. All audit documentation regarding any significant matter related to the audit shall be retained whether or not the documentation contains information or data inconsistent with the auditor’s final conclusions. Significance of a matter shall be determined based on an objective analysis of the facts and circumstances. Audit documentation to be retained shall also include all documentation of consultations on, or resolutions of, any differences of opinion regarding the exercise of professional judgment. Note: Authority cited: Section 5010, 5018, and 5098, Business and Professions Code. Reference: Sections 5097 and 5098, Business and Professions Code.

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Section 68.4. Changes in Audit Documentation After Issuance of the Report. (a) Changes in audit documentation include any addition, removal, deletion, substitution, or editing of audit documentation, including, but not limited to, physical or electronic additions to any audit documentation file or preexisting audit documentation, occurring after the date of issuance of the audit report which is supported in whole or in part by the audit documentation. (b) Except as provided in subsection(c), in addition to any other documentation required by professional standards, any changes in audit documentation shall provide the identity of the person(s) making the change, and identity of any person(s) approving the change, the date of the change, and the reasons for the change if the reason is other than the assembling of pre-existing documents. The documentation which is changed shall contain sufficient detail to enable a reviewer with relevant knowledge and experience, having no previous connection with the audit engagement, to understand the nature, timing, reason for, and extent of the change. (c) During a 60-day period after the date of issuance of the audit report documents may be added to the file for assemblage and documentation of work previously performed. Nothing in this subsection authorizes the deferral of audit procedures required to be performed prior to the issuance of the report. Note: Authority cited: Section 5010, 5018, and 5098, Business and Professions Code. Reference: Sections 5097 and 5098, Business and Professions Code. Section 68.5. Audit Documentation Retention and Destruction Policy. (a) Licensees shall maintain, and document compliance with, a written Audit Documentation Retention and Destruction Policy which provides for the preservation of audit documentation for the full time period required by Business and Professions Code Section 5097. The policy and documentation of compliance shall be available to the Board upon request. (b) This policy shall provide for the authorized custody, security, access, retention, and destruction of the documentation. This 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 audit documentation,

(3) procedures for approving any changes to audit documentation, (4) procedures for approving the destruction of documentation when no longer

required to be maintained by Business and Professions Code Section 5097.

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(c) The procedure required by subsection (b)(4 ) shall provide for identifying the persons by name or position, authorized to approve the destruction of audit documentation. In the alternative, the procedure required by subsection (b)(4) maybe self-executing once the retention period has expired Note: Authority cited: Section 5010, 5018, and 5098, Business and Professions Code. Reference: Sections 5097 and 5098, Business and Professions Code.

Case Study on California Documentation Standards

Roma Contador Publico, an Italian accounting firm, had an Italian client with offices in California. Since the firm had vast experience in performing audits, and several of the senior partners desired to vacation in sunny California, no one seemed to be concerned about their competence to perform the audit. So the firm followed their standard procedures for performing the audit in accordance with international standards. Results of their decision: Unfortunately no one bothered to check whether California had specialized rules for performing audits of California clients.

• No index or guide to the audit workpapers was prepared

• Alterations were made to the workpapers after issuance of the report without the proper approvals

• No formal policy for the retention and destruction of workpapers was adopted

Discussion Questions: What are the criteria for deciding if the company being audited is a California company? Do foreign CPA firms with California clients have to abide by California’s documentation standards?

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Appendix F - List of Relevant Reading Materials

Professional and Government Publications

1. California Accountancy Act - California Board of Accountancy, 2000 Evergreen Street,

Sacramento, CA 95815-3832 (www.dca.ca.gov/cba) 2. Update - California Board of Accountancy, Ibid. 3. Code of Professional Conduct - AICPA , Harborside Financial Center, 201 Plaza Three,

Jersey Center, NJ. 07311 (www.aicpa@org) 4. Journal of Accountancy, AICPA, Ibid 5. Joint Ethics Enforcement Program (JEEP) Manual of Procedures - AICPA, Ibid.

