2007 nasba annual report 2007 nasba annual report · 2 2007 nasba annual report ... mission, goals,...

1 � 2007 NASBA Annual Report 2007 NASBA Annual Report � 1

Our Mission

To enhance the effectiveness of state boards of accountancy.

Our Goals

• Provide high quality, effective programs and services.

• Identify, research and analyze major current and emerging issues affecting state boards of

accountancy.

• Strengthen and maintain communications with member boards to facilitate the exchange of ideas

and opinions.

• Develop and foster relationships with organizations that impact the regulation of public accounting.

Core Values

• Preserve the public trust and confidence in the CPA license and credential.

• Support the licensing of individuals who demonstrate and maintain competence through education,

examination and experience requirements.

• Ensure that the integrity, objectivity and independence of licensees are not compromised.

• Foster compliance with ethical and all professional standards.

• Promote the rights of boards of accountancy to regulate licensees in all their professional activities.

Our Vision

To be and to be known as the clear, trusted and leading voice of state boards of accountancy serving

the public interest.

2 � 2007 NASBA Annual Report

Focusing on the Boards

Table of Contents

Focusing on the Boards: Mission, Goals, Core Values and Vision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Reflecting on an Outstanding Year: Message from the Chair, CEO and COO . . . . . . . . . . . . . . . . . . . . . . . 3

Counting on Committees: Committee Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Leaning on Leadership: Board of Directors, Officers and Staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

Respecting the Past - Anticipating the Future: Timeline of NASBA Events . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

Focusing on Mobility: A Look at Mobility and the Future of Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Banking on Service: Overview of NASBA’s Programs and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

Applauding the Fiscal Year: Reviewing 2006 - 2007 Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34

Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

2007 NASBA Annual Report � 3

The Core of NASBA

Founded in 1908, the National Association of State Boards of Accountancy (NASBA) serves as a forum for 55

boards of accountancy, including state boards in the 50 states, the District of Columbia, Guam, Puerto Rico,

Virgin Islands and the Commonwealth of the Northern Mariana Islands. Through its volunteer committee net-

work, programs and services, NASBA protects the public interest by assisting the boards of accountancy.

Business programs to assist the boards include:

• CPA Examination Services• International Qualification Examination• NASBA Center for the Public Trust• Professional Credential Services• Wall Certificate Service• NASBAtools

� Accountancy Licensing Library

� Accountancy Licensee Database

� Colorado Licensure

� CredentialNet

� CPEmarket

� CPEtracking

� National Registry of CPE Sponsors

� Quality Assurance Service

What a delight it is to be the President and CEO ofNASBA during its 100th anniversary. And what a pleas-ure it has been to serve with NASBA Chair WesleyJohnson who has led this 100th year of achievementin outstanding fashion. Typically, this page of theannual report highlights the activities of the past year.And we have had a great year —we’ve made excel-lent strides in our mobility efforts, our compliance serv-ices have grown, our participation in the Uniform CPAExamination has never been higher and we aresounder and healthier fiscally than at any time in ourhistory. But this year I want to honor our theme of“Respecting the Past/Anticipating the Future.”

I trust each of you will pick up your copy of our histo-ry, 100 Years of NASBA. You will find that the “modernera of NASBA” really began with William (Bill) H. VanRensselaer as our first full-time employee in 1972. Hewas a staff of one but provided the impetus in estab-lishing the guiding principles and foundation for anassociation that would grow to 200 employees by thetime of this year’s annual meeting. One of Bill’scrowning achievements was the 1984 hiring ofLorraine P. Sachs, whose significant accomplishmentsin examination services and relationship develop-ment will always distinguish her in the annals ofNASBA. In the mid-1980s with Bill’s and Lorraine’s lead-ership and encouragement, NASBA matured tobecome an involved, active and productive associa-tion of volunteers who dedicated themselves to serv-ing the public interest and earning the public trust.NASBA continues to this day in that focus that appre-ciates and respects the accounting profession, but isclearly and uncompromisingly dedicated to enhanc-ing the effectiveness of its state boards’ regulatoryand public service mission and goals.

Yes, we do with grateful hearts respect our rich pastfor it is the luminous gateway to our future. And as wereflect on the past and dream about our future…

We Celebrate…• Century of service to state boards and the

public they serve• Decades of progress in state-based

regulation• Years of accomplishment.

We Appreciate…• Thousands of state board volunteers • Vision of great men and women for the

past 100 years• Outstanding NASBA volunteer leadership.

We Anticipate…• The day when no state board of accountan-

cy will ever again have to use resource limi-tations and restrictions as reasons not to pur-sue its regulatory mission

• The clarity to and understanding by the public of the independent roles of state boards in areas such as the CPA exami-nation, peer review (compliance assur-ance), ethics and other key regulatory issues

• A NASBA which will continue to prosper financially and thereby be able to take advantage of strategic opportunities and move aggressively to meet its mission of enhancing the effectiveness of state boards of accountancy.

Today is our first step into the future…and, while we’vehad a storied and accomplished past, our best yearsare ahead.

Ad astra (to the stars)Per aspera (through challenges)

David A. Costello, CPAPresident & CEO


MESSAGEReflecting on anOutstanding Year

“Light tomorrow with today.” Elizabeth Barrett Browning


From Left to Right: Joseph T. Cote, CPA, COO, Lorraine P. Sachs, CAE, Executive Vice President,David A. Costello, CPA, President and CEO, and Wesley P. Johnson, CPA, Chair


Pursuing the work of NASBA’s committees, NASBA volunteers and staff spent thousands of hours considering

and deliberating topics ranging from the review of financial statements to the development of model rules

for the member boards’ consideration. The committee structure continues to serve as a cornerstone of sup-

port for the organization.

ADMINISTRATION AND FINANCECOMMITTEEThe Administration and Finance Committee moni-tors the fiscal operations of the Association. WalterC. Davenport, NASBA Treasurer, serves as chair ofthe Committee. The Board of Directors relies on theAdministration and Finance Committee to provideoversight of NASBA's current and future financialand investing performance. The Committee metfour times during the fiscal year and reviewed thefinancial policies, financial statements and project-ed operating results of both NASBA and its wholly-owned subsidiary, Professional Credential Services,Inc. The Committee also reviewed insurance cover-ages, internal controls and operating and capitalbudgets.

