7-0100-15128-1
STATE OF MINNESOTA
OFFICE OF ADMINISTRATIVE HEARINGS
FOR THE STATE BOARD OF ACCOUNTANCY
In
the Matter of Proposed Permanent Rules REPORT OF THE
Governing
Licensing and Regulation of ADMINISTRATIVE
LAW JUDGE
Accountants,
Minn. Rules Chapter 1105
The above matter came on for hearing before Administrative Law Judge (ALJ) Richard C. Luis at 10:00 a.m. on December 10, 2002, at the Minnesota Department of Commerce, 85 East Seventh Place, St. Paul, Minnesota. The hearing continued until everyone present had an opportunity to state their views on the proposed rules.
The hearing and this Report are part
of a rulemaking process governed by the Minnesota Administrative Procedure
Act. The rulemaking process is designed
to ensure that state agencies have met all of the requirements that Minnesota
law specifies for adopting rules. The
requirements include assurances that the proposed rules are necessary and reasonable
and that any modifications that the agency may have made after the proposed
rules were published initially do not result in substantial differences from
what the agency proposed originally.
The rulemaking process also includes a hearing when a sufficient number
of people request it. The hearing is
intended to allow the agency and the Administrative Law Judge reviewing the
proposed rules to hear public comment regarding the impact of the proposed
rules and what changes might be appropriate.
Bernard E. Johnson, Assistant Attorney
General, 525 Park Street, Suite 200, St. Paul, Minnesota 55103-2106, appeared
on behalf of the State Board of Accountancy (Board). Two former Board Chairs, Robert Hyde and Phillip Gleason, and
Dennis Poppenhagen, Executive Secretary of the Board, constituted the panel
which offered affirmative evidence and were available to provide the public
with information about the proposed rules and answer any questions. Approximately 25 members of the public
attended the hearing, 21 signed the hearing register, and six spoke for the
record.
After the hearing, the record remained
open for 20 days, until December 30, 2002, to allow interested persons and the
agency an opportunity to submit written comments. Following that comment period, the record remained open for an
additional five business days to allow interested persons and the agency the
opportunity to file a written response to the comments submitted. The deadline for responses to the comments
was January 7, 2003, and the hearing record closed for all purposes on that
day.
The Board of Accountancy must make this Report available for review for at least five working days before the Board takes any further action to adopt final rules or to modify or withdraw the proposed rules. During that time, this Report must be made available to interested persons upon request.
If the Board makes any further changes
to the rules as proposed, other than those recommended in this Report, it must
resubmit the Rules to the Chief Administrative Law Judge for a review of those
changes.
After adopting the final version of the rules, the Board should inform this Office. This Office will request certified copies of the rules from the Revisor and will file the rules with the Secretary of State.
Based upon all of the testimony,
exhibits and written comments, the Administrative Law Judge makes the
following:
1.
On October 17, 2002, the
Board of Accountancy requested that a hearing be scheduled and filed the
following documents with the Chief Administrative Law Judge:
a.
The Notice of Hearing
proposed to be published;
b.
A copy of the proposed
rules, certified as to form by the Revisor’s Office;
c.
The Statement of Need
and Reasonableness (SONAR) and;
d.
A copy of the Notice of
Intent to Adopt Rules with a public hearing as published in the State Register;
2.
The Administrative Law
Judge approved the Board’s Notice of Hearing on October 18, 2002.
3.
On October 28, 2002, the
Board published a Dual Notice of Intent to Adopt Rules Without a Public Hearing
Unless 25 or More Persons Request a Hearing and Notice of Hearing if 25 or More
Requests for Hearing are Received, at 27 State Register 603. The Notice set a deadline of November 27,
2002 for the submission of written requests for a public hearing. More than 25 such requests were received,
and this hearing process followed.
4.
On November 1, 2002, the
Board mailed the Notice of Hearing to all persons and associations who had
registered their names with the agency for the purpose of receiving such notice
and to interested and affected parties on the Board’s mailing list. On December 4, 2002, the Board mailed the
Notice of Hearing to all persons who had filed requests for a hearing.
5.
The Board placed the
following documents into the record on the day of the hearing:
a.
The Notice of Hearing
published in the State Register on October 28, 2002 at 27 SR 603;
b.
The Board’s resolution
authorizing the adoption of the proposed rules;
c.
The October 29, and
December 4, 2002 versions of proposed and adopted permanent rules for licensing
and regulating accountants, including approval of the Revisor;
d.
The Statement of Need
and Reasonableness (SONAR);
e.
The Certificate of
Mailing the SONAR to the Legislative Reference Library and a transmittal
letter;
f.