Other Relevant Readings

1. A Casebook on Ethics in the Accounting Curriculum, William A. May, Professor at the University of Southern California

2. A New Approach to Understanding Accounting Ethics, Mark L. Cheffers, Michael Pakaluk,

Allen David Press 3. Blog on accounting ethics by Art Berkowitz – www.accountingethics.blogspot.com 4. Business Ethics Magazine, PO Box 8439, Minneapolis, MN 55408 5. “Develop Your Ethical Edge”, Dr. Arthur Manoharan, 2006 Azalea Circle, Decatur, GA

30033 6. Enron: A Professional’s Guide to the Events, Ethical Issues, and Proposed Reforms Arthur

L. Berkowitz, Published by CCH INCORPORATED www.enronguide.com 7. Integrity Management: A Guide to Managing Legal and Ethical Issues in the Workplace,

Center for Ethics, The University Of Tampa, Tampa, FL 8. Moral Courage, Rushworth Kidder, Institute for Global Ethics, Camden ME

www.globalethics.org 9. “The Ethics of Choice”, David Thomas, Ph.D., PO Box 31813, Omaha, NE 68131

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http://www.enronguide.com/

http://www.globalethics.org/

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7Presented by:

Art Berkowitz, CPA

1

Art Berkowitz, CPA, is a noted author, speaker, and practitioner. He has written a weekly column for The Wall Street Journal, a book on Enron, and numerous courses on fraud, ethics, and accounting.

Art Berkowitz Seminars – www.artberkowitz.com 2

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To inform CPAs of the current rules and regulations of the California Accountancy Act


To discuss key issues that California CPAs may face:◦ Continuing education◦ Enforcement and disciplinary actions◦ Client records◦ Peer review◦ California documentation standards


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If you came across violations of California rules or regulations at your organization, what would you do?

a) Keep it to myselfb) Confront the personc) Tell a colleague or supervisord) Anonymously file a complaint with the CBAe) Depends on the situation


Article 1.5 – Continuing Education (Appendix A) Article 2 - Client Records (Appendix C) Article 3 – Fees and Commissions Article 4 – Peer Review (Appendix D) Article 5 – Licensing (Expiration of Pathway 1) Article 5.5 – Audit Documentation (Appendix E) Article 6 – Disciplinary Procedures (Appendix B)

Keeping Up to Datehttp://www.dca.ca.gov/cba/laws_and_rules/index.shtml


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Section 4 – Safe Harbor Section 5.5 – Substantial Equivalency Section 11.1 – Accounting Study Section 15 – Retired Status Sections 18 to 22 - Practice Privilege Section 37.5 – Fingerprinting and Disclosure

Requirements

Keeping Up to Datehttp://www.dca.ca.gov/cba/laws_and_rules/index.shtml



CONTINUING EDUCATION REQUIREMENTS

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Section 80 – Inactive License Status Section 81 – Continuing Education for Renewing

an Expired License Section 87 to 89 – Continuing Education

Requirements

Keeping Up to Datehttp://www.dca.ca.gov/cba/laws_and_rules/index.

shtml


BASIC REQUIREMENT:◦ 80 hours every two years◦ A minimum of 20 hours each year with a minimum of 12 hours in technical areas


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Technical – minimum of 50%

Nontechnical – maximum of 50%

Not acceptable - 0


ETHICS:◦ 4-hour General Ethics course every two years◦ 2-hour Regulatory Review course every six years


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GOVERNMENT:◦ 24 hours every two years

ACCOUNTING & AUDITING:◦ 24 hours every two years

FRAUD◦ If subject to either the government or A&A

requirement, four hours every two years


Live

Webcast

Self-study


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University or college courses

Instructor

Publishing and other methods


Art Berkowitz Seminars – www.artberkowitz.com 16Art Berkowitz Seminars – www.artberkowitz.com

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7Continuing Education


Which of the following alternatives could Sarah follow?

a) Give up her one compilationb) Try to get more compilationsc) Keep the write-up, tax, and consulting work,

but bring in another CPA to do the compilation

d) All of the above


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7Art Berkowitz Seminars – www.artberkowitz.com 19

ENFORCEMENT AND DISCIPLINARY ACTIONS OF THE CALIFORNIA BOARD OF

ACOUNTANCY

Has someone you personally known been contacted by the California Board of Accountancy about a suspected violation?

a) Yesb) No


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CALIFORNIA BUSINESS & PROFESSIONAL CODE Article 6 – Disciplinary Procedures

REGULATIONS Article 12.5 -

Article 13



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Closure of the case

Requirement to take additional CE

Citation or fine

Referral to the Attorney General’s office


In writing

Describe the nature of the violation in detail

May contain an assessment, an order of correction, or both

Served in accordance with Section 11505 (c) of the Government Code

Describe terms of contesting citation or assessment


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In writing to the CBA

Within 30 days

Failure to appeal within 30 days confirms order


Accusation – a formal document that notifies a licensee of the agency’s charges against the licensee.