The Investment Committee, a Subcommittee of theAdministration and Finance Committee, is com-prised of the chair and two Committee members.The Subcommittee reviewed the performance ofNASBA’s short-term and long-term investments andmonitored compliance with the Board-approvedinvestment policy of the Association.

Chair: Walter C. Davenport (NC)Members: John W. Clay (KY)

Welling W. Fruehauf (PA)Leonard R. Sanchez (NM)E. Kent Smoll (KS)R. Stanley Vaughan (NC)Harris W. Widmer (ND)

Staff Liaison: Michael R. Bryant

AWARDS COMMITTEE The Awards Committee met in July 2007 and rec-ommended Milton Brown (NJ) as the recipient ofthe 2007 William H. Van Rensselaer Award andCharles H. Calhoun, III (FL) as the recipient of the2007 NASBA Distinguished Service Award.

Chair: Janice B. Wilson-Marcum (CA)Members: Welling W. Fruehauf (PA)

Marianne Mickelson (IA)Susan J. Reinardy (WI)George G. Veily (CT)Michael D. Weatherwax (CO)

Staff Liaison: Kim Ellis

BYLAWS COMMITTEEThe Bylaws Committee met via conference callon July 9, 2007. During the call, the Committeemembers reviewed the Bylaws and determinedthat no changes were warranted for this year.

Chair: John E. Katzenmeyer (OH)Members: Patrick D. McCarthy (LA)

Roger L. Reinhart (MN)Beryl C. Stover (MT)Myra A. Swick (IL)


COMMITTEESCounting on Committees


CBT ADMINISTRATION COMMITTEEThe CBT Administration Committee continues its focuson operational examination issues and enhancements.A task force for five years, its status was changed to acommittee in November of 2006. Ronald Rotaru,Executive Director of the Accountancy Board of Ohio,became chair of the Committee when Ken Bishopassumed his position with NASBA on January 1, 2007.

The Committee completed and distributed the RetestPolicy and implemented a new procedure for stateboards to collect statistical data from examination can-didates as part of the application process. In addition,the Committee worked on new policy and proceduresfor “secret shoppers” and developed policy and proce-dural changes to accommodate the biometrics forPrometric during the candidate check-in process.

The Committee will continue to monitor, review andmake necessary changes to enhance the examinationprocess.

Chair: Ronald J. Rotaru (OH)Members: Ken L. Bishop (MO)

Robert N. Brooks (NC)Richard C. Carroll (KY)Daniel J. Dustin (NY)Michael A. Henderson (LA)Barbara R. Porter (ID)Carol Sigmann (CA)Patricia Soukup (NM)

Staff Liaisons: Denise Hanley Patricia L. Hartman


COMMITTEE ON INTERNATIONALIZATION OF THE CPA EXAMINATIONThe newly formed Committee on Internationalization of theCPA Examination was charged to study:

• Why international candidates have such an interest in taking the CPA Examination and other examinations sponsored by entities outside their own countries;

• How many international candidates might take the CPA Examination if it were offered internationally;

• What percentage of international candidates might desire to work in the U.S.; and

• What steps could be taken to maximize security of examination content.

The Committee met with other high-stakes examinationsponsors, including the National Council of State Boards ofNursing (NCSBN), the Graduate Management AdmissionsCouncil (GMAC) and Pearson VUE, a computer-based testdelivery vendor. Discussions focused on each organiza-tion’s experience with international testing, lessons learnedand biggest challenges. The Committee met with theAICPA and Prometric to learn their perspectives and con-cerns regarding international delivery resulting in a decisionto establish a joint committee with the AICPA. A report willbe issued by the joint committee in 2008.

Chair: John B. Peace (AR)Members: Gary L. Fish (IL)

Wendy S. Perez (CA)William Treacy (TX)David A. Vaudt (IA)

Staff Liaison: Joseph T. Cote


COMMUNICATIONS COMMITTEEThe Communications Committee is charged to pro-mote innovative and unique programs and meth-ods to enhance communications by state boards ofaccountancy and NASBA with other agencies, con-sumers, legislative bodies, licensees and theaccounting profession including those to be used inthe event of a disaster. The Committee created theconcept of a state board Communications Officerand created a media "tool kit" for state boards touse to enhance public awareness of their existenceand effectiveness. These programs were presentedby Chair Mark Harris to the membership at this year'sExecutive Directors Conference and RegionalMeetings. Additional efforts were made by theCommittee to review the technical communica-tions of NASBA by reviewing NASBA’s Web sites forcontent, architecture and ease of use by memberboards, examination candidates and the generalpublic.

In the 2007-2008 year, it is anticipated theCommittee will follow-up with the newly appointedCommunications Officers in order to enhance, cre-ate and implement communications programs sothat greater public awareness for state boards ofaccountancy may be attained.

Chair: Mark P. Harris (LA)Members: Norman Wade Biswell (OK)

Richard P. Bond (CT)Nina B. Kavich (NE)John Steven Marcum (KY)Nicole L. Olson (SD)Arnold Williams (MD)Dena G. Williams (NY)

Staff Liaison: Thomas G. Kenny

COMMITTEE ON NATIONALEXAMINATION PREPAREDNESSIn 2006, the Committee on National ExaminationPreparedness was established to focus on twomajor initiatives:

• Develop a contingency examination should the current CPA Examination not be available for any reason; and

• Prepare for the optimal course of action when the current CBT Services Agreement (between NASBA, the AICPA and Prometric) ends in 2014.

The Committee studied the factors that need to beconsidered in developing and delivering a contin-gency CPA Examination. After meeting with threeof NASBA’s consulting psychometricians, theCommittee discussed these issues and developed acourse of action. Among the issues studied havebeen:

• Length of a contingency examination• Type of examination (paper-based or

computer-based)• Content of the examination• Types of measurement items on the

examination• Cost of the examination• Compliance with existing state board laws

and rules• Appropriate method and timetable for

development.

