BILL REQ. #:  H-0636.3 

Read first time 01/21/2003.   Referred to Committee on Commerce & Labor.

     AN ACT Relating to accountability requirements under the public accountancy act; amending RCW 18.04.025, 18.04.195, 18.04.215, 18.04.295, 18.04.390, 18.04.370, and 18.04.405; creating a new section; prescribing penalties; and providing an expiration date.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

Sec. 1   RCW 18.04.025 and 2001 c 294 s 2 are each amended to read as follows:
     Unless the context clearly requires otherwise, the definitions in this section apply throughout this chapter.
     (1) "Board" means the board of accountancy created by RCW 18.04.035.
     (2) "Certificate holder" means the holder of a certificate as a certified public accountant who has not become a licensee, has maintained CPE requirements, and who does not practice public accounting.
     (3) "Certified public accountant" or "CPA" means a person holding a certified public accountant license or certificate.
     (4) "State" includes the states of the United States, the District of Columbia, Puerto Rico, Guam, and the United States Virgin Islands.
     (5) "Reports on financial statements" means any reports or opinions prepared by licensees, based on services performed in accordance with generally accepted auditing standards, standards for attestation engagements, or standards for accounting and review services as to whether the presentation of information used for guidance in financial transactions or for accounting for or assessing the status or performance of commercial and noncommercial enterprises, whether public, private, or governmental, conforms with generally accepted accounting principles or other comprehensive bases of accounting. "Reports on financial statements" does not include services referenced in RCW 18.04.350(6) provided by persons not holding a license under this chapter.
     (6) The "practice of public accounting" means performing or offering to perform by a person or firm holding itself out to the public as a licensee, for a client or potential client, one or more kinds of services involving the use of accounting or auditing skills, including the issuance of "audit reports," "review reports," or "compilation reports" on financial statements, or one or more kinds of management advisory, or consulting services, or the preparation of tax returns, or the furnishing of advice on tax matters. The "practice of public accounting" shall not include practices that are permitted under the provisions of RCW 18.04.350(6) by persons or firms not required to be licensed under this chapter.
     (7) "Firm" means a sole proprietorship, a corporation, or a partnership. "Firm" also means a limited liability company formed under chapter 25.15 RCW.
     (8) "CPE" means continuing professional education.
     (9) "Certificate" means a certificate as a certified public accountant issued prior to July 1, 2001, as authorized under the provisions of this chapter.
     (10) "Licensee" means the holder of a license to practice public accountancy issued under this chapter.
     (11) "License" means a license to practice public accountancy issued to an individual under this chapter, or a license issued to a firm under this chapter.
     (12) "Manager" means a manager of a limited liability company licensed as a firm under this chapter.
     (13) "NASBA" means the national association of state boards of accountancy.
     (14) "Quality assurance review" means a process established by and conducted at the direction of the board of study, appraisal, or review of one or more aspects of the attest work of a licensee or licensed firm in the practice of public accountancy, by a person or persons who hold licenses and who are not affiliated with the person or firm being reviewed.
     (15) "Peer review" means a study, appraisal, or review of one or more aspects of the attest work of a licensee or licensed firm in the practice of public accountancy, by a person or persons who hold licenses and who are not affiliated with the person or firm being reviewed, including a peer review, or any internal review or inspection intended to comply with quality control policies and procedures, but not including the "quality assurance review" under subsection (14) of this section.
     (16) "Review committee" means any person carrying out, administering or overseeing a peer review authorized by the reviewee.
     (17) "Rule" means any rule adopted by the board under authority of this chapter.
     (18) "Holding out" means any representation to the public by the use of restricted titles as set forth in RCW 18.04.345 by a person or firm that the person or firm holds a license under this chapter and that the person or firm offers to perform any professional services to the public as a licensee. "Holding out" shall not affect or limit a person or firm not required to hold a license under this chapter from engaging in practices identified in RCW 18.04.350.
     (19) "Natural person" means a living, human being.
     (20) "Inactive" means the certificate is in an inactive status because a person who held a valid certificate before July 1, 2001, has not met the current requirements of licensure and has been granted inactive certificate holder status through an approval process established by the board.
     (21) "Working papers" means documentation of procedures applied, evidence obtained, and conclusions reached related to any professional service offered by a licensee, certificate holder, or nonlicensee owner, including documentation of a subsequent review of the licensee's work such as a quality assurance review, peer review, or a review required for compliance with federal or state law.

