Proposals for Changes to the Accounting Legislation

Issue One

Permit Chartered Accountants, Certified General Accountants, and Certified Management Accountants to operate as limited liability partnerships.

Background

On August 21, 2002, the Institute of Chartered Accountants of Newfoundland requested to amend the Chartered Accountants Act, and the Partnership Act, to provide chartered accounting firms the option of operating as limited liability partnerships.

Presently, chartered accounting firms are permitted to operate only as general partnerships, the terms of which are outlined in the Partnership Act. Under a general partnership agreement, all partners in a firm are jointly and severally liable for the debts and obligations incurred by the firm while he/she is a partner. This means that each partner is not only personally liable for the debts and obligations of the firm he/she incurs through his/her role as a partner, but also those debts and obligations incurred by other partners, in which they have no involvement. As a consequence, a partner's personal assets are exposed when the firm's assets cannot fulfill its debts and obligations.

Providing provisions for chartered accounting firms to operate as limited liability partnerships will lessen the degree of personal liability risk for partners. Partners will not be held personally responsible for the negligence, wrongful acts, or misconduct of another partner, but will remain personally liable for the debts and obligations they incur themselves and those incurred by employees they directly supervise. It does not limit the liability of accounting firms, or affect creditors' rights to the firm's assets or insurance coverage.

Several other provinces have already amended their partnership legislation to provide provisions for operating as limited liability partnerships.

Issue Two

To amend the Public Accountancy Act to provide provisions for those licensed under the Act to practice in corporate form.

Background

In 1999 the Public Accountants Licensing Board (the Board) requested to amend their governing legislation, the Public Accountancy Act, to provide provisions for licensees to incorporate. In this Province, individuals wanting to practice public accounting (i.e., auditing) must obtain a license under the Public Accountancy Act, which is administered by the Board. The licensing requirements include educational, personal and moral qualifications, as prescribed by the Board, and membership in good standing with one of the three designated accounting bodies (i.e., Chartered Accountants, Certified General Accountants, or Certified Management Accountants).

Presently, the Public Accountancy Act does not permit corporations to practice public accounting. If public accounting firms were provided the option of incorporation, the liability of its owners would be limited to the amount of money they invest. However, the Board has proposed that the provision would stipulate that any liability of an individual arising while engaged in the practice of public accounting cannot be dismissed by reason only that the services are provided by a corporation.

Presently, some jurisdictions have amended legislation permitting accounting firms to incorporate.

Issue Three

To amend the Public Accountancy Act to provide provisions that restrict the practice of review engagements to those licensed under the Act.

Background

Included in the Board's request to amend their legislation, was the provision to restrict the practice of review engagements to licensees. The purpose of a financial statement is to enable a business to establish the result of its operations over a period of time and to determine its worth at a specific date. Financial statements are often prepared by business people to assist them in evaluating their financial condition. Sometimes it is necessary to provide specific financial statements at the request of a banker or supplier. Tax returns require a financial statement when a business is involved.

Financial statements prepared internally can be in any form that is convenient or acceptable to management. When financial statements are provided to outside parties, however, they are required to be in a standard format and follow specific rules of preparation. There are three types of financial statements which can be prepared by an external accountant. These are called compilation, audit, and review engagements.

Compilation engagements are ones in which the accountant receives information from the client and arranges it into the form of a financial statement. The accountant is concerned that the assembly of information is arithmetically correct and does not attempt to verify the accuracy or completeness of the information provided. No expression of assurance regarding the financial statements is provided by the accountant. A compilation engagement can be done by anyone with knowledge of the accounting process; in most provinces a license from a designated accounting group is not necessary.

Generally accepted auditing standards require that a licensed accountant plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. It also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Those people eligible to practice audit engagements varies across the country. The provinces of Ontario, Prince Edward Island, Nova Scotia and Newfoundland and Labrador are the only jurisdictions that have established public accounting legislation, the purpose of which is to license accountants to practice audit engagements.

Review engagements are generally non-audit engagements in which the financial statements are prepared by either the accountant or the client and are then subject to enquiry, analytical procedures and discussion by the accountant for plausibility in the circumstances. The objective of review engagements is to add a measure of credibility to the financial statements. The provinces of Alberta, Nova Scotia, Ontario, Quebec and Saskatchewan require accountants performing review engagements to be licensed. Presently, in this Province a license is not required.

The Public Accountants Licensing Board has proposed to amend the Public Accountancy Act to include in their definition of public accounting, the practice of review engagements. This would mean that all accountants performing review engagements must obtain a license from the Board. Because many accountants who are currently practicing review engagements do not hold a membership in one of the three designated accounting professions, and therefore are not eligible to receive a license under the Act, the Board has proposed to grant them permits so that they may continue to practice. People eligible to receive these permits must be practicing review engagements at the time the amendments receive royal assent.

Issue Four

Whether certain recommendations of the Canadian Public Accountability Board (CPAB) respecting the auditing of publicly traded companies should be extended to the auditing of non-publicly traded companies in this Province.

Background

On July 17, 2002 it was announced that a new oversight system for accounting firms auditing publicly traded companies will be administered and enforced by the Canadian Public Accountability Board (CPAB).

Canada's major Chartered Accounting firms have voluntarily agreed to implement the new requirement. The CPAB requirements will apply to all other firms auditing public companies within three years.

The CPAB requirements we are considering for implementation with accounting firms in this Province that audit non-publicly traded companies are as follows:

• Limitations on Non-Auditing Services:
  An auditing firm may not provide the following services to its audit clients:
  • internal audit services;
  • information technology system design and implementation services;
  • valuation services;
  • actuarial services; and,
  • corporate finance services.
• Time Period for Permitted Auditing Activities:
  An individual cannot serve as the audit engagement partner for an audit client for more than seven consecutive years.

Send your Comments

E-Mail

consultation@gov.nl.ca

Postal Mail

MANAGER OF TRADE PRACTICES
DEPARTMENT OF GOVERNMENT SERVICES AND LANDS
PO BOX 8700
ST. JOHN'S NL  A1B 4J6

Telephone

(709) 729-4196