The Committee is considering hosting a specialexamination conference in 2008 to discuss theseissues with representatives of state boards.

Chair: Diane M. Rubin (CA)Members: Sheila Birch (OH)

Daniel J. Dustin (NY)Gary W. Heesacker (WA)Kathleen J. Smith (NE)

Staff Liaison: Joseph T. Cote


COMPLIANCE ASSURANCE COMMITTEE AND REVIEW TASK FORCEWorking together under similar charges, both the Committee and Task Force were chaired by Thomas Sadlerand met in tandem in two meetings and three conference calls. The group approved a business plan forthe development of a Compliance Assurance Review Board, responded to the AICPA peer review exposuredraft and developed a revision to Rule 7 of the Uniform Accountancy Act Model Rules. The 2007 RegionalMeeting participants heard a presentation and were given supporting documents including a comparativechart on state board peer review programs, a newly-developed description of the model elements of aCompliance Assurance Oversight Committee (CAOC) and samples of related documents from variousboards. These documents were updated and placed in a “tool kit” available to boards of accountancy onNASBA’s Web site which include:

• Revised and accepted UAA Section 7 Rules;• Elements of a CAOC;• List of states with peer review as acceptance for licensure;• List of states with CAOC; and• Letter from Chair Sadler explaining the concepts.

During its year-end conference call, the Committee passed a resolution supporting the concept of an inde-pendent oversight function for peer reviews performed by an independent board appointed by NASBA tobe entitled the Compliance Assurance Review Board (CARB).

Chair: Thomas J. Sadler (WA)Members: Jimmy E. Burkes (MS)

James S. Ciarcia (CT)Charles W. Clark (ID)Doris Cubitt (SC)Alicia J. Foster (MD)James W. Goad (AR)Janice L. Gray (OK)J. Lamar Harris (AL)Sharon J. McNair (NV)Robert Petersen (CA)Virginia A. Powell (KS)Robert G. Zunich (OH)

Staff Liaison: Lisa J. Axisa


Replacing the previous Examinations Committee,the CPA Licensing Examinations Committee wascharged to communicate with boards of account-ancy and others with a vested interest in theExamination to ensure the boards are provided withthe best professional licensing examination possible.To achieve that goal, boards were requested to pro-vide feedback so that positive aspects would beretained and negative aspects addressed.Although limited input was received, the flavor ofthe comments seemed indicative of the opinions ofboards that were heard in various quarters. It wasapparent the members were dealing with the con-cerns that were important to boards, including thescoring process, the practice analysis project andthe inclusion of ethics on the Examination. Again thisyear, the members solicited recommendations formembership on the Board of Examiners and its sub-committees and were pleased to submit highly qual-ified individuals.

The Committee also reviewed the responses to therecommendations in the CPA Examination ReviewBoard management letter, drafted conclusions andmade plans to distribute their findings in a report tothe boards of accountancy.

Chair: Robert A. Pearson (MO)Members: Kay C. Carnes (WA)

John W. Clay (KY)Rick Elam (MS)Peggy Morgando (WY)Thomas R. Weirich (MI)Janice B. Wilson-Marcum (CA)

Psychometric Consultant: Robert L. Brennan (IA)

Staff Liaison: Lorraine P. Sachs

CPA EXAMINATION REVIEW BOARD The CPA Examination Review Board (ERB) presentedits Annual Report to the 2007 Regional Meeting par-ticipants. The ERB reported that boards of account-ancy could rely on the 2006 Uniform CPAExamination and the International QualificationExamination (IQEX) in carrying out their licensingresponsibilities. Because the computer-based test(CBT) program is multifaceted, deeply complex andutilizes innovative technology, the ERB provided acomprehensive management letter with 50 recom-mendations for enhancing the program.

The ERB performed an analysis of the accumulatedcosts associated with the CBT solely to evaluate theappropriateness and treatment of costs accumulat-ed by the AICPA that are associated with the cre-ation of the CBT. Based on their analysis, the ERB didnot note any material exceptions to the AICPA orNASBA CBT development, one-time and operationalexpenses for the fiscal years ended July 31, 2002,2003, 2004 and 2005. Moreover, the Review Board’sanalysis of projected future CBT operational expens-es did not detect any unreasonable assumptions insuch projections.

Chair: Asa L. Hord* (KY), 2006-07Barton Baldwin** (NC) 2007-08

Vice Chair: Donald E. Howard (MD)Members: O. Charlie Chewning, Jr. (NC)

Jerry A. Davis* (TX)Will J. Pugh (TN)Donnie Roland (GA)Charles L. Talbert, III ** (SC)David A. Vaudt (IA)Sandra R. Wilson (AK)Robert G. Zunich** (OH)

Psychometric Consultant: Steven M. Downing

Technology Consultant: Michael W. Harnish

Staff Liaison: Lisa J. Axisa

*Term ended June 30, 2007 **Term began July 1, 2007

CPA LICENSING EXAMINATIONS COMMITTEE


CPE ADVISORY COMMITTEE Members of the CPE Advisory Committee convenedseveral times throughout the year to create interpre-tations and clarifications for the Statement onStandards for Continuing Professional Education(CPE), to determine and recommend best practiceprocedures for enforcement of CPE requirementsand to evaluate appeals of CPE sponsors. Tostrengthen their commitment, the Committeeaddressed boards and CPE sponsors at the March2007 CPE Conference.