Sec. 2   RCW 18.04.195 and 2001 c 294 s 11 are each amended to read as follows:
     (1) A sole proprietorship engaged in business in this state and offering to issue or issuing reports on financial statements or using the title CPA or certified public accountant shall license, as a firm, every three years with the board.
     (a) The sole proprietor shall hold a license to practice under RCW 18.04.215;
     (b) Each resident person in charge of an office located in this state shall hold a license to practice under RCW 18.04.215; and
     (c) The licensed firm must meet competency requirements established by rule by the board.
     (2) A partnership engaged in business in this state and offering to issue or issuing reports on financial statements or using the title CPA or certified public accountant shall license as a firm every three years with the board, and shall meet the following requirements:
     (a) At least one general partner of the partnership shall hold a license to practice under RCW 18.04.215;
     (b) Each resident person in charge of an office in this state shall hold a license to practice under RCW 18.04.215;
     (c) A simple majority of the ownership of the licensed firm in terms of financial interests and voting rights of all partners or owners shall be held by natural persons who are licensees or holders of a valid license issued under this chapter or by another state that entitles the holder to practice public accounting in this state. The principal partner of the partnership and any partner having authority over issuing reports on financial statements shall hold a license under this chapter or issued by another state that entitles the holder to practice public accounting in this state; and
     (d) The licensed firm must meet competency requirements established by rule by the board.
     (3) A corporation engaged in business in this state and offering to issue or issuing reports on financial statements or using the title CPA or certified public accountant shall license as a firm every three years with the board and shall meet the following requirements:
     (a) A simple majority of the ownership of the licensed firm in terms of financial interests and voting rights of all shareholders or owners shall be held by natural persons who are licensees or holders of a valid license issued under this chapter or by another state that entitles the holder to practice public accounting in this state and is principally employed by the corporation or actively engaged in its business. The principal officer of the corporation and any officer or director having authority over issuing reports on financial statements shall hold a license under this chapter or issued by another state that entitles the holder to practice public accounting in this state;
     (b) At least one shareholder of the corporation shall hold a license under RCW 18.04.215;
     (c) Each resident person in charge of an office located in this state shall hold a license under RCW 18.04.215;
     (d) A written agreement shall bind the corporation or its shareholders to purchase any shares offered for sale by, or not under the ownership or effective control of, a qualified shareholder, and bind any holder not a qualified shareholder to sell the shares to the corporation or its qualified shareholders. The agreement shall be noted on each certificate of corporate stock. The corporation may purchase any amount of its stock for this purpose, notwithstanding any impairment of capital, as long as one share remains outstanding;
     (e) The corporation shall comply with any other rules pertaining to corporations practicing public accounting in this state as the board may prescribe; and
     (f) The licensed firm must meet competency requirements established by rule by the board.
     (4) A limited liability company engaged in business in this state and offering to issue or issuing reports on financial statements or using the title CPA or certified public accountant shall license as a firm every three years with the board, and shall meet the following requirements:
     (a) At least one member of the limited liability company shall hold a license under RCW 18.04.215;
     (b) Each resident manager or member in charge of an office located in this state shall hold a license under RCW 18.04.215;
     (c) A simple majority of the ownership of the licensed firm in terms of financial interests and voting rights of all owners shall be held by natural persons who are licensees or holders of a valid license issued under this chapter or by another state that entitles the holder to practice public accounting in this state. The principal member or manager of the limited liability company and any member having authority over issuing reports on financial statements shall hold a license under this chapter or issued by another state that entitles the holder to practice public accounting in this state; and
     (d) The licensed firm must meet competency requirements established by rule by the board.
     (5) Application for a license as a firm shall be made upon the affidavit of the proprietor or person designated as managing partner, member, or shareholder for Washington. This person shall hold a license under RCW 18.04.215. The board shall determine in each case whether the applicant is eligible for a license. A partnership, corporation, or limited liability company which is licensed to practice under RCW 18.04.215 may use the designation "certified public accountants" or "CPAs" in connection with its partnership, limited liability company, or corporate name. The board shall be given notification within ninety days after the admission or withdrawal of a partner, shareholder, or member engaged in this state in the practice of public accounting from any partnership, corporation, or limited liability company so licensed.
     (6) Licensed firms which fall out of compliance with the provisions of this section due to changes in firm ownership or personnel, after receiving or renewing a license, shall notify the board in writing within ((thirty)) ninety days of its falling out of compliance and propose a time period in which they will come back into compliance. The board may grant a reasonable period of time for a firm to be in compliance with the provisions of this section. Failure to bring the firm into compliance within a reasonable period of time, as determined by the board, may result in suspension, revocation, or imposition of conditions on the firm's license.
     (7) Fees for the license as a firm and for notification of the board of the admission or withdrawal of a partner, shareholder, or member shall be determined by the board. Fees shall be paid by the firm at the time the license application form or notice of admission or withdrawal of a partner, shareholder, or member is filed with the board.
     (8) Nonlicensee owners of licensed firms are:
     (a) Required to fully comply with the provisions of this chapter and board rules;
     (b) Required to be a natural person;
     (c) Required to be an active individual participant in the licensed firm or affiliated entities as these terms are defined by board rule; and
     (d) Subject to discipline by the board for violation of this chapter.
     (9) Resident nonlicensee owners of licensed firms are required to meet:
     (a) The ethics examination, registration, and fee requirements as established by the board rules; and
     (b) The ethics CPE requirements established by the board rules.
     (10)(a) Firms must notify the board within thirty days after:
     (i) Sanction, suspension, revocation, or modification of their license or practice rights by the securities exchange commission, internal revenue service, or another state board of accountancy;
     (ii) Sanction or order against the licensee or nonlicensee firm owner by any federal or other state agency related to the licensee's practice of public accounting or violation of ethical or technical standards established by board rule; or
     (iii) The firm is notified of any investigation by any federal or other state agency related to the firm's license, practice rights, or violation of ethical or technical standards established by board rule.
     (b) The board may adopt rules to implement this subsection and may also adopt rules specifying requirements for licensees to report to the board sanctions or orders relating to the licensee's practice of public accounting or violation of ethical or technical standards entered against the licensee by a nongovernmental standard-setting entity.

