Today’sCPA July/August 2016 25 T he Texas State Board of Public Accountancy is charged with policing the accounting profession and, when necessary, meting out punishment for violations of the rules of professional conduct that the Board has promulgated. (Tex. Occ. Code §§ 901.051, 901.501) Four times a year, the Board publishes the Texas State Board Report, a newsletter in which it lists the outcomes of Board enforcement actions. Many of these actions conclude with the Board’s acceptance of an agreed consent order with the respondent. The list covered in the following paragraphs represents the top 10 ways that practitioners (or in some instances firms) have run afoul of the Board. The list is based on a review of 40 Texas State Board Reports over 10 years (from May 2005 to May 2015), encompassing the outcomes of more than 5,000 reported enforcement matters, including licensing and CPE actions. The Board frequently opens separate matters involving both an individual practitioner and his/ her firm based on the same underlying conduct. Many matters involved multiple rule violations. Failing to Pay Licensing Fees The most common type of Board enforcement action involves failure to pay licensing fees. In the 10 years reviewed, the Board revoked the certificates of 2,796 practitioners based upon Section 901.502(4) of the Public Accountancy Act, which authorizes discipline for “the failure of a person who is licensed under this chapter to renew the license not later than the third anniversary of the date on which the person most recently obtained or renewed the license.” (Tex. Occ. Code § 901.502(4)) Pursuant to this subsection, the Board revokes the certificates of CPAs who have failed to pay license fees for three consecutive license periods. The revocation is “without prejudice,” which means that the practitioner may regain his/her certificate by paying all of the outstanding fees and penalties, and “by otherwise coming into compliance with the Act.” Not Meeting CPE Requirements Failing to take enough continuing professional education (CPE) is the second most frequent way to get in trouble with the Board. Texas CPAs are required to “participate in a program of continuing professional education designed to maintain professional competency.” (Tex. Occ. Code § 901.411) To do so, they must complete 120 hours of CPE in each three-year period, and a minimum of 20 hours in each one-year period. (22 Tex. Admin. Code § 523.112(a)) Failing to meet the CPE requirements may result in license suspension for three years or until the licensee comes into compliance, whichever is earlier, as well as a $100 fine for each year of noncompliance. In the 10 years reviewed, the Board suspended 1,580 practitioners for failing to keep up with their CPE. Ignoring the Board It is a bad idea for a Texas CPA to ignore a communication from the Board. Rule 501.93 states that failing to respond to a Board inquiry, typically within 30 days from when the Board sent the inquiry (not from the practitioner’s receipt of the inquiry), constitutes a separate rule violation. (22 Tex. Admin. Code § 501.93) In fact, the Board cited practitioners for not responding in a timely manner in 134 enforcement matters in the 10 years reviewed. The lesson: if a practitioner thinks he/she needs more time to respond, the best course of action is to communicate that need to the Board and seek an extension. Practicing Without a Firm License A firm cannot hold itself out to be an accounting firm or offer to provide attest services unless the firm holds a firm license issued by the Board or qualifies under certain practice privileges. (22 Tex. Admin. Code 501.81(a)) All firms are required to have a firm license if they have an office in Texas. (Id. § 501.81(b)) In addition to many cease and desist orders for entities holding themselves out as accounting firms without a firm license, the Board cited violations of these licensing rules in 134 enforcement matters between 2005 and 2015, frequently involving a practitioner holding himself/herself out as working at a firm when that firm had an expired firm license or no firm license at all. Not Performing Work “Competently” The current version of Rule 501.74 states that a person “shall not undertake any engagement for the performance of professional accounting services or professional accounting work which he cannot reasonably expect with due professional competence,” including (where applicable) compliance with generally accepted auditing standards, generally accepted accounting principles and other FEATURE By Gavin R. Villareal, JD How to Get in Trouble with the Texas State Board of Public Accountancy continued on next page A 10-year review of Texas State Board Reports provides insight into the most frequent ways that Texas CPAs run afoul of the Board and its rule. 26 Today’sCPA professional standards. (22 Tex. Admin. Code § 501.74(a)) Texas CPAs can run afoul of this broad “competency” rule in a number of ways. The rule encompasses both the technical ability to do the work, and the ability to supervise and evaluate the quality of work performed by staff. (Id. § 501.74(a)(1)) If a practitioner does not have or cannot gain sufficient competency for the work, the practitioner “shall suggest to the client the engagement of someone competent to perform” the work, either independently or as an associate. (Id. § 501.74(a)(2)) In addition, licensees are expected to exercise due professional care in their work, adequately plan and supervise such work, and obtain and maintain appropriate documentation to provide a reasonable basis for their conclusions and recommendations. (Id. § 501.74(b)-(d)) Respondents were cited with a violation of the competency rule in 131 reported enforcement matters in the 10 years reviewed. About half of these matters involved tax services, and included such issues as failing to timely prepare a client’s tax return or doing so incorrectly. About a quarter of the matters involved issues related to attest services, such as failing to properly plan a financial statement audit or to maintain adequate documentation of the work performed. The remainder included a variety of mistakes relating to general accounting advice, such as failing