Chair: Michael W. Skinner (GA)Members: Thomas S. Chambers (MD)

Rick Elam (MS)Carole M. Hersch (VA)Adley E. Johnson (KS)Telford A. Lodden (IA)John McManus (DE)L. Martin Miller (PA)Ojel Rodriguez (PR)John R. Rogers (IL)Ramanik Shah (MN)Willie B. Sims, Jr. (MS)Robert H. Sommer (NJ)Taling M. Taitano (GU)Douglas E. Warren (TN)Mark Weinstein (NM)Richard Zacharia (NE)

Staff Liaisons: Carla BlakeBridget CandlerYordanos A. Dumez

CPA MOBILITY TASK FORCE Throughout 2007, the CPA Mobility Task Force hasbeen engaged in a major effort to advance theadoption of Sections 7, 14 and 23 of the UAA whichprovide for “No Notice, No Fee and No Escape” forCPAs who engage in practice across jurisdictionalboundaries. Eleven states have now adopted provi-sions through legislation or rules changes that imple-ment “mobility.” A total of 26 state boards ofaccountancy have voted to support and movetoward the adoption of mobility language in thecurrent or 2008 legislative sessions. More are expect-ed to adopt the mobility provisions in 2009. The TaskForce has worked closely with the CPA SocietyExecutives Association, AICPA, and theAccountants Coalition in this endeavor.

Chair: Ken Bishop (MO)Members: Ed Barnicott (KY)

Albert J. Cannon (OH)Ellis M. Dunkum (VA)Thomas J. Kilkenny (WI)Theodore W. Long, Jr. (OH)Cynthia H. Norwood (VA)Barbara R. Porter (ID)Ronald J. Rotaru (OH)Leonard R. Sanchez (NM)Robert H. Temkin (MA)Laurie J. Tish (WA)Arthur M. Winstead, Jr. (NC)

Staff Liaison: Maria-Lisa Caldwell


EDUCATION COMMITTEE In January 2007, the Education Committee met toconsider 41 states’ responses to the Committee’sSeptember 2006 questionnaire. Based on theresponses, the members determined only minorchanges were necessary to update its draft frame-work of UAA Model Rules 5-1 and 5-2, which wasoriginally exposed in March 2006.

On April 30, 2007, NASBA hosted a Joint PanelConference on Education in Dallas, TX, in order toengage in discussions with representatives fromAAA, AACSB, ACBSP, AICPA, FSA, firms, IFAC andethics experts. Jan Williams, Dean of the University ofTennessee’s College of Business, moderated thepanel discussions. Members of academia, 21 stateboards, state societies and other professional groupswere in attendance as well.

Based on the input from that meeting, theCommittee met in May to review and revise thedraft framework. The revised May 31, 2007, frame-work was presented at both Regional Meetings andwas a breakout session topic. Breakout sessions indi-cated sufficient support to move forward with adraft of UAA Model Rules 5-1 and 5-2 changes con-sistent with the framework.

In late June, members began rewriting UAA ModelRules 5-1 and 5-2. Committee and Task Force mem-bers engaged in e-mail exchanges prior to the sub-mission of the final draft of the Rules to the NASBABoard of Directors in July. After the Board’s prelimi-nary review, the Committee met via conference callon July 24 to make additional changes to the draft.The Rules draft was then submitted to the UAACommittee for its consideration. On September 18,2007, the UAA Committee approved the draft andreferred it to the Board of Directors for approval torelease for public exposure.

Chair: Billy M. Atkinson (TX)Members: Beth A. Bialy (MI)

Charles H. Calhoun, III (FL)Ruben A. Davila (CA)Stephen C. Del Vecchio (MO)Sonia Gomez de Torres (PR)Janice L. Gray (OK)Nicholas J. Mastracchio, Jr. (FL)Patrick D. McCarthy (LA)John E. Peterson (SD)Douglas W. Skiles (NE)Melanie G. Thompson (TX)Joanne Vician (IL)Sharon T. Walters (KY)Penelope Yunker (IL)



EXECUTIVE DIRECTORS COMMITTEEThe Executive Directors Committee developed anexciting agenda for the 25th Annual Conference forexecutive directors and staff of boards of account-ancy that was held in Las Vegas, NV, in March.Seventy representatives from 36 boards agreed theConference was a success as they discussed topicsincluding enforcement, mobility, communicationsand the CPA Examination. For the second consec-utive year, attendees participated in five tabletopic discussions which allowed participants to dis-cuss regulatory matters in small group settings.

Chair: Linda L. Biek (TN)Members: Matthew Azer (CO)

J. Lamar Harris (AL)Ronald J. Rotaru (OH)Edith Steele (OK)Richard C. Sweeney (WA)Daniel Sweetwood (NE)Viki A. Windfeldt (NV)


ETHICS COMMITTEEThe Ethics Committee organized their work throughfour Task Forces:

• Examination• Ethics CPE Directory• Enforcement• Standards Board

The Committee held their organizational confer-ence call in December, followed by a meeting inNashville in January, and then continued their workvia conference calls. Chair Jacob Cohen also rep-resented the Committee on conference calls heldby the Regulatory Response Committee and theAICPA Professional Ethics Executive Committee.

A recommendation was sent to the CPA LicensingExamination Committee that the CPA Examinationinclude more ethics-related questions. With theassistance of the NASBA Compliance ServicesDivision, progress was made on a proposal for anEthics CPE Directory that recognizes ethics CPEproviders meeting NASBA standards. However, withincreased state acceptance of UAA Section 23,there is less need to standardize state ethics coursesas multi-state licensing decreases. The July vote ofthe Board of Directors to include the NASBA Codeof Conduct in the UAA Model Rules marked theachievement of a long-term goal of the EthicsCommittee.

Chair: Jacob J. Cohen (MD)Members: J. Coalter Baker (TX)

Rona Cherno (NY)Susan M. Harris (MS)Marianne Mickelson (IA)Larry E. Nunn (IN)Robert Petersen (CA)Vicky Petete (OK)Patricia Anne Snell (MD)Wesley E. Stille (ID)Charles L. Talbert, III (SC)Michael Weinshel (CT)Cecil Wood (MO)

Staff Liaison: Louise Dratler Haberman


INTERNATIONAL REGULATORSCONFERENCE COMMITTEECreated in 2007, the International RegulatorsConference Committee was appointed to identifyand contact international government agenciesthat regulate the practice of accounting with thepurpose of determining if enough interest exists toconvene an international conference to discussaccounting, auditing and ethics standards and reg-ulation in the global arena. The Committee held itsfirst meeting in March 2007 and has subsequentlymet via conference call to develop an action planand identify the resources necessary to move for-ward with planning such an event. As a result, twosubcommittees were established. The first will focuson establishing a relationship with our Canadianand Mexican counterparts and begin formulatingan agenda for the Conference. The other willresearch various international conferences spon-sored by other U.S, and international organizations.