Cost recovery – The licensee is ordered to pay the Board certain costs of investigation and prosecution including, but not limited to, attorney fees.

Default decision – The licensee failed to file a Notice of Defense or has otherwise failed to request a hearing, object, or otherwise contest the accusation. The Board takes action without a hearing based on the accusation and documentary evidence on file.

Effective date - The date the disciplinary decision becomes operative.


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Probation – The licensee may continue to engage in activities for which licensure is required.

Reinstatement – The licensee is ordered to pay the Board certain costs of investigation and prosecution including, but not limited to, attorney fees.

Revocation - The individual, partnership, or corporation is no longer licensed as a result of a disciplinary action.

Stayed – The action does not immediately take place and may not take place if the licensee complies with other conditions (such as a probation term).


Stipulation – The action is negotiated and settled without going to hearing.

Surrendered – The licensee has surrendered the licensee. The individual, partnership, or corporation no longer is licensed. The CBA, however, may impose discipline against a surrendered license in certain circumstances. Surrender also may require certain conditions be met should the former licensee ever choose to reapply for licensure.

Suspension – The licensee is prohibited for a specified period of time form engaging in activities for which licensure is required.


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7Trend in actions


Some Recent Cases: Jeffery Applewhite – Repeated acts of tax fraud Scott Crawford – Licensing violations Edward Hradowy – Failure to respond to CBA Kent Maloney - Embezzlement Gordon McKinney – Unregistered firm and peer review violations

Large Cases with Historical Significance: Ernst & Young LLP – 2012 – violations of PCAOB Moss Adams – 2006 – negligence on review engagement KPMG LLP – 2008 – gross negligence and fraud in tax shelters Deloitte & Touche LLP – 2011 – violations of PCAOB standards Arthur Andersen – multiple cases


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7Enforcement and Disciplinary

Actions


Do you believe this is a fair decision by the Board?

a) Too strictb) Too lenientc) Just about right


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CLIENT RECORDS

Whose records are they?

When you must return the records

When you might not have to…but should


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Definition of Client records:

Any working paper which would ordinarily be part of the client’s books and records

Art Berkowitz Seminars – [email protected] 35

When to return:

UPON DEMANDEVEN IF

The work was performed by the accountantAND EVEN IF

The accountant has not been paid

Art Berkowitz Seminars – [email protected] 36

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7Client Records


Who is right?

a) Wernerb) Sheldonc) Franzellad) None of theme) All of the them


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PEER REVIEW

No size exception, even sole practitioners Firms already participating in the AICPA Peer

review program will have few changes ALL FIRMS must complete and submit a form

prior to renewal date


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What reports are covered:◦ Audits◦ Reviews◦ Compilations – with and without disclosures◦ Special reports


Standard

Substandard


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7Peer Review


For those who have been through peer review (either with the AICPA or California), which of the following was the most important?

a) Reviewing my workpapers prior to the peer review

b) A trial practice reviewc) Hiring a peer reviewer who was familiar

with my size practice and industryd) Getting a recommendation for my peer

reviewere) Other


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CALIFORNIA’S AUDIT DOCUMENTATION

STANDARDS

Applies to all audits, not just publicly traded entities


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Understandable by a knowledgeable person having no previous connection with the audit engagement

Presumption that work not documented was not performed

Retained for seven years Written policy for retention and destruction of

audit workpapers


Audit Documentation


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Do you check each state’s documentation requirements before performing services in that state?

a) Yesb) No


How many of you?

a) Learned something useful todayb) Feel better prepared to handle unethical

situationsc) Had fun while learning todayd) All of the above


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Contact: Art Berkowitz, CPAE-mail: [email protected]

Tel. (949) 362-9940Address: 26762 Westhaven Drive

Laguna Hills, CA 92653Website: www.artberkowitz.com


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7Forensic Services Section

Benefi ts of Membership

As a Forensic Services Section member, your added benefi ts include:

• Leadership Development—Working your way from the back of the room to the front and enhancing your ability to be selected as an expert;

• Networking with other forensic services professionals including attorneys and judges;

• Full-day Education Meetings with speakers, case studies and practice development tools;

• Leading-edge, practice specifi c articles in The Witness Chair;

• Breaking news in the forensic accounting, valuation, damages,family law, litigation and fraud practice areas; and

• Effective representation on credentials, standards, practice aids, precedent-setting legal cases and other professional guidance.

