State Board of Accountancy: Watchdog or Lapdog?

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Editor's Note: Carl Olson, who teaches college accounting and participates in the American Accounting Association's Public Interest Section, offers insight into yet another important area where the lack of transparency and accountability harms the public interest. He closely follows actions of the California Board of Accountancy for a couple years and set up the non-profit Fund for Stockowners Rights, P. O. Box 6102 Woodland Hills, California 91365.

By Carl Olson

If you can't trust CPA auditors, who can you trust in making investments with your family funds?  Managers of pension funds, endowment funds, mutual funds, insurance companies, and so on have the same concern.  Auditors are supposed to certify that the figures on corporate financial statements are accurate and reliable.  But if auditors misbehave, what recourse does the investing public have?

We all have watched with apprehension numerous debacle companies and the losses of hundreds of billions of dollars for the investing public.  The state government's two enormous pension funds, CalPERS and CalSTRS, have lost tens of billions in the last few months.  The debacle companies all had one thing in common.  Their CPA auditors said that everything was just fine for years.

AIG and Freddie Mac are clients of PricewaterhouseCoopers.  Fannie Mae and Bear Stearns have Deloitte & Touche.  Ernst & Young audits Lehman Brothers and IndyMac Bank.   The last of the Big Four,  KPMG, is responsible for Wachovia and  Countrywide.

Misbehaving CPA auditors are supposed to be disciplined by  state boards of  accountancy.  The board can impose fines,  re-education,  suspension of licenses,  and  ultimately the revocation of licenses.   But this process depends entirely on the political wherewithal behind the boards of accountancy.

Unfortunately in California, the board of accountancy has become totally overwhelmed with cases but without any means to investigate most of them.  Major cases go begging because of lack of staff.  The board is so hampered that it does not even have an office in Southern California.

The governor and legislature share the blame.  They have just recently taken away $11 million for the board's Accountancy Fund.  The board runs entirely on license fees and not on tax revenues.  The governor and legislature have enacted hiring rules such that the pay scale for investigator CPAs is way under the market rate.  The obvious result is the abject inability to protect the public.  The board's enforcement division has had several vacancies for years.

In a real sense, the board of accountancy is more than important than the medical board.  Doctors can injure patients only one at a time.  Misbehaving CPAs can wipe out thousands of investors with the stroke of a pen on defective audit opinions.

Our current financial system needs to produce confidence in its integrity.  A key advance would be to make CPA auditors truly responsible for their audit opinions.  The sooner the better.  California is the biggest state.   Why isn't it the best in consumer protection?

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