Chair: Michael D. Weatherwax (CO)Members: Linda L. Biek (TN)

Charles H. Calhoun, III (FL)Samuel K. Cotterell (ID)Robert L. Gray (NY)Gaylen R. Hansen (CO)Mark P. Harris (LA)Wesley P. Johnson (MD)William Treacy (TX)

Staff Liaison: Maria-Lisa Caldwell

INTERNATIONAL QUALIFICATIONSAPPRAISAL BOARDThe NASBA/AICPA International QualificationAppraisal Board (IQAB) met in Washington, DC, inMay and in Dallas, TX, in October. Task forces includ-ed those studying:

• Hong Kong Institute of CPAs;• Four E’s Evaluation Criteria Scoring

Template;• Institute of Certified Public Accountants of

Kenya;• Review of Mexico/Canada/US Mutual

Recognition Agreemnent;• IQAB Procedures and Questionnaire; and• AICPA Board of Examiners’ IQEX.

Paul George, UK Public Oversight Board Director,and Todd Nissen of the US Trade Representative’s(USTR) office, addressed the May meeting.Communication with the USTR continued throughoutthe year particularly in connection with the Instituteof Chartered Accountants in India’s limited partici-pation in GATS. Chair William Treacy and IFACLiaison Charles Calhoun represented NASBA at theWorld Congress of Accountants in November.

Chair: William Treacy (TX)Members: Sheila M. Birch (OH)

Gerald W. Burns (OR)Kay C. Carnes (WA)Ruben A. Davila (CA)Nathan T. Garrett (NC)Kermit Lucena (PR)Leonard R. Sanchez (NM)

Consultant: Charles H. Calhoun, III (FL)Staff Liaisons: Louise Dratler Haberman

Patricia Hartman


LEGISLATIVE SUPPORT COMMITTEEThe Legislative Support Committee was formed byNASBA Chair Wesley Johnson in response to a rec-ommendation from a previous year’s StrategicInitiatives Committee. The Committee met inDecember to map out how best to fulfill theircharge. A decision was made to develop a Webpage to be hosted on nasba.org. The Web pagewill contain practical information to assist theaccountancy boards in their legislative efforts. Pollswere conducted to gather information to populatethe new page. Components of the page willinclude:

• Legislative tracking resources; • Publications and related links; • Legal opinion papers;• Sample letters on support, opposition and

analysis;• Draft/issue papers;• Expert witness/testimony bureau;• National and state issues;• Legislative clearinghouse for member

boards; and• Consensus building/networking.

Chair: Sally Flowers (CA)Members: Kenneth Clark (MO)

John H. Hawkins, Jr. (KY)Carlos E. Johnson (OK)Harry O. Parsons (NV)Carol Rives (OR)Ronald J. Rotaru (OH)E. Kent Smoll (KS)


LEGAL AFFAIRS COMMITTEECommittee Chair Kathleen Smith appointedRebecca Connors, Office of Attorney General ofColorado, to chair a subcommittee that developedand conducted the 2007 Annual Legal CounselConference, which was attended by 32 boardcounsel representatives. The Legal Affairs Commit-tee also continued its focus on enforcement of statelaws and rules and particularly in a collaborativefashion such as interstate enforcement compacts.The Committee collaborated with Noel Allen,NASBA legal counsel, in the creation of a sampleEnforcement Compact to give the state boardsmore assurance that licensees could not avoid dis-cipline by crossing state lines. The EnforcementCompact was presented at the Legal CounselConference, along with a discussion of confidential-ity issues facing state boards of accountancy.

Working in conjunction with the RegulatoryStructures and Issues Committee, the task forcecontinued discussions with the PCAOB. Previouslythis task force submitted questions/ requests todevelop an information exchange with the PCAOBonce an investigation has been initiated. Meetingswere held between the task force and the PCAOBin an effort to continue to press for more coopera-tion from the PCAOB in sharing information with thestate boards.

Chair: Kathleen J. Smith (NE)Members: Richard C. Carroll (KY)

Jacob J. Cohen (MD)Rebecca Connors (CO)Michael R. Granen (CA)Pam Griebel (IA)Larry C. Hunter (ID)Frank Munoz (NY)John B. Peace (AR)Robert A. Pearson (MO)William L. Raby (AZ)

Staff Liaisons: Maria-Lisa CaldwellStacey Grooms


PAST CHAIR ADVISORY COUNCILEstablished in 2000, members of the Past ChairAdvisory Council have come together annually toprovide insight in analyzing current issues based ontheir experiences. The 2006 meeting was no excep-tion as NASBA’s past chairs met to review programsand services and to reflect on the similarity of theregulatory issues they had faced. Additionally, themembers provided input into the development ofNASBA’s 100 year history book to be distributed atthe 2007 Annual Meeting.

Chair: Diane M. Rubin (CA)Members: Barton W. Baldwin (NC)

Sarah G. Blake (AZ)Milton Brown (NJ)Thomas F. Cardegna (MD)K. Michael Conaway (TX)Albert J. Derbes, III (LA)Robert C. Ellyson (FL)Welling W. Fruehauf (PA)Nathan T. Garrett (NC)John M. Greene (SC)Thomas Iino (CA)Noel P. Kirch (OK)Andrew P. Marincovich (CA)John B. Peace (AR)Ronnie Rudd (TX)Jerome A. Schine (FL)Wilbert H. Schwotzer (GA)Jerome P. Solomon (MA)Dennis P. Spackman (UT)Wilbur H. Stevens (CA)Sandra A. Suran (OR)David A. Vaudt (IA) Michael D. Weatherwax (CO)Sam Yellen (CA)


NOMINATING COMMITTEEThe Committee met in March to review the qualifi-cations of state board nominees and select the2007-2008 vice chair candidate. As a part of theselection process, each candidate was asked tocomplete a questionnaire centering on the majorissues facing both the accounting profession andNASBA. In accordance with the Bylaws, theCommittee met in June to select individuals to fillthe vacant director-at-large and regional directorpositions. On June 27, the Committee submitted itsreport recommending the 2007-2008 slate of officersto NASBA Chair Wes Johnson.

