Hawaii Mandates Peer Review for Out-of-State Firms

It’s a “peer review law unlike others in the nation.”

It covers any firm doing business in the state, whether or not they have an office there. They are also required to pay taxes in the state, but as many as 70 percent of out-of-state firms may be delinquent.

John W. Roberts, M.B.A., CPA, president of the Hawaii Association of Public Accountants (not to be confused with the HSCPA), reports from the front lines:

I wish to bring to your attention that on April 30, 2010 the Hawaii legislature overrode the veto of Hawaii Governor Linda Lingle and passed a mandatory peer review law unlike others in the nation.  A copy of the new law (SB2501, SD1, HD1) is attached (PDF, 10 pages) for your reference.  You may also read about its legislative history at  http://www.capitol.hawaii.gov/session2010/lists/measure_indiv.aspx?billtype=SB&billnumber=2501.

The unique characteristics of this law include the following:

1.  All firms doing attestation work in Hawaii, regardless of their size or the location of their home office, will be required to have their Hawaii office and Hawaii work product peer reviewed. There are to be no exemptions for international and multi-state CPA firms whose Hawaii offices are seldom selected for peer review because of their small size relative to the size of their other offices in the United States.

2.  The focus of the peer reviews will be educational and remedial. Punitive measures will only be employed in egregious circumstances.

3.  All CPA firms will be entitled to due process and the right of appeal to reduce the risk that peer review could be abused as an anti-competitive tool against any firm.

4.  The Board of Public Accountancy will have the discretion to allow time extensions due to hardship, such as military service, illness, and other personal emergencies.

5.  If the Board of Public Accountancy authorizes a third party to provide peer review services (such as a trade association), CPA firms, firm owners, or firm employees will not be required to join that third-party organization, and the same price for peer review services will be charged to both members and non-members.

Most CPA firms in Hawaii already undergo voluntary peer review as part of their AICPA membership requirements. The Hawaii offices of international and multi-state accounting firms and an unknown number of tiny CPA firms are not peer reviewed at the Hawaii level. PriceWaterhouseCoopers (PWC) closed its Hawaii office a couple of years ago and now flies in accountants to service Hawaii clients. Under this new law, I believe that at least some of PWC’s non-PCAOB attestation engagements in Hawaii will have to be selected for peer review even though PWC no longer has an office in Hawaii. Deloitte & Touche, KPMG, Ernst and Young, and Grant Thornton still have offices in Hawaii and will be subject to the new law.

By the way, the Hawaii Association of Public Accountants (HAPA) conducted a study earlier this year of those non-Hawaii CPA firms whose owners or employees received temporary individual CPA permits to practice in Hawaii during the years 2007 and 2008.  (Hawaii will begin issuing CPA firm permits to practice later this year.) The HAPA study revealed that approximately 70 percent of these firms appear to have not filed Hawaii General Excise Tax (GET) and Hawaii income tax returns for those years. A sample was made of those non-Hawaii CPA firms who appear to have not filed their Hawaii taxes. 100 percent of those firms sampled also did not register to do business in Hawaii, as required by Hawaii law. Because public domain data is not available on income tax filings by individual CPAs, no conclusions could be drawn with respect to individual CPA tax compliance.

HAPA obtained the temporary permit data from the Hawaii Department of Commerce and Consumer Affairs and then compared the firm names to the public domain list of businesses with General Excise Tax licenses. (A GET license is needed for a business to file tax returns in Hawaii.)  In addition to highlighting that Hawaii CPA firms are competing in the Hawaii market against outside CPA firms who are not paying their share of Hawaii taxes, this high rate of non-compliance raises all kinds of questions about tax compliance by CPA firms and individual CPAs who physically cross other state borders to work under the CPA mobility provisions of many states. Unlike Hawaii, most of these other states probably do not have the data to perform a similar study.

HAPA’s study, which includes the identities of the subject CPA firms, the individual CPAs, and their Hawaii clients, has been turned over to the Hawaii Director of Taxation and to the Hawaii Board of Public Accountancy for further investigation and appropriate action, if any. Copies of the study, excluding the attachments containing the identities of the firms, CPAs, and their clients, have been provided to selected Hawaii legislators. To my knowledge, no copies of the study have been provided to members of the press.

Posted on May 10, 2010