The Certificate of
Mailing the Notice of Hearing, Certification of the Accuracy of the Mailing
List, Certification of the Mailing List, and a copy of the Notice of Hearing
mailed to those who had requested a hearing;
g.
Written comments
received during the period for filing comments and requests for hearing,
including the requests for hearing, and comments received after the deadline of
November 27, 2002;
6.
The Administrative Law
Judge finds that the Board of Accountancy has met all of the procedural
requirements of applicable statutes and rules.
7.
This rule proposal
involves the adoption of a new chapter (1105) in the Minnesota Rules, to
replace Minn. Rules Chapter 1100 relating to the licensure and regulation of
accountants in Minnesota. The 2001
legislature passed Minn. Stat
§ 326A, also known as the Accountancy Act of 2001. These proposed rules are designed to implement the provisions of
the new legislation, which became effective January 1, 2003 and supersedes
Minn. Stat. Chapter 326, by specifying procedures to effect the transition from
the provisions of Chapter 326 to the provisions of Minn. Stat. Chapter 326A.
8.
The portion of the
proposed rules that drew the greatest interest and comment involves educational
and experience requirements for licensure as a Certified Public Accountant
(CPA). Under the proposed rules,
licensed public accountants who have not been designated earlier as CPAs will
now be allowed licensure under that designation. As part of that process, all actively Licensed Public Accountants
(LPAs) on December 31, 2002, were issued a CPA certificate. This proposal is controversial because a CPA
certificate is now available to accountants who never passed (or never took)
the CPA examination.
9. Minn.
Stat. § 326A.02, subd. 5, provides that:
(a) Subd. 5 Rules.
The Board may adopt rules governing its administration and enforcement
of this Chapter and the conduct of licensees and persons registered under
section 326A.06, including:
. . .
(3) rules specifying educational and experience qualifications required for the issuance of certificates and the continuing professional education required for renewal of certificates;
. . .
(6) rules governing the manner and circumstances of use of the titles “Certified Public Accountant”, “CPA,” “Registered Accounting Practitioner,” and “RAP";
. . .
(8) rules on
substantial equivalence to implement section 326A.14;
. . .
(10) rules regarding the issuance and renewals of
certificates, permits and registrations;
(11)
rules regarding
transition provisions to implement this Chapter;
(12)
rules specifying the
educational and experience qualifications for registration, rules of
professional conduct, rules regarding peer review, rules governing standards
for providing services, and rules regarding the conduct and content of
examination for those persons registered under section 326A.06(b); and
(13) rules regarding fees for examinations,
certificate issuance and renewal, firm permits, registrations under Section
326A.06(b), notifications made under Section 326A.14, and late processing fees.
10.
The Administrative Law
Judge finds that the Board of Accountancy has the statutory authority to adopt
the proposed rules.
Rulemaking Legal
Standards
11. Under Minnesota law, one of the determinations that must be made in a rulemaking proceeding is whether the agency has established the need for and reasonableness of the proposed rules by an affirmative presentation of facts.[1] In support of a rule, an agency may rely on legislative facts, namely general facts concerning questions of law, policy and discretion, or it may simply rely on interpretation of a statute, or stated policy preferences.[2] The MPCA prepared a SONAR in support of its proposed rules. At the hearing, the MPCA primarily relied upon the SONAR as its affirmative presentation of need and reasonableness for the proposed amendments. The SONAR was supplemented by comments made by MPCA staff at the public hearing, and by the MPCA’s written post-hearing comment and submissions.