Chair: Diane M. Rubin (CA)Members: J. Coalter Baker (TX)

Robert B. Cagnassola (NJ)John G. D. Carden (AL)Michael T. Daggett (AZ)Kenneth J. Hull (IL)Leonard W. Jones (NC)Nina B. Kavich (NE)David L. Koerwitz (WY)

Staff Liaisons: David A. CostelloAnita L. Holt


The Regulatory Response Committee monitoredexposure drafts released by the InternationalFederation of Accountants, American Institute ofCPAs, Securities and Exchange Commission, PublicCompany Accounting Oversight Board and otherorganizations and agencies to determine their im-pact on the state accountancy boards’ regulationof CPAs. When the Committee determined therewas such potential impact, through a series of con-ference calls and emails under the leadership ofChair Rick Isserman, they drafted responses forNASBA Chair Wesley Johnson and President DavidCostello. The responses composed by theCommittee were directed towards:

• AICPA Proposed Omnibus Proposal of Professional Ethics Division Interpretations and Rulings of September 8, 2006 and Proposed Interpretation of 102-7;

• Department of Labor Interpretative Bulletin 75-9;

• Financial Accounting Series Invitation to Comment – Valuation Guidance for Financial Reporting;

• International Ethics Standards Board for Accountants Exposure Draft Section 290 of the Code of Ethics Independence – Audit and Review Engagements;

• President’s Council on Integrity and Efficiency Draft Report on National Single Audit Sampling Project;

• Financial Accounting Standards Board Interpretation No. 48 – Accounting for Uncertainty in Income Taxes; and

• PCAOB Proposed Ethics and Independence Rule 3526.

Chair: Richard Isserman (NY) Members: Alan J. Bronstein (VI)

Stephen Epstein (MI)Janice L. Gray (OK)Gaylen R. Hansen (CO)James Hill, Jr. (IL)Robert J. Hyde (MN)J. Sam Johnson (GA)Edwin G. Jolicoeur (WA)Leslie A Mostow (MD)John C. Olsen (NY) Ray G. Stephens (OH)Robert H. Temkin (MA)


PROFESSIONAL & REGULATORY RESPONSE COMMITTEE


In mid-year, a special task force of the ResponseCommittee was created by NASBA Chair WesleyJohnson to identify entities that promulgate interna-tional practice standards that may impact or influ-ence the public protection mandates of the stateboards of accountancy. The Task Force was todetermine if the entities possess the appropriate cre-dentials, experience and background for reliability.The Task Force, charged to review and evaluate cur-rent and proposed standards, would make recom-mendations to the Regulatory Response Committeebased on their findings and conclusions. This wasdone with the Response Committee’s considerationof the International Ethics Standards Board’sExposure Draft of Section 290.

Chair: Richard Isserman (NY)Members: J. Coalter Baker (TX)

Samuel K. Cotterell (ID)Robert L. Gray (NY)Gaylen R. Hansen (CO)Wesley P. Johnson (MD)Ray G. Stephens (OH)Robert H. Temkin (MA)

Ex-Officio: David A. CostelloStaff Liaison: Louise Dratler Haberman

REGULATORY RESPONSE COMMITTEE’S SUBCOMMITTEE ON INTERNATIONAL PROFESSIONAL STANDARDS

The Committee continued its project prompted bythe June 2006 Associated Press report that stateboards were not following up on Securities andExchange Commission enforcement actions. OnJanuary 31, Committee Chair Robert Gray, NASBAlegal counsel Noel Allen, Antonia Smiley (DC),Richard Carroll (KY) and Committee staff liaisonLouise Dratler Haberman met with SEC ChiefAccountant Conrad Hewett, Senior Associate ChiefAccountant John Albert, Coordinator with StateBoards Lawrence Soper and other SEC staff, atwhich time the importance of working together wasunderscored and no problems were noted. Meetingvia conference call, the Committee recommendedNASBA provide additional assistance to the boardsto ensure they are notified when SEC action is taken.In addition, representatives of the Committeeworked on a joint task force with representatives ofthe Legal Affairs Committee holding discussions withthe PCAOB staff to achieve more timely and com-plete distribution of information to the state boards.

Chair: Robert L. Gray (NY)Members: James S. Ciarcia (CT)

Patricia A. Crecco (NY)Valerie M. Elliott (AZ)Claireen Herting (IL)Robert J. Hyde (MN)Thomas Mechsner (MO)Antonia B. Smiley (DC)


REGULATORY STRUCTURES & ISSUES COMMITTEE


STRATEGIC INITIATIVES COMMITTEE The Strategic Initiatives Committee, charged withidentifying emerging and significant issues facingboards of accountancy, centered its focus on fourmajor areas:

• Globalization as it relates to technology and transparency of financial reporting;

• Convergence with and /or adoption of international accounting standards and the impact on the public interest;

• Specialty designations and their regulatory relevance under state board jurisdiction; and

• Essential Elements of Regulation to enhance the effectiveness of boards ofaccountancy in the areas of board composition, legal powers, legislative, regulatory and fiscal efficiency.

The Committee’s research and investigationthroughout the year were enhanced following dis-cussions with member boards at the StrategicInitiatives breakout sessions at the RegionalMeetings.

Chair: Gaylen R. Hansen (CO)Members: Kent Bailey (OR)

Margaret A. Cartier (IL)Bobby R. Creech, Jr. (SC)Richard G. David (MI)Daniel J. Dustin (NY)M.C. Princy Harrison (MS)Dan J. Rieke (AR)Lydia M. Washington (NY)

Staff Liaison: Thomas G. Kenny

RELATIONS WITH MEMBER BOARDS This year saw increased visits by Regional Directorsand other NASBA leaders to the member boards.Hot discussion topics included the changes to theUniform Accountancy Act, altering entry-levelrequirements and overseeing compliance assur-ance programs. The Committee modified theRegional Meetings’ program to permit more time foreach Region to meet, with only present and formerboard members and staff from each Region inattendance. To increase readership of the quarter-ly Focus Question responses, an executive summarywas added. In addition to creating and monitoringthe member boards’ responses to focus questions,the Regional Directors moderated the 2007Regional Meetings and conducted the new boardmember training programs.

