Memories of Enron, bad tax shelters fuel accountancy debate

The state enforcer of the rules governing California’s 37,000 Certified
Public Accountants (CPA) is caught in the crosshairs of watchdog groups and
a state senator, who fear the century-old board could become a handmaiden to
the powerful, national accounting firms known as the “Big Four” and allow
abusive tax shelters in California.

“The ultimate concern is that we’re getting a board that is more concerned
about its members and accountancy than consumer protection. In all
appearances, this is where we are heading,” said Sen. Liz Figueroa, D-Sunol.

The Center for Public Interest Law (CPIL) at the University of San Diego,
which has tracked the California Board of Accountancy (CBA) for more than
two decades, agrees. The board favors changes in rules “that would allow
out-of-state CPAs who are criminals to market and sell tax shelters whose
purpose is nothing more than to help people evade their taxes,” said
Julianne D’Angelo Fellmeth, CPIL’s administrative director.

Accountancy regulators, working through changes to a new law that took
effect in January, say emphatically that those fears are misplaced. “This
legislation is not intended to allow that kind of activity,” said CBA
President Ronald Blanc. “If that is not clear, then we are anxious to make
it clear. There is no exemption for the marketing of abusive tax shelters,
or the marketing of them, or the promotion of them by our state’s

But critics aren’t convinced. Two events are fueling their suspicions.
The first is Gov. Arnold Schwarzenegger’s May 10 appointment of attorney
Marcus McDaniel as a public member to the 15-member CBA, which by statute
must be composed of a narrow majority of members drawn from the public at
large. McDaniel replaced Gail Hillebrand, a four-term board member and
Consumers Union advocate who was not reappointed to another term by

McDaniel is a partner in the law firm Latham and Watkins, has represented
all of the “Big Four” members at one time or another–Deloite & Touche, Ernst
& Young, KPMG and Pricewaterhouse Coopers. The law firm has taken positions
on board policy, such as in 2002 when it wrote a legal analysis that a board
regulation was preempted by federal law, and it is likely to represent one
or more of those accounting companies before the board, Figueroa said.
McDaniel is not subject to Senate confirmation.

“Your May 10 appointment of Mr. Marcus McDaniel appears to be moving away
from consumer protection and toward protection of the industry it
regulates,” Figueroa wrote Schwarzenegger in a May 18 letter. “I bring this
up not to impugn Mr. McDaniel, or other public members of CBA, but to
emphasize the context of his appointment. The reputation of the CBA as a
consumer board, independent of the industry it regulates, is now directly at
issue.” Figueroa, a candidate for lieutenant governor and the chairwoman of
the Senate Business and Professions Committee, urged Schwarzenegger to
“reconsider your recent public-member appointment.” There was no response
from the governor.

Figueroa also is the Senate’s watchdog over the effectiveness of the more
than two dozen regulatory boards within the Consumer Affairs Department that
watch over everything from physicians to automobile mechanics.

The second event is AB 1868 by Assemblyman Rudy Bermudez, D-Norwalk, a bill
that is intended to address issues that arose out of the new regulatory
rules that went into effect in January. The bill would also address issues
arising from federal legislation, known as the Sarbanes-Oxley Act, passed in
2002 in the wake of accounting scandals at Arthur Andersen. Figueroa
authored the legislation that set up the new state rules. Bermudez’s bill is
set to go before Figueroa’s committee on June 12.

Among other things, the new rules set up a system called “practice
privilege,” in which out-of-state CPA’s are allowed to do business in
California by notifying the CBA in advance, paying a $100 registration fee
and promising not to solicit or promote new business while in the state. The
privilege is valid for a year. Among other things, the system is intended to
resolve the problems of taxpayers who earn income in several states and who
can use their preferred accountant to handle all their affairs, rather than
having to hire a separate accountant in each state.

But under the current law, if the out-of-state CPA acts on behalf of a firm,
the firm must be registered in California and have at least one partner
present for registration–a lengthy and detailed process that accountancy
interests say hinders cross-border practices and that goes against
Sarbanes-Oxley, which requires regular rotation of auditors.

Bermudez’s bill, supported by both the CBA and the 27,000-member California
Society of Certified Public Accountants, would rescind practice privilege
and restore the system that was in effect before January 1, known as
“temporary and incidental,” a less onerous system that would allow the
out-of-state firm to perform “tax services” in California so long as the
firm agrees not to solicit new clients or represent themselves as registered
in the state.

The Bermudez bill leaves undefined the term “tax services,” and critics
contend this would open the door to firms to write abusive tax shelters.
Such shelters got the auditing giant KMPG in trouble, resulting in a $456
million fine nationally, a guilty plea in March by the KMPG partner in San
Diego and similar criminal problems pending in New York. Supporters of
Bermudez’s bill say such tax shelters already are outlawed in California by
previous legislation and include $5 million fines violations, although
critics aren’t convinced.

“‘Tax services’ is not defined in California law, so it can mean anything
from tax advice to preparation to planning to compliance. It can include tax
shelters,” Fellmeth said. “It just opens a gaping loophole in public
protection. I believe the state has a duty not to let this happen.”

The controversy surrounding the board of accountancy is unusual: The panel,
under the authority of the Department of Consumer Affairs, is an important,
deliberative regulatory body with authority to license CPAs and enforce
professional standards, qualifications and ethics. The board’s primary
mission is to protect the public.

But the panel is relatively unknown in the Capitol, even though it’s been
around since 1901. In part, that’s because the clash of accountants may not
make compelling reading, in part because the issues involving the board are
complex and not easily described. But despite the furor, the board remains
balanced and deliberative, said Blanc, who rejected suggestions that the
“Big Four” wield disproportionate influence over the CBA.

“I don’t think so, and I think I see things as they are,” Blanc said. “The
members act in the public’s interest. I have never seen that as an issue.
They represent differing interests all the time. It’s not like there is an
industry position coming through.

“We have business people, a health-care professional, a member of the
Assembly staff. There is not ‘one voice’ here at all,” Blanc said.

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