Capitol Beat: A Tardy Budget

California CPA magazine: November 2008

Finally, after setting a record for the longest delay in state history, California has a budget and the Legislature adjourned its two-year session.

Leading up to the final days of the the budget tug-o-war, in mid-September, the Legislature sent a revenue proposal to Gov. Schwarzenegger. The governor was not happy with provisions of the package and announced that he would veto the proposal. During the press conference when he announced his intention, the governor was asked what he would do if the Legislature voted to override his veto. He responded that he would only sign those bills that were important to the people of California in this time of fiscal crisis and veto the rest.

We all know the result.

The governor followed up on his pledge to veto legislation that had the potential to increase costs to California. He vetoed 174 pieces of legislation in the hours just before the final deadline. Added to his previous vetoes, the total for the two-year session reached 415 bills and only 771 were signed.

Gov. Schwarzenegger vetoed 35 percent of the legislation that made it to his desk—the highest rate for any governor since the California Legislature went full time 40 years ago.

Most of the vetoed measures were returned to the Legislature with the following message: “The historic delay in passing the 2008-2009 State Budget has forced me to prioritize the bills sent to my desk at the end of the year’s legislative session. Given the delay, I am only signing bills that are the highest priority for California. This bill does not meet that standard and I cannot sign it at this time. Sincerely, Arnold Schwarzenegger.”

Redevelopment Agency Bill Vetoed

One of those bills the governor vetoed was SB 1689 (Lowenthal), which CalCPA opposed. The bill would have required the state controller to perform quality-control reviews of redevelopment agency audits.

As introduced, the bill also would have allowed the controller to unilaterally suspend audit firms from performing redevelopment agency audits for up to three years, if the reviewed firm’s audits were judged to be deficient by the CBA. The bill’s final version required a determination by the CBA prior to suspension.

The bill also would have increased the authority of the Department of Housing and Community Development.

Independent Contractor Misclassification

SB 1583 (Corbett) would have made a consultant who, “knowingly advises an employer to treat an individual as an independent contractor to avoid employee status,” liable, along with the employer, for any damages. This proposed bill also was vetoed. CalCPA, along with all major business groups, opposed SB 1583.

The veto message was direct and on point: “Existing law governing the difference between an employee and an independent contractor is confusing to employers. As the Legislature has failed to address this confusion, many employers turn to consultants for help in determining how best to classify individuals for employment purposes. The new liability imposed by this bill will make consultants wary of providing services to businesses, leaving these employers without any guidance in an increasing litigious environment. I encourage the Legislature to focus on addressing the confusion caused by current law, not punishing those trying to create and grow jobs in California.”

CBA Tables Licensing Proposal

At its September meeting, the CBA tabled a proposal that would have required all candidates to complete the attest experience requirement for entry into the CPA profession and a related measure that would have required the CBA to issue distinctive licenses for CPAs who had completed the attest experience requirement.

Both proposals are inconsistent with the Uniform Accountancy Act licensing provisions that most other states follow. A majority of states have recognized that the attest experience requirement is inconsistently interpreted, provides limited, if any, assurance to the public and serves as something of an artificial barrier to entry. Those states look to peer review as a more effective method of assuring that CPAs have the necessary knowledge, experience and competence.

CalCPA has a long-standing policy of supporting UAA conformity and CalCPA Government Relations Committee member Hal Schultz testified that, “The issuance of two distinct licenses has significant potential to increase consumer confusion and to be very misleading regarding a licensee’s ability to perform a quality audit.”

He encouraged the CBA to look at peer review as a better method of providing consumer protection, since, “professional standards require much more than a mini-apprenticeship to qualify as an auditor.”

Mandatory Peer Review

At the same meeting, the CBA moved closer to mandating peer review for firms performing audits, reviews and compilations, by approving a peer review report that will be sent to the Legislature. The CBA may pursue legislation next year to begin mandating peer review. If successful, peer review could be mandatory by 2010 or 2011.