Chair: Theodore W. Long, Jr. (OH)Members: Jacob J. Cohen (MD)

Sally Flowers (CA)Gaylen R. Hansen (CO)Richard Isserman (NY)Carlos E. Johnson (OK)Michael W. Skinner (GA)E. Kent Smoll (KS)



The Board’s July 2007 approval of both the revisedUniform Accountancy Act and of the revised ModelRules were the outstanding achievements of theCommittee this year. These achievements wereaccomplished through an enormous number of con-ference calls and a face-to-face meeting inWashington, DC. To carry out its work, theCommittee created three task groups:

• Enforcement (chaired by Michael Granen)• Mobility (chaired by Robert Pearson)• Standards/Ethics (chaired by Marcela

Donadio)

Committee Chair Andrew DuBoff participated in allthe task group conference calls and Noel Allen,NASBA legal counsel, provided many carefully craft-ed revisions before the work was completed.

In the first few months of the 2006-2007 Committeeyear, the UAA Committee focused on fine-tuningModel Rules revisions. In January, the Committeeincorporated suggestions from the Mobility TaskForce aimed at increasing the implementation ofUAA Section 23’s substantial equivalency concept.

They are now in the process of collecting suggestionsfrom the member boards as to what areas of theRules and Act need to be reviewed again to keepthe UAA “evergreen.”

Chair: Andrew L. DuBoff (NJ)Members: Robert N. Brooks (NC)

Marcela E. Donadio (TX)Ellis M. Dunkum (VA)Michael R. Granen (CA)*J. Dwight Hadley (NY)Thomas J. Mulligan (OH)Robert A. Pearson (MO)Laurie J. Tish (WA)Michael D. Weatherwax (CO)Michael Weinshel (CT)


* The Committee mourns the untimely passing of its invaluable member Michael R. Granen.

UNIFORM ACCOUNTANCY ACT COMMITTEE

OFFICERS

Wesley P. Johnson, CPAChair

Samuel K. Cotterell, CPAVice Chair

Diane M. Rubin, CPAPast Chair

Thomas J. Sadler, CPADirector-at-Large/Secretary

Walter C. Davenport, CPADirector-at-Large/Treasurer

Billy M. Atkinson, CPADirector-at-Large

Andrew L. DuBoff, CPADirector-at-Large

Ellis M. Dunkum, CPADirector-at-Large

Mark P. Harris, CPA Director-at-Large

John E. Katzenmeyer, CPADirector-at-Large

Robert A. Pearson, CPADirector-at-Large

Kathleen J. Smith, CPA, Esq.Director-at-Large

REGIONAL DIRECTORS

Jacob J. Cohen, CPA Middle Atlantic Regional Director

Sally FlowersPacific Regional Director

Gaylen R. Hansen, CPAMountain Regional Director

Carlos E. Johnson, CPA Southwest Regional Director

Richard Isserman, CPANortheast Regional Director

Theodore W. Long, Jr., CPAGreat Lakes Regional Director

E. Kent Smoll, CPACentral Regional Director

Michael W. Skinner, CPASoutheast Regional Director

EXECUTIVE DIRECTORS’ LIAISON

Linda L. Biek, CPA

NASBA EXECUTIVE STAFF

David A. Costello, CPA

President and Chief Executive Officer

Lorraine P. Sachs

Executive Vice President

Joseph T. Cote, CPA

Chief Operating Officer

Michael R. Bryant, CPA

Chief Financial Officer

Robert E. “Gene” Brosky, CPA

Chief Administrative Officer


LEADERSLeaning on Leadership

2006-2007 BOARD OF DIRECTORS


Seated from left to right: L. Biek, S. Cotterell, D. Rubin, D. Costello, W. Johnson, L. Sachs, T. Sadler. Middle row from left to right: C. Johnson, J. Katzenmeyer, J. Cohen, S. Flowers, M. Harris, N. Allen, G. Hansen.

Back row from left to right: R. Pearson, B. Atkinson, T. Long, K. Smoll, A. DuBoff, R. Isserman, M. Skinner, W. Davenport(Not pictured: E. Dunkum and K. Smith)


Ken Bishop, President Andrea Bledsoe, COO Troy Walker, CFO

Milton Brown, PA

Chair

Andrew L. DuBoff, CPA Wesley P. Johnson, CPA John B. Peace, CPA, Esq. Diane M. Rubin, CPA