Sec. 3   RCW 18.04.215 and 2001 c 294 s 13 are each amended to read as follows:
     (1) Three-year licenses shall be issued by the board:
     (a) To persons meeting the requirements of RCW 18.04.105(1), 18.04.180, or 18.04.183.
     (b) To certificate holders meeting the requirements of RCW 18.04.105(4).
     (c) To firms under RCW 18.04.195, meeting the requirements of RCW 18.04.205.
     (2) The board shall, by rule, provide for a system of certificate and license renewal and reinstatement. Applicants for renewal or reinstatement shall, at the time of filing their applications, list with the board all states and foreign jurisdictions in which they hold or have applied for certificates, permits or licenses to practice.
     (3) An inactive certificate is renewed every three years with renewal subject to the requirements of ethics CPE and the payment of fees, prescribed by the board. Failure to renew the inactive certificate shall cause the inactive certificate to lapse and be subject to reinstatement. The board shall adopt rules providing for fees and procedures for renewal and reinstatement of inactive certificates.
     (4) A license is issued every three years with renewal subject to requirements of CPE and payment of fees, prescribed by the board. Failure to renew the license shall cause the license to lapse and become subject to reinstatement. Persons holding a lapsed license are prohibited from using the title "CPA" or "certified public accountant." Persons holding a lapsed license are prohibited from practicing public accountancy. The board shall adopt rules providing for fees and procedures for issuance, renewal, and reinstatement of licenses.
     (5) The board shall adopt rules providing for CPE for licensees and certificate holders. The rules shall:
     (a) Provide that a licensee shall verify to the board that he or she has completed at least an accumulation of one hundred twenty hours of CPE during the last three-year period to maintain the license;
     (b) Establish CPE requirements; and
     (c) Establish when new licensees shall verify that they have completed the required CPE.
     (6) A certified public accountant who holds a license issued by another state, and applies for a license in this state, may practice in this state from the date of filing a completed application with the board, until the board has acted upon the application provided the application is made prior to holding out as a certified public accountant in this state and no sanctions or investigations, deemed by the board to be pertinent to public accountancy, by other jurisdictions or agencies are in process.
     (7) A licensee shall submit to the board satisfactory proof of having completed an accumulation of one hundred twenty hours of CPE recognized and approved by the board during the preceding three years. Failure to furnish this evidence as required shall make the license lapse and subject to reinstatement procedures, unless the board determines the failure to have been due to retirement or reasonable cause.
     The board in its discretion may renew a certificate or license despite failure to furnish evidence of compliance with requirements of CPE upon condition that the applicant follow a particular program of CPE. In issuing rules and individual orders with respect to CPE requirements, the board, among other considerations, may rely upon guidelines and pronouncements of recognized educational and professional associations, may prescribe course content, duration, and organization, and may take into account the accessibility of CPE to licensees and certificate holders and instances of individual hardship.
     (8) Fees for renewal or reinstatement of certificates and licenses in this state shall be determined by the board under this chapter. Fees shall be paid by the applicant at the time the application form is filed with the board. The board, by rule, may provide for proration of fees for licenses or certificates issued between normal renewal dates.
     (9)(a) Licensees, certificate holders, and nonlicensee owners must notify the board within thirty days after:
     (i) Sanction, suspension, revocation, or modification of their license or practice rights by the securities exchange commission, internal revenue service, or another state board of accountancy;
     (ii) Sanction or order against the licensee, certificate holder, or nonlicensee owner by any federal or other state agency related to the licensee's practice of public accounting or the licensee's, certificate holder's, or nonlicensee owner's violation of ethical or technical standards established by board rule; or
     (iii) The licensee, certificate holder, or nonlicensee owner is notified of any investigation by any federal or other state agency related to the licensee's, certificate holder's, or nonlicensee owner's license, practice rights, or violation of ethical or technical standards established by board rule.
     (b) The board may adopt rules to implement this subsection and may also adopt rules specifying requirements for licensees, certificate holders, and nonlicensee owners to report to the board sanctions or orders relating to the licensee's practice of public accounting or the licensee's, certificate holder's, or nonlicensee owner's violation of ethical or technical standards entered against the licensee, certificate holder, or nonlicensee owner by a nongovernmental standard-setting entity.