to apply the proper accounting treatment for a specific type of transaction. Not Participating in Peer Review This issue relates more to firms than to individuals. The Board has established “a peer review program to monitor CPAs’ compliance with applicable accounting, auditing and other attestation standards adopted by generally recognized standard-setting bodies.” (22 Tex. Admin. Code § 527.1(a)) Every firm licensed with the Board that performs “any attest service or any accounting and/or auditing engagements, including audits, reviews, compilations, forecasts, projections or special reports” is required to participate in the program. (Id. § 527.4(a)) If a firm does not perform such services, it is nonetheless required to submit a written request for an exemption from the peer review program. (Id. § 527.4(b)) In 105 matters in the 10 years reviewed, the Board disciplined firms for violations of the peer review requirements, often for wholly failing to participate in the peer review program. Practicing Without a License Rule 501.80 is fairly straightforward: “A person may not engage in the practice of public accountancy unless he holds a valid license or qualifies under a practice privilege.” (22 Tex. Admin. Code § 501.80(a)) Also, a person cannot use the title “CPA” or “certified public accountant” without a valid license. id. In addition to many cease and desist orders for people using terms such as “CPA” and FEATURE continued from previous page Today’sCPA July/August 2016 27 “accountant” without a license, the Board had 78 enforcement actions between 2005 and 2015 involving practitioners performing accounting work without a valid license (often involving an expired or a suspended license). Ignoring a Client and Other “Discreditable Acts” Rule 501.90 prohibits Texas CPAs from committing “any act that reflects adversely on that person’s fitness to engage in the practice of public accountancy.” (22 Tex. Admin. Code § 501.90) The rules provide a non-exclusive list of acts that are “discreditable.” The most frequent reason for discipline under this provision in the 10 years reviewed was the conviction or deferred adjudication for a felony. (22 Tex. Admin. Code § 501.90(4)) This provision came up in 65 reported matters, many involving convictions for drug crimes or felony DWI. Other “discreditable acts” that were mentioned include: • Suspension or revocation of, or entering into a consent decree concerning, the right to practice before any state or federal regulatory or licensing body, for a cause that the Board believes warrants the action. (22 Tex. Admin. Code § 501.90(7)) The Board cited this provision in 55 reported matters in the 10 years reviewed, most frequently following the revocation of a Texas CPA’s practice privileges with the SEC or IRS. • Repeated failure to respond to a client’s inquiry within a reasonable time, without good cause. (22 Tex. Admin. Code § 501.90(12)), previously id. § 501.90(11). The Board cited this rule in 49 matters from 2005 to 2015. • Final conviction or deferred adjudication in a crime involving dishonesty or fraud, moral turpitude, alcohol or drug abuse, or physical harm or the threat of physical harm. (22 Tex. Admin. Code § 501.90(5)) A crime of moral turpitude is defined as “a crime involving grave infringement of the moral sentiment of the community.” (Id. § 501.90(19)) This subsection was cited in 46 reported matters. Not Complying With GAAS Rule 501.60 states: “A person shall not permit his name to be associated with financial statements in such a manner as to imply that he is acting as an auditor with respect to such financial statements, unless he has complied with GAAS.” (22 Tex. Admin. Code § 501.60) The Board cited this rule in 62 reported matters involving audits with a wide variety of alleged GAAS deficiencies, including insufficient planning, mathematical errors, failure to make required disclosures and inadequate support for representations made in an audit report. Not Telling the Board About a “Reportable Event” As discussed above, Texas CPAs can run afoul of the Board by being involved in certain discreditable acts. But under Rule 501.91, practitioners can also get in trouble by failing to inform the Board about certain “reportable events,” many of which are similar to discreditable acts. (22 Tex. Admin. Code § 501.91) For instance, a Texas CPA has an affirmative responsibility to report to the Board in writing within 30 days any of these events: • a conviction or imposition of deferred adjudication for: a felony; a crime of moral turpitude; any crime “of which fraud or dishonesty is an element or that involves alcohol abuse or controlled substance;” or any crime “related to the qualifications, functions, or duties of a public accountant or CPA, or to acts or activities in the course and scope of the practice of public accountancy or as a fiduciary;” • the loss of a CPA certificate in another state, foreign country or other jurisdiction; • an unappealable adverse finding in a court, or an agreed settlement in a civil matter concerning professional accounting services or work, or a finding of breach of fiduciary duty, fraud or misappropriation; and • the loss of a professional license from a state or federal regulatory agency resulting from an unappealable adverse finding. Failing to report such events to the Board came up in 49 enforcement matters in the 10 years reviewed. In many instances, practitioners got in trouble (or, more accurately, in deeper trouble) for failing to report criminal convictions. These are just a sampling of the ways that Texas CPAs get in trouble with the Board. Keeping these frequently violated rules in mind may help a practitioner avoid showing up on the Board’s radar screen. n Gavin R. Villareal, JD is a litigation partner in the Austin office of Baker Botts L.L.P. He is past chair of the Professional Liability Litigation Committee of the American Bar Association’s Section of Litigation, and has represented individuals and accounting firms in enforcement actions brought by the Texas State Board of Public Accountancy. He may be reached at gavin. email@example.com. THE MOST COMMON TYPE OF BOARD ENFORCEMENT ACTION INVOLVES FAILURE TO PAY LICENSING FEES.