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Looser Rules Sought for Accountants

Regulatory officials take steps to promote the profession and roll back tough standards imposed in the post-Enron era.

June 19, 2006|Peter Nicholas | Times Staff Writer

SACRAMENTO — 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.

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