Sec. 4   RCW 18.04.295 and 2001 c 294 s 14 are each amended to read as follows:
     The board shall have the power to: Revoke, suspend, refuse to renew, or reinstate a license or certificate; impose a fine in an amount not to exceed ((ten)) thirty thousand dollars plus the board's investigative and legal costs in bringing charges against a certified public accountant, a certificate holder, a licensee, a licensed firm, or a nonlicensee holding an ownership interest in a licensed firm; may impose full restitution to injured parties; may impose conditions precedent to renewal of a certificate or a license; or may prohibit a nonlicensee from holding an ownership interest in a licensed firm, for any of the following causes:
     (1) Fraud or deceit in obtaining a license, or in any filings with the board;
     (2) Dishonesty, fraud, or negligence while representing oneself as a nonlicensee owner holding an ownership interest in a licensed firm, a licensee, or a certificate holder;
     (3) A violation of any provision of this chapter;
     (4) A violation of a rule of professional conduct promulgated by the board under the authority granted by this chapter;
     (5) Conviction of a crime or an act constituting a crime under:
     (a) The laws of this state;
     (b) The laws of another state, and which, if committed within this state, would have constituted a crime under the laws of this state; or
     (c) Federal law;
     (6) Cancellation, revocation, suspension, or refusal to renew the authority to practice as a certified public accountant by any other state for any cause other than failure to pay a fee or to meet the requirements of CPE in the other state;
     (7) Suspension or revocation of the right to practice matters relating to public accounting before any state or federal agency;
     For purposes of subsections (6) and (7) of this section, a certified copy of such revocation, suspension, or refusal to renew shall be prima facie evidence;
     (8) Failure to maintain compliance with the requirements for issuance, renewal, or reinstatement of a certificate or license, or to report changes to the board;
     (9) Failure to cooperate with the board by:
     (a) Failure to furnish any papers or documents requested or ordered by the board;
     (b) Failure to furnish in writing a full and complete explanation covering the matter contained in the complaint filed with the board or the inquiry of the board;
     (c) Failure to respond to subpoenas issued by the board, whether or not the recipient of the subpoena is the accused in the proceeding;
     (10) Failure by a nonlicensee owner of a licensed firm to comply with the requirements of this chapter or board rule; and
     (11) Failure to comply with an order of the board.

Sec. 5   RCW 18.04.390 and 2001 c 294 s 21 are each amended to read as follows:
     (1) In the absence of an express agreement between the licensee or licensed firm and the client to the contrary, all statements, records, schedules, working papers, and memoranda made by a licensee or licensed firm incident to or in the course of professional service to clients, except reports submitted by a licensee or licensed firm, are the property of the licensee or licensed firm.
     (2) No statement, record, schedule, working paper, or memorandum may be sold, transferred, or bequeathed without the consent of the client or his or her personal representative or assignee, to anyone other than one or more surviving partners, shareholders, or new partners or new shareholders of the licensee, partnership, limited liability company, or corporation, or any combined or merged partnership, limited liability company, or corporation, or successor in interest.
     (3) A licensee shall furnish to the board or to his or her client or former client, upon request and reasonable notice:
     (a) A copy of the licensee's working papers or electronic documents, to the extent that such working papers or electronic documents include records that would ordinarily constitute part of the client's records and are not otherwise available to the client; and
     (b) Any accounting or other records belonging to, or obtained from or on behalf of, the client that the licensee removed from the client's premises or received for the client's account; the licensee may make and retain copies of such documents of the client when they form the basis for work done by him or her.
     (4) ((Nothing in this section shall require a licensee to keep any work paper or electronic document beyond the period prescribed in any other applicable statute)) (a) For a period of seven years after the end of the fiscal period in which a licensed firm concludes an audit, review, or compilation of a client's financial statements, the licensed firm must retain:
     (i) Working papers that form the basis of the audit, review, or compilation; and
     (ii) Other documents, and relevant working papers, including memoranda, correspondence, communications, and records, including electronic records, that:
     (A) Are created, sent, or received in connection with the audit, review, or compilation; and
     (B) Contain conclusions, opinions, analyses, or financial data related to the audit, review, or compilation.
     (b) A licensed firm must retain materials described in this subsection whether the conclusions, opinions, analyses, or financial data in the materials support or cast doubt on the final conclusions reached by the licensee. Such materials include documentation of differences of opinion concerning accounting auditing issues.
     (c) The board may adopt rules to implement this subsection and may also adopt rules relating to working papers and document retention.
     (5) Nothing in this section should be construed as prohibiting any temporary transfer of ((workpapers)) working papers or other material necessary in the course of carrying out peer reviews or as otherwise interfering with the disclosure of information pursuant to RCW 18.04.405.