Learn more and join at calcpa.org/fss

For more information, contact:Marie Ebersbacher, Forensic Services Section Chair [email protected] Ku, Forensic Services Section Manager [email protected]

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7VPE

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40 50VPE

24COUPON

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VPE 80 is one of our most economical programs. Mix and match any of our offerings to earn your credit hours, like at our CPE weeks at luxury destinations.

CalCPA Members: $1,295

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Coupons are ideal for attending full and multi-day Conferences and Courses. They are fully transferable, making it easy to distribute to staff and/or clients.


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Save up to $1,955 per year with our exclusive member discount for Value-Priced Education (VPE).

CalCPA Education Foundation

Discount Programs

calcpa.org/discount | (800) 922 5272

Coupons Coupon holders can choose between any of our live and webcast CPE formats (self-study products not included).

All discount programs are valid for one year from date of purchase.

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Take advantage of these great savings for all your CPE needs with CalCPA Education Foundation discount programs. With more than 1,400 opportunities to choose from, you have the flexibility to tailor your education to your schedule, professional requirements and learning style.

CalCPA Education Foundation VPE programs can be used for all conferences, courses and self-study products (on demand and PDF).

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Post your accounting position today.Members pay just $195 for 30 days

CalCPA.org/classifieds(800) 922-5272

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Choose from more than 100 self-paced, skill building courses.

To search for self-study products, visit-calcpa.org/SelfStudy

Note: All Education Foundation self-study formats—including on demand and PDF—qualify for interactive self-study credit.

Connect with CalCPAcalcpa.org/Linkedin

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calcpa.org/RSSfeedsVPE

80VPE

40 50VPE

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VPE 80 is one of our most economical programs. Mix and match any of our offerings to earn your credit hours, like at our CPE weeks at luxury destinations.

CalCPA Members: $1,295

VPE 50 is a limited time offer in honor of CalCPA Education Foundation’s 50th anniversary. Get 10 bonus hours of CPE at the same great price. Available March 1, 2016 – April 30, 2017.


VPE 24 is a practical option if you want to attend a staff training, or if you are interested in three of our specialty conferences.

Coupons are ideal for attending full and multi-day Conferences and Courses. They are fully transferable, making it easy to distribute to staff and/or clients.


Coupon 10: $2,495

Save up to $1,955*80 hours of CPE

Save up to $1,235*Now 50 hours of CPE!

Save up to $300*24 hours of CPE

10 Couponseach valid for up to

8 hours of event CPE; excludes self study

Save up to $1,955 per year with our exclusive member discount for Value-Priced Education (VPE).

CalCPA Education Foundation

Discount Programs

calcpa.org/discount | (800) 922 5272

Coupons Coupon holders can choose between any of our live and webcast CPE formats (self-study products not included).

All discount programs are valid for one year from date of purchase.

*Savings based on live/webcast conference costs.

Take advantage of these great savings for all your CPE needs with CalCPA Education Foundation discount programs. With more than 1,400 opportunities to choose from, you have the flexibility to tailor your education to your schedule, professional requirements and learning style.

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ConferencesMAYGovernmental Accounting and Auditing May 12: Sacramento | Webcast

Introduction to School Districts Auditing May 18: Webcast only

Not-for-Profit OrganizationsMay 24: BurbankMay 25: San Francisco | Webcast

JUNEEntertainment IndustryJune 15: Los Angeles/Beverly Hills | Webcast

Estate and Trust June 16-17: San Francisco | Webcast

SEPTEMBERFarmers Tax and AccountingSept. 21: Fresno | Webcast

OCTOBERFamily LawOct. 27: Los Angeles Oct. 28: San Francisco | Webcast

NOVEMBERFederal, State, Local and International TaxationNov. 2-4: Burbank Area | Webcast

DECEMBERWine Industry ConferenceDec. 5: Napa | Webcast

APRIL 2017Accounting, Auditing and Employee Benefit Plans April 24-25: San Francisco | Webcast

Women’s Leadership ForumApril 28: San Francisco | Webcast

2016-17

CPE WeeksSAN DIEGOHyatt Regency Mission BayJuly 11–15

MONTEREY Embassy Suites Monterey Bay - SeasideAug.1-5

SAN LUIS OBISPO Embassy Suites San Luis ObispoOct. 24-28

LAKE TAHOE Hyatt Regency Lake Tahoe Resort, Spa and Casino Nov. 7-9

PALM SPRINGS Omni Rancho Las Palmas Resort Nov. 28-Dec. 2

calcpa.org/conferences

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• Your Voice Advocacy in Sacramento

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Im not just a CPA ...

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