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19-01-2021 | Original Paper

# The Influence of Political Regime on State-Level Disciplinary Actions of CPAs Sanctioned by the PCAOB

Authors: Abdullah Al-Moshaigeh, Denise Dickins, Julia L. Higgs

Published in: Journal of Business Ethics | Issue 2/2022

## Abstract

We investigate whether enforcement is influenced by politics by comparing the severity of PCAOB sanctions of individual CPAs to the severity of related state-level disciplinary actions imposed by boards of accountancy (BOAs). Our results provide evidence that when responding to PCAOB sanctions, BOAs under Republican regimes impose less severe penalties than do BOAs under Democratic regimes. Our data and analyses inform the regulatory and enforcement practices of the accounting profession and other professions. Most directly, motivated by improvements in technology that facilitate the cross-jurisdiction practice of public accounting, states have adopted mobility laws where CPAs are only required to be licensed in their state of residence to practice in multiple states. These laws simplify licensing but may complicate enforcement. Beyond generalized red-state, blue-state differences in enforcement, we find that non-resident CPAs receive less severe disciplinary actions. If not reasonably consistent across BOAs, regulators may be unwilling to delegate responsibility for enforcement to another state’s BOA.
Footnotes
2
As prescribed by Sect. 5, Investigations and Adjudications, of Rules of the Board – available at: https://​pcaobus.​org/​Rules/​Pages/​Section_​5.​aspx.

3
See ipassthecpaexam.com for a state-by-state comparison of licensee requirements.

4
Some BOA members are appointed by other state governing bodies, like a board of regents, whose members are appointed by the state’s governor (e.g., New York).

6
The three BOA members are all CPAs, one holds a J.D., and two are academics. It follows that if a state society board is dominated by members of a political party that is different from that of the Governor, that political party could influence BOA actions and our results. There are several reasons why we believe that the results of our analyses are robust for differences in the political party of Governors and state CPA society board members. First, as described, the political party of most states does not change; there are only a handful of “swing states.” Since Governors are of the same political party as the majority of state voters, the likelihood is high that the majority of state CPA society boards are of the same political party as the Governor. Second, even if a state society recommends a BOA member, the Governor is not obligated to follow the recommendation. Third, state society board members are volunteers whose appointment is typically voted on or ratified by societies’ full memberships which reduces the influence of politics.

9
An individual’s worldview also impacts career choice. Studies have shown that accountants tend to fall into categories on various Jungian-based personality tests that describe their personality traits as cautious, deliberate, analytical, and questioning (among others, Shackleton 1980; Schloemer and Schloemer 1997; Burton et al. 2016). Perhaps not surprising, data of the Federal Election Commission reported by Verdant Labs reports approximately 60 percent of CPAs are registered Republicans (See http://​verdantlabs.​com/​politics_​of_​professions/​).

10
Registered firms are also sanctioned by the PCAOB, as when violations are attributed to failures in firms’ quality control processes. In many of the 165 sanctions examined here, both the CPA and their registered firm are sanctioned. Our analyses are restricted to comparing the relationship between PCAOB sanctions and BOA actions for CPAs because, as confirmed by discussions with three current and former BOA members, state-level enforcement actions against CPAs carryover to their firms in part due to states’ “holding out” regulations. For example, if John Doe’s CPA license is revoked, so is that of his sole-practitioner firm, John Doe CPA. If his firm is a partnership, Doe and Smith CPAs, his firm must change its name or become a different firm. BOAs rarely impose actions against firms separate from their firm-member CPAs. At the state level, firm licensing/registration is primarily for monitoring unlicensed activity by non-CPAs and “holding out” rules.

11
The 234 BOA Actions are classified as Red (or not) based on the date of the action. During the period of our analyses, only three states were affiliated with Independent Party governors. Two had no PCAOB sanctions (Alaska and Rhode Island), and one (Florida) elected a Republican governor in 2007 who changed his political affiliation to Independent in May 2010 (Charlie Christ)—the last of his 4-year term. Our dataset includes two Florida BOA actions in 2010, one of which is dated March 19. The other is of a non-resident, for which no action was taken. These BOA actions have been classified as Red.

12
“Bar” is most commonly associated with CPA-employees or partners of larger firms, and “revocation” is most commonly associated with CPA-partners of smaller firms. In some cases, the PCAOB sanctions both the CPA and the CPA’s firm; for example, when poor quality controls over the firm’s processes contributed to the matter. When firms are small, disentangling fines between the CPA and his or her firm is difficult. Also, perhaps as a way of penalizing all partners, the fines assessed annually inspected firms can be very large. Related to our dataset of PCAOB sanctions against individual CPAs, four annually inspected firms were assessed fines that ranged from $1,000,000 to$2,000,000. Excluding these large firm fines, related firm fines ranged from zero to $20,000 (mean =$3515, median = $0). 14 Spencer et al. (2015) provide information on data available about disciplinary actions at BOA websites. For future researchers, we found that their data continue to be reliable for the 30 states represented in our analyses except for Colorado, Florida, North Carolina, and Texas. These states now include finalized disciplinary actions on their website. 15 Utah’s standard agreement requires that disciplined CPAs reimburse costs but does not specify the amount of such costs. We assume these costs are less than$1,000.

16
For 11 observations, BOA action is more severe than PCAOB sanction. Since in each of these matters the CPA had prior BOA violations and the action was for multiple infractions, we code these observations as equal in severity.

17
An alternative to including these proxies for differences in BOA characteristics is to include fixed effects indicator variables for each of the 30 states represented by the BOA actions included in our dataset. Because our dataset includes only 234 observations, doing so would greatly reduce the power of the study’s analyses.

18
An alternative to using indicator variables to control for the three periods would be to include fixed effects indicator variables for each of the 13 years considered in the study. Because our dataset includes only 234 observations, doing so would greatly reduce the power of our analyses.

19
Consistent with this finding, a transcript of the continuing professional education course, Ethics: Protecting the Integrity of Florida CPAs (2018–19) (available at: https://​ficpa.​org/​Public/​Products/​ProductDetailsv3​.​aspx?​ProductID=​ETHOL18) reports that revocations (Category 5, Table 4) are rare, and long suspensions (Category 4, Table 4) may be used to prevent CPAs from practicing while enabling the BOA to maintain jurisdiction over the CPA.

20
Using ordinal logistic regression to estimate the equation does not change the study’s results. The coefficient on Red BOA is significant (p < 0.001) and the direction and significance of the control variables is unchanged. An alternative form of the equation used to test the study’s hypothesis is: Severity Difference = Red BOA + BOA Characteristics + PCAOB Sanction Characteristics + CPA Characteristics, where Severity Difference is a continuous variable intended to measure the difference in severity of the ordered categorization of PCAOB sanctions (Table 4, range 1 to 5) and the ordered categorization of BOA actions (Table 5, range 0 to 5). Estimating this alternative, using either linear or ordinal regression produces equivalent results. The coefficients on Red BOA are significant (p < 0.01) and the direction and significance of the other control variables are unchanged.

21
Bazelon (2019) describes process and outcome differences in prosecutorial and trial-by-jury actions.

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Title
The Influence of Political Regime on State-Level Disciplinary Actions of CPAs Sanctioned by the PCAOB
Authors
Abdullah Al-Moshaigeh
Denise Dickins
Julia L. Higgs
Publication date
19-01-2021
Publisher
Springer Netherlands
Published in
Journal of Business Ethics / Issue 2/2022
Print ISSN: 0167-4544
Electronic ISSN: 1573-0697
DOI
https://doi.org/10.1007/s10551-020-04733-9

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