Sec. 6   RCW 18.04.370 and 2001 c 294 s 19 are each amended to read as follows:
     (1) Any person who violates any provision of this chapter, shall be guilty of a crime, as follows:
     (a) Any person who violates any provision of this chapter is guilty of a misdemeanor, and upon conviction thereof, shall be subject to a fine of not more than ((ten)) thirty thousand dollars, or to imprisonment for not more than six months, or to both such fine and imprisonment.
     (b) Notwithstanding (a) of this subsection, any person who uses a professional title intended to deceive the public, in violation of RCW 18.04.345, having previously entered into a stipulated agreement and order of assurance with the board, is guilty of a felony, and upon conviction thereof, is subject to a fine of not more than ((ten)) thirty thousand dollars, or to imprisonment for not more than two years, or to both such fine and imprisonment.
     (2) With the exception of first time violations of RCW 18.04.345, subject to subsection (3) of this section whenever the board has reason to believe that any person is violating the provisions of this chapter it shall certify the facts to the prosecuting attorney of the county in which such person resides or may be apprehended and the prosecuting attorney shall cause appropriate proceedings to be brought against such person.
     (3) The board may elect to enter into a stipulated agreement and orders of assurance with persons in violation of RCW 18.04.345 who have not previously been found to have violated the provisions of this chapter. The board may order full restitution to injured parties as a condition of a stipulated agreement and order of assurance.
     (4) Nothing herein contained shall be held to in any way affect the power of the courts to grant injunctive or other relief as above provided.

Sec. 7   RCW 18.04.405 and 2001 c 294 s 22 are each amended to read as follows:
     (1) A licensee, certificate holder, or licensed firm, or any of their employees shall not disclose any confidential information obtained in the course of a professional transaction except with the consent of the client or former client or as disclosure may be required by law, legal process, the standards of the profession, or as disclosure of confidential information is permitted by RCW 18.04.350 (3) and (4), 18.04.295(8), 18.04.390, and this section in connection with quality assurance, or peer reviews, investigations, and any proceeding under chapter 34.05 RCW.
     (2) This section shall not be construed as limiting the authority of this state or of the United States or an agency of this state, the board, or of the United States to subpoena and use such confidential information obtained by a licensee, or any of their employees in the course of a professional transaction in connection with any investigation, public hearing, or other proceeding, nor shall this section be construed as prohibiting a licensee or certified public accountant whose professional competence has been challenged in a court of law or before an administrative agency from disclosing confidential information as a part of a defense to the court action or administrative proceeding.
     (3) The proceedings, records, and ((work)) working papers of a review committee shall be privileged and shall not be subject to discovery, subpoena, or other means of legal process or introduction into evidence in any civil action, arbitration, administrative proceeding, or board proceeding and no member of the review committee or person who was involved in the peer review process shall be permitted or required to testify in any such civil action, arbitration, administrative proceeding, or board proceeding as to any matter produced, presented, disclosed, or discussed during or in connection with the peer review process, or as to any findings, recommendations, evaluations, opinions, or other actions of such committees, or any members thereof. Information, documents, or records that are publicly available are not to be construed as immune from discovery or use in any civil action, arbitration, administrative proceeding, or board proceeding merely because they were presented or considered in connection with the quality assurance or peer review process.

NEW SECTION.  Sec. 8   (1) By December 1, 2003, the board of accountancy shall report to the senate committee on commerce and trade and the house committee on commerce and labor, or successor committees, on the issue of auditor independence.
     (2) This section expires January 1, 2004.