12. The question of whether a rule has been shown to be reasonable focuses on whether it has been shown to have a rational basis, or whether it is arbitrary based upon the rulemaking record. Minnesota case law has equated an unreasonable rule with an arbitrary rule.[3] Arbitrary or unreasonable agency action is action without consideration and in disregard of the facts and circumstances of the case.[4] A rule is generally found to be reasonable if it is rationally related to the end sought to be achieved by the governing statute.[5] The Minnesota Supreme Court has further defined an agency’s burden in adopting rules of requiring it to “explain on what evidence it is relying and how the evidence connects rationally with the agency’s choice of action to be taken.”[6] An agency is entitled to make choices between possible approaches so long as the choice made is rational. Generally, it is not the proper role of the Administrative Law Judge to determine which policy alternative presents the “best” approach since this would invade the policy-making discretion of the agency. The question is, rather, whether the choice made by the agency is one that a rational person could have made.[7]
13. In addition to need and reasonableness, the Administrative Law Judge must assess whether the rule adoption procedure was complied with, whether the rule grants undue discretion, whether an agency has statutory authority to adopt the rule, whether the rule is unconstitutional or illegal, whether the rule constitutes an undue delegation of authority to another entity, or whether the proposed language is not a rule.[8]
14. Minnesota law allows an agency to withdraw a proposed rule, or a portion of a rule, at any time prior to filing it with the Secretary of State,[9] “unless the withdrawal of a rule or a portion of the rule makes the remaining rules substantially different.[10]
15. The standards to determine whether changes create a substantially different rule are found in Minn. Stat. § 14.05, subd. 2. The statute specifies that a modification does not make a proposed rule substantially different if “the differences are within the scope of the matter announced . . . in the notice of hearing and are in character with the issues raised in that notice,” the differences “are a logical outgrowth of the contents of the . . . notice of hearing, and the comments submitted in response to the notice,” and the notice of hearing “provided fair warning that the outcome of that rulemaking proceeding could be the rule in question.” In determining whether modifications are substantially different, the Administrative Law Judge is to consider whether “persons who will be affected by the rule should have understood that the rulemaking proceeding . . . could affect their interests,” whether the “subject matter of the rule or issues determined by the rule are different from the subject matter or issues contained in the . . . notice of hearing,” and whether the effects of the rule differ from the effects of the proposed rule contained in the . . . notice of hearing.”
Additional
Notice Requirements
16. The Board’s proposed Additional Notice Plan consisted of notification in the Board’s Newsletter, which goes to all holders of CPA and LPA certificates and licenses and licensed firms, of the Board’s intent to adopt rules and that the planned rules were available upon request. The notification in the newsletter stated that all CPA and LPA certificate holders and licensees and licensed firms would be affected by the changes. Also, individuals who previously expressed an interest in Board rules were mailed the Request for Comments and the planned rule amendments, and Board staff attempted to notify and identify all professional organizations representing affected persons. All Minnesota schools, colleges and universities that teach accounting were notified. The Dual Notice of Hearing published in the State Register contained a statement that a free copy of the proposed rules and the SONAR were available from the Board’s contact person.
17. The Board mailed the Notice and the SONAR to those legislators required to receive them under Minn. Stat. § 14.116, by letter dated October 23, 2002.
18. The Administrative Law Judge finds that the Board has fulfilled its additional notice requirements.
Statutory Requirements for the
SONAR
19. Minn. Stat. § 14.131 requires an agency proposing to adopt rules to include in its SONAR:
(1) a description of the classes of persons who probably will be affected by the proposed rule, including classes that will bear the costs of the proposed rule and classes that will benefit from the proposed rule;
(2) the probable costs to the agency and to any other agency of the implementation and enforcement of the proposed rule and any anticipated effect on state revenues;
(3) a determination of whether there are less costly means or less intrusive methods for achieving the purpose of the proposed rule;
(4) a description of any alternative methods for achieving the purpose of the proposed rule that were seriously considered by the agency and the reasons why they were rejected in favor of the proposed rule;
(5) the probable costs of complying with the proposed rule; and
(6) an assessment of any differences between the proposed rule and existing federal regulations and a specific analysis of the need for and reasonableness of each difference.
20. The SONAR includes a discussion of the analysis that was performed by the agency to meet the requirements of this statute.
21. The SONAR specifies that the persons affected and who will bear the cost of the rules include applicants for the CPA examination, Certified Public Accountants, licensees, CPA firms and Registered Accounting Practitioners (RAPs) and RAP firms. Persons who will benefit from the rules are alleged in the SONAR to be the public who uses the services of the Certified Public Accountants and Registered Accounting Practitioners, applicants for the CPA examination, Certified Public Accountants, licensees, CPA firms and Registered Accounting Practitioners and RAP firms.
22. Assuming compliance with the rules, it is not anticipated that there will be significant costs to the Board or any other agency and that state revenues also would not change significantly. Regarding less costly or intrusive methods that were considered for achieving the purpose of the proposed rule, the Board notes that it regulates a profession where the granting of a CPA certificate to an individual by the Board and subsequent licensing is highly valued by that individual. It is noted that services provided by CPAs are also highly valued by the public because of the standards followed and the code of professional conduct observed by the profession, which is regulated by the Board. The rules implement a Uniform Accountancy Act, which was adopted by Minnesota in 2001. The SONAR notes that for the most part, the regulation of the profession by each of the 54 licensing jurisdictions in this country is substantially the same, and that it is important in today’s marketplace that regulation between jurisdictions be as consistent as possible.