Ex-Officio

PROFESSIONAL CREDENTIAL SERVICES BOARD OF DIRECTORS

NASBA CENTER FOR THE PUBLIC TRUST BOARD OF DIRECTORS

Milton Brown, PA

Chair

Noel L. Allen, Esq. Quinton Booker, CPA Larry Bridgesmith, Esq. Linda Galindo

PROFESSIONAL CREDENTIAL SERVICES EXECUTIVE STAFF

NASBA CENTER FOR THE PUBLIC TRUST STAFF BOARD MEMBERS

Alfonzo D. Alexander

VP of Development

Lisa Axisa

Vice President


CFO


President & CEO

Mark P. Harris, CPA Leonard R. Sanchez, CPA Charles Story C. Dan Stubbs, CPA


STAFF DIRECTORS AND MANAGERS

Alfonzo AlexanderChief Relationship OfficerVP Development, Center for the

Public Trust

Lisa J. AxisaExecutive Director and VP, Center for

the Public TrustDirector, ERB and Special Initiatives

Ed BarnicottChief Technology Officer

Linda BiekDirector, Governmental, International

and Professional Relationships

Ken BishopDirector, CPA Examination Services

and National Candidate Database Operations

President, PCS Examination Operations

Carla Blake, CPAManager, Sponsor Services

Pam BergeronManager, Web Development

Andrea T. BledsoeVP, Chief Operating OfficerDirector, PCS Examination Operations

Robert E. “Gene” Brosky, CPAChief Administrative Officer

Maria-Lisa Caldwell, Esq.General CounselDirector, Business Development

Bridget CandlerManager, Instructional Design Review

Dean CarrollDirector, Infrastructure and Security

Joy ConkwrightSenior Project Manager

Matt J. CookManager, PCS Examination Operations

Lisa DampfManager, Benefits

Yordanos A. Dumez, CPADirector, Compliance Services

John FieldsSenior Project Manager

John D. GillespieManager, CBT Accounting

Stacey GroomsManager, Regulatory Affairs

Meritta M. GrantManager, Accounts Payable

Mary GreenManager, Business System Support

Louise Dratler HabermanDirector, Information and Research

Denise HanleyChief Information Officer

Patricia L. HartmanDirector, CPA Examination Services

and National Candidate Database Administration

Adam HerjeczkiManager, Special Accommodations

Karen HillDirector, Project Management Office

Anita HoltPresident’s Executive Assistant

Wendee HowellSenior Project Manager

Cheryl HutchingsManager, PCS and Non-CPA Exam

Operations Accounting

Karen Johnson, CPAManager, Payroll Compliance

Randy JungManager, Operations Guam

Computer Testing Center

Linda A. KellnerDirector, PCS Examination Development

Thomas G. KennyDirector, Communications

Christy LewellenManager, Human Resources

Kathy LoveManager, State Coordinators

Angel S. LunnChief People Officer

Jose A. Manzon, IVManager, Guam Computer TestingCenter

Chris MaysManager, National Candidate Database

Ken MorrisManager, Licensee Services

Chel NelsonManager, Candidate Services

Rebecca RodriguezManager, Business Development

John RolandManager, CPA Operations Accounting

Anne E. RussellManager, PCS Site Administration

Anne E. ScalfManager, Compliance Services Products

Morgan ScheelManager, Wall Certificate Service

James O. “Butch” ThomasManager, Development Systems

Jill ThompsonManager, CPETracking Account

Francine A. TilleyManager, PCS Application Processing

PCS Cosmetology

Penny A. VernonManager, Candidate Care

Troy A. Walker, CPANASBA ControllerPCS Chief Financial Officer

Jan WinslettManager, Quality Assurance

100 YEARSRespecting the Past

Enforcing Codes of EthicsAs early as 1953, NASBA adopted a resolutionacknowledging the need for state boards toenforce codes of ethics.

Making HistoryNASBA looks back at the past 100 years of service.

Father of NASBAHomer A. Dunn, a partner of Haskins andSells, becomes the firstpresident of NASBA in1908. Dunn was a notedauthor and respectedspeaker on accountingtopics.

Name ChangesBefore 1967, our organization was called theNational Association of CPA Examiners. The boardsvoted to change the name to National Associationof State Boards of Accountancy (NASBA).

NASBA NewsIn 1972, NASBA’s first newsletter, NASBA News, isprinted on a monthly basis.The name changed to theState Board Report in 1976.

Hiring Full-TimeNASBA hires its first full-time employee, William H.Van Rensselaer in 1972. Aformer AICPA staff mem-ber, Van Rensselaerworked with state societyrelations, state legislationand ethics.

nasba

An Organization is BornNASBA traces its roots to a meeting that took place in Atlantic City,

New Jersey, Monday, October 19, 1908. This initial meeting took

place in conjunction with the annual meeting of the American

Association of Public Accountants (AICPA). In 1908, only 16 states

had boards of accountancy, garnering a total of 55 board members

throughout the United States. Attendance at the 1908 meeting

included 17 examiners from 10 state boards — a respectable 63 per-

cent of the states and 31 percent of the board members. Attendees

voted to form an organization to be known as the National

Association of CPA Examiners, later known as the National

Association of State Boards of Accountancy (NASBA). The group also

identified its purpose - “To provide advice and information to

achieve more uniform examinations and to systematize matters as

far as possible under different laws.”

Computer Age LaunchesThe first computer-based CPA Examination was administered in April

2004 at Prometric Testing Centers across America. NASBA’s involve-

ment with the computerized CPA Examination began in 1995 after

responding to the AICPA’s “Invitation to Comment: Conversion of

the Uniform CPA Examination to a Computer-Based Examination.”

In 1998, the CPA Examination Computer Implementation

Committee was formed to research and develop a computer-based

examination. In 2000, a plan originated to launch legislative initiatives

for implementing a computerized exam.

The computer-based testing (CBT) agreement was compli-

cated as it was a joint agreement among the AICPA, NASBA,

Prometric and 54 examination jurisdictions. In 2002, the final joint

agreement featured the state boards of accountancy as insured

entities, allowing them third-party beneficiary rights and audit provi-

sions. NASBA, the AICPA and Prometric were three parties to the

contract, but when required, there was an additional contract

between NASBA and a jurisdiction to accommodate specific state

laws.

As a result of the CBT success, NASBA opened a computer

testing center in Guam, which has become the largest CPA testing

center in the nation. This center attracts candidates from Asian

countries who wish to sit for the CPA examination.

100 YEARSAnticipating the Future

Moving On OutIn 1978, NASBA establishesown offices in New YorkCity, NY.

Going Down SouthAs the association began togrow, NASBA relocated itsmain office to Nashville, TNin 1997.

Celebrating 100 YearsNASBA kicks off its celebration of 100 years atthe 2007 Annual Meeting inMaui, HI.

UAA UnleashedNASBA publishes the first of four editions of theUniform Accountancy Act (UAA) in 1984 explainingboth alternatives to the peer review and experience issues.

CPA LeaderDavid A. Costello, CPA,President and CEO, joinedthe organization in 1994.Through his leadership anddetermination, Costello continues to bring vitality andgrowth to the organization.

NASBA Stands AloneIn 1977, NASBA independently hosted its first annual meeting in

Williamsburg, Virginia - the first meeting