To gain insight into the extent of malpractice in the State of California prior to the Passage of Sarbanes-Oxley, we examined the nature and magnitude of complains filed with the California Board of Accountancy (CBA) against both licensed and unlicensed accountants during the fiscal years 2000, 2001, and 2002. The CBA currently licenses and regulates over 73,000 licenses, with 1,431 complaints filed during the period reviewed.
Disciplinary actions were taken against 283 different licensees for the three fiscal years reviewed. SEC issues were involved in 19 cases, theft or embezzlement 46 cases, public accounting malpractice 146 cases, improper retention of client records 11 cases, cheating on the CPA examination 9 cases, and miscellaneous other 52 cases.
Over half of the complaints involved public accounting issues. Audit related complaints accounted for 48%, tax related complaints 36%, and compilations or reviews accounted for 16% of the complaints. These statistics were in line with the experience of the AICPA Professional Liability program.
Within the above sections, the paper contains specifics with regards to the most common problems identified as a result of this work. While a number of interesting facts were discovered, one item of particularly interest was the significant number of claims that involved non-profit organizations. CBA administrators do not believe there is any greater tendency for non profit reporting versus for profit reporting, thus appearing to indicate this is just an area that has a greater possibility of accounting malpractice.
In an attempt to restore public trust in the accounting profession and investor confidence in the financial markets, Congress enacted the Public Company Accounting Reform and Investor Protection Act of 2002, better known as the Sarbanes-Oxley Act (SOX). Prior to the enactment of this legislation, there was a perceived crisis in the credibility of the auditing profession given the newsworthy scandals such as Enron, WorldCom, and Global Crossing. Tax preparers also fall prey to the media attacks as evidenced by a USA Today front page headline, "Many Burned by Inept or Crooked Tax Preparers" (McCoy, 2006).
To gain insight into the extent of malpractice in the State of California prior to SOX, we examined the nature and the magnitude of complaints filed with the California Board of Accountancy (CBA) against both licensed/unlicensed accountants during the fiscal years-ended 2000 through 2002. In addition, we reviewed the corresponding disciplinary actions taken by the CBA related to these complaints.
BACKGROUND OF THE CBA
The CBA currently licenses and regulates more than 73,000 licensees, the largest group of licensed accounting professionals in the nation, including individual Certified Public Accountants (CPAs) and Public Accountants (PAs). The CBA's stated mission is to "protect the public welfare, particularly consumers, by ensuring that only qualified persons and firms are licensed to practice public accountancy and that appropriate standards of competency and practice, including ethics, objectivity and independence are established and enforced." As part of this mission, the CBA is responsible for initiating and investigating complaints against individuals practicing public accounting in California.
When the CBA receives a complaint, an investigation is usually conducted by their Enforcement Division. The Enforcement Division is staffed by professional investigative CPAs holding strong backgrounds in accounting practices and professional standards. In addition to investigating complaints, the Enforcement Division also provides testimony at administrative hearings and monitors compliance of those accountants placed on probation. Following an investigation by the Enforcement Division, and subsequent administrative hearings, the CBA has the option of revoking or suspending the individual's license or placing the CPA/PA on probation. …