23. Regarding any alternative methods to achieve the purpose of the proposed rules seriously considered by the Board, the Board notes that it considered several options and concluded that the rules requiring education, examination and experience were appropriate because they were similar in concept to those required currently for CPAs. The legislature has mandated a change from the “two-tier” licensing system in Minn. Stat. Chapter 326 to the “one-tier” licensing system adopted under Chapter 326A. The Board considered the system it proposes for adoption to be the most effective implementation of the legislature’s intent in that regard.
24. The Board does not believe that there will be any significant costs to individuals as a result of the proposed rules, and it is noted that the federal agencies who have accountants practicing before them, such as the Securities and Exchange Commission and Internal Revenue Service, do not have authority to regulate such practitioners. There are no federal regulations different from the proposed rules.
Performance-Based Regulation
25. Minn. Stat. § 14.131 requires that an agency include in its SONAR a description of how it “considered and implemented the legislative policy supporting performance based regulatory systems set forth in section 14.002”. Section 14.002 states that “whenever feasible, state agencies must develop rules and regulatory programs and emphasize superior achievement in meeting the agency’s regulatory objectives and maximum flexibility for the regulated party and the agency in meeting those goals.”
26. The Board of Accountancy, in considering the proposed rules, attempted to increase regulatory effectiveness by eliminating or clarifying language from its previous rules which were the subject of questions raised to the Board. The clarifying language should result in fewer questions and reduced time and expense associated with questions and inquiries. In addition, rules which were obsolete, unnecessary or duplicative were deleted.
27. The Administrative Law Judge finds that the Board has met the requirements set forth in Minn. Stat. § 14.131 for assessing the impact of the proposed rules, including consideration and implementation of the legislative policy supporting performance-based regulatory systems.
Analysis of Specific Proposals
28. This Report is limited to the discussion of the portions of the proposed rules that received critical comment or otherwise need to be examined, and will not discuss each comment or rule part. Persons or groups who do not find their particular comments referenced in this Report should know that each and every suggestion, including those made prior to the hearing, has been carefully read and considered. Moreover, because some sections of the proposed rules were not opposed and were adequately supported by the SONAR, a detailed discussion of each section of the proposed rules is unnecessary. The Administrative Law Judge finds that the Board of Accountancy has demonstrated, by an affirmative presentation of facts, the need for and reasonableness of all rule provisions not specifically discussed in this Report. The Administrative Law Judge also finds that all provisions not specifically discussed are authorized by statute and there are no other problems that would prevent the adoption of the rules.
29. The Board’s SONAR notes that because of significant changes in Chapter 326A (compared to Minn. Stat. Chapter 326), new rules are required to change from “two-tier” licensing to “one-tier” licensing, to implement the new education requirement of 150 semester hours (or 225 quarter hours), to implement a change to a computer-based examination, a change in the experience requirement, the elimination of Licensed Public Accountants (LPAs) and the establishment of the new category of Registered Accounting Practitioners (RAPs).
30. The most controversial rule proposal is that which converts the license of all Licensed Public Accountants (LPAs) to certificates as Certified Public Accountants on December 31, 2002. This conversion is opposed by several hundred persons, organized by Robert Kitchenmaster of Mankato, who petitioned the Board and the Administrative Law Judge, alleging that the conversion proposal cheapens the certificates of “real” CPAs who took and passed the Certified Public Accountancy examination. It is noted that there are approximately 300 LPAs in Minnesota, and over 12,000 “real” CPAs.
The Petitioners are unable to be granted relief in this rulemaking process. It is a matter for the legislature. The “conversion” of Licensed Public Accountant status to that of a CPA is implemented at Rule 1105.4500, which is perfectly consistent with Minn. Stat. § 326A.06(a), which reads:
“All Licensed Public Accountants (LPA) who are actively licensed by the state board on December 31, 2002, shall be issued a Certified Public Accountant certificate. LPAs are those accountants who are eligible for licensure on July 1, 1979, under the law in effect on that date and who are issued a license as a Licensed Public Accountant by the Board at that time.”
It is found that proposed rule 1105.4500 is necessary and reasonable.
31. The other area of substantial controversy involves persons currently licensed as CPAs, who have already passed the CPA examination. These people are concerned that they do not qualify as “full” Certified Public Accountants in the interim between January 1, 2003 and July 1, 2006, because of their status as accountants for entities where employment does not count as “public accounting experience” within the meaning of Minn. Stat. 326A.03, subd. 8. See also Minn. Stat. 326A.03, subds. 5 and 6. In order to qualify before July 1, 2006, the experience must be as a staff employee of a certified public accountant, or a firm, as an auditor in the office of legislative auditor or state auditor (or as an auditor or examiner for another agency of government, if the experience, in the opinion of the Board, is equally comprehensive and diversified) or as a self-employed public accountant or partner in a firm, or in any combination of the foregoing capacities. The persons affected by the restriction on experience include people who have been employed as accountants, or have applied their skills as accountants in or for public entitles other than those specified, in academia and for private industry. In the interim until July 1, 2006, those persons will be designated as “CPA-Inactive”. It is found that the remedy for such affected people is found with the legislature, and cannot be implemented in this rulemaking process.
