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The Los Angeles Times
Jun 19, 2006 - 01:00 AM

by Peter Nicholas, Times Staff Writer

State Moves to Ease Oversight on Accountants;

Regulatory officials take steps to promote the profession and roll back tough post-Enron standards.
SACRAMENTO, CA -- Just as Enron's top executives are facing prison, California officials are quietly starting to unravel consumer protections adopted in the wake of that company's collapse, watchdog groups and some state lawmakers said.

The Board of Accountancy, which licenses certified public accountants and accounting firms, is taking steps to roll back standards that demand rigorous documentation of certain changes made in the course of preparing an audit.

The board has been pushing a bill in the Legislature that could open the door for out-of-state accountants to offer tax shelters and practice in California without the oversight now required.

Equally worrisome to public interest groups who follow the 15-member board is a recent appointment made by Gov. Arnold Schwarzenegger.

The governor replaced Gail Hillebrand, considered to be the strongest voice for consumer protection and whose term had expired, with a partner in a law firm that represents Big Four accounting firms.

Marcus McDaniel, an attorney in the firm Latham & Watkins, served for one month -- in what is meant to be a "public" position set aside for people who are not accountants.

After a state lawmaker complained that the link to the Big Four posed a conflict of interest, Schwarzenegger's office said the appointment had "slipped through the cracks." The governor's office earlier this month asked McDaniel to resign. It is unclear whom Schwarzenegger will appoint next.

The trends underscore the political clout of the accounting profession, whose members sought the changes in Sacramento and have given about $500,000 to campaign funds that support Schwarzenegger's political agenda. An industry trade group has reported lobbying the governor's office this year on appointments to the accounting board.

Even as Schwarzenegger publicly moves to the left politically this campaign season, watchdog groups say his administration remains protective of the business interests that are a crucial part of his political base.

"This is a board that has become a wholly owned subsidiary of the accounting profession," said Julianne D'Angelo Fellmeth, administrative director of the Center for Public Interest Law in San Diego, who has been monitoring the board for years. "It is supporting a bad bill without understanding it or analyzing it. It has voted to weaken auditing regulations that the board itself adopted only three years ago in the wake of Enron. This is a board that does not understand its public protection role."

But Ronald Blanc, the Board of Accountancy president, denied the board has abandoned its duty to protect the public.

"I believe that we are very conscious of consumer protection," Blanc said. "We totally understand our mission, and indeed our votes are rather overwhelming when we make a decision. We vet these things carefully. Some groups might not agree, but I don't see consumer interests are diluted or compromised at all."

The Enron collapse in 2001 spurred the Board of Accountancy to tighten regulations in hopes of preventing anything on that scale from happening again. Enron's questionable accounting practices were blamed partly for its demise.

The company concealed substantial amounts of debt through off-the-books partnerships, presenting a more positive view of its financial condition than was actually the case.

In public statements, the company said it had done so with the support of its accounting firm, Arthur Andersen, which destroyed documents after its audit.

After the scandal, the California board called for accounting firms to carefully document any material removed from an audit.

Firms were required to reveal who removed the material, what was removed and why it was done.

The change was meant to ensure credible audits, so investors and banks are able to make smart choices about where to put their money.

Last month, the board took a position in favor of scrapping that requirement. It will solicit public comment and hold more hearings before the change becomes official.

Hillebrand, now an attorney with the West Coast office of Consumers Union, said the change would be a step backward. "We've just seen the completion of criminal trials in Enron," she said. "And it's clear that more people got hurt than the company executives who defrauded the public. Anything we can do in California to avoid that happening again, we should be doing. If we have an existing requirement, we shouldn't be weakening it."

Board officials said in an interview that they merely want California to be aligned with standards put in place by an industry trade association and by a national nonprofit group that oversees firms that audit public companies.

Another post-Enron change was an attempt to better monitor what out-of-state accountants are doing in California. These accountants are now required to get a temporary permit to practice in the state.

But the industry complained that certain parts of the new regulation were a burden.

Now the board is backing a revision that would, in effect, deregulate a major portion of the accounting business, according to some state officials and watchdog groups.

In February, the board endorsed a proposal that would excuse out-of-state accountants who practice by phone, fax or Internet but who don't physically enter California, from going through the trouble of getting a permit.

They would be free to provide unspecified "tax services" without getting a California accounting license or even notifying the accounting board.

Assemblyman Rudy Bermudez (D-Norwalk) has folded this proposal into a bill that has already passed the Assembly and is due to be heard by a Senate committee today.

Explaining the board's rationale, Blanc said: "Accountants do a lot more than write up a tax return on the computer. They're involved in representing clients in audits and maybe getting IRS rulings for their clients. We wanted to allow businesses as well as individuals who wanted to use out-of-state accountants to be able to do so without a lot of administrative barriers put up."

Opponents warn that the open-ended law would invite out-of-state firms to promote suspect tax shelters without the board's knowledge. Blanc said he doesn't want that to happen.

Dubious tax shelters are a growing problem in California and cost the state about $500 million a year in uncollected revenue, according to the Franchise Tax Board and officials. Last year, the Big Four firm KPMG reached a settlement with the U.S. Justice Department in which it agreed to pay $456 million for its use of such tax shelters, thus avoiding criminal prosecution.

Should any kind of fraud arise, the accounting board would be hard-pressed to crack down, watchdog groups contend. An enforcement staff of five people has jurisdiction over 75,000 licensed accountants.

A state Senate analysis of the Bermudez bill concluded that the accounting board "has by far the smallest and least well-staffed enforcement division of any comparably sized consumer board in this state. This is an ongoing and enormous problem that is only made worse as each new accounting scandal moves into the headlines."

Atty. Gen. Bill Lockyer said: "You could imagine lots of bad things -- abusive tax shelters -- that would be permitted. Enforcement would be weakened…. In light of the energy deregulation debacle, the savings and loan industry deregulation debacle, the trucking industry deregulation debacle, why would you want to do another one?"

Bermudez said his intent is merely to allow, say, an out-of-state accountant -- who may be a friend of the client -- to file a tax return and provide other advice without too much hassle.

His bill is sponsored by the California Society of Certified Public Accountants, a trade group. In the last seven months, Bermudez has received $2,500 in campaign contributions from the society. John Dunleavy, chief executive officer of the group, did not return calls for comment.

State records show Bermudez has also taken in $8,800 in campaign donations from the Big Four accounting firms. Bermudez said in an interview that the contributions from the accounting industry are nothing extraordinary. "I think just about everybody has" contributed to his campaign fund, he said.

When the lessons of Enron were freshest, the consensus in Sacramento was that the board needed to be tougher and more of an advocate for the public.

Under former Gov. Gray Davis, the accounting board's membership was changed in a way that diminished the industry's clout. Licensed accountants became a minority on the board. What are known as "public" members -- people who are not CPAs -- became the majority.

State Sen. Liz Figueroa (D-Fremont) pushed legislation in 2002 bringing about that change. More recently, she wrote the letter to Schwarzenegger objecting to the McDaniel appointment and voicing concerns about what she describes as the board's pro-industry tilt.

Figueroa says it defeats the purpose to make "public" members a majority on the board if Schwarzenegger appoints people whose firms represent members of the accounting industry.

Campaign money from the accounting profession has been flowing into Schwarzenegger's political accounts as well. PricewaterhouseCoopers has given $119,000 to campaign funds promoting the governor's political causes; KPMG has given more than $90,000 and Ernst & Young has given $79,000.


Times staff writer Dan Morain contributed to this report.

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