32. In response to comments from the affected public, the Board proposes a number of changes from the version of the rules published in the State Register. Many of the changes are clarifying or clerical in nature. Such changes not commented upon in this Report are found to be necessary and reasonable, and do not constitute substantial changes.
33. At proposed Rule 1105.4500E, the Board, in response to a comment made by the Administrative Law Judge at the hearing, proposes to delete the word “taken” (the last word of the subpart) and substitute the words “successfully passed”. The proposed change is found to be necessary and reasonable, and does not constitute a substantial change. However, it is suggested that the word “passed” be used as the substitute for “taken”, and that the word “successfully” be dropped from the rule subpart as finally adopted by the Board. The point made by the ALJ at the hearing was that the universe of people who did not take the CPA examination is a subset of those who did not pass the test. The Board’s panel agreed that the rule’s language should capture the larger set of people. Insertion of the word “successfully” implies that the universe of people under consideration is limited to those who sat for the examination, implying that those who did not sit for the examination are not being talked about in the subpart. To avoid confusion, it is recommended that the final clause read “…state that a CPA examination was not passed”. It is noted also that the word “successfully” is redundant within the phrase “successfully passed”. If the Board adopts the ALJ’s suggestion and uses the single word “passed” instead of “successfully passed”, it is found that the rule will be needed and reasonable and will not result in a substantial change.
Based on the foregoing Findings of Fact, the Administrative Law Judge makes the following:
CONCLUSIONS
1. That the Board of Accountancy gave proper notice of the hearing in this matter.
2. That the Board has fulfilled the procedural requirements of Minn. Stat. §§ 14.14, and all other procedural requirements of law or rule.
3. That the Board has documented its statutory authority to adopt the proposed rules, and has fulfilled all other substantive requirements of law or rule within the meaning of Minn. Stat. §§ 14.05, subd. 1, 14.15, subd. 3 and 14.50 (i) and (ii).
4. That the Board has demonstrated the need for and reasonableness of the proposed rules by an affirmative presentation of facts in the record within the meaning of Minn. Stat. §§ 14.14, subd. 4 and 14.50.
5. That the additions and amendments to the proposed rules which were suggested by the Board after publication of the proposed rules in the State Register do not result in rules which are substantially different from the proposed rules as published in the State Register within the meaning of Minn. Stat. §§ 14.05, subd. 2 and 14.15, subd. 3.
6. That a finding or conclusion of need and reasonableness in regard to any particular rule subsection does not preclude and should not discourage the Board from further modification of the rules based upon an examination of the public comments, provided that the rule finally adopted is based upon facts appearing in this rule hearing record.
Based upon the foregoing Conclusions, the Administrative Law Judge makes the following:
RECOMMENDATION
IT IS RECOMMENDED that the proposed rules be adopted consistent with the Findings and Conclusions made above.
Dated this 6th day of February, 2003.
/s/
Richard C. Luis
_______________________________
RICHARD
C. LUIS
Administrative
Law Judge
Reported,
Shaddix & Associates, Court Reporters.
Gail
M. Hinrichs, Court Reporter.
Transcript
Prepared.
[1] Minn. Stat § 14.14, subd. 2; Minn. R. part 1400.2100.
[2] Mammenga v. Comm’r of Human Services, 442 N.W.2d 786 (Minn. 1989); Manufactured Hous. Inst. v. Pettersen, 347 N.W.2d 238, 244 (Minn. 1984).
[3] In re Hanson, 275 N.W.2d 790 (Minn. 1978); Hurley v. Chaffee, 231 Minn. 362, 43 N.W.2d 281, 284 (1950).
[4] Greenhill v. Bailey, 519 F.2d 5, 19 (8th Cir. 1975).
[5] Mammenga, 442 N.W.2d at 789-90; Broen Mem’l Home v. Minnesota Dep’t of Human Services, 364 N.W.2d 436, 444 (Minn. Ct. App. 1985).
[6] Manufactured Hous. Inst. v. Pettersen, 347 N.W.2d at 244.
[7] Federal Sec. Adm’r v. Quaker Oats Co., 318 U.S. 218, 233 (1943).
[8] Minn. R. part 1400.2100.
[9] Minn. Stat. § 14.05, subd. 3.
[10] Minn. R. part 1400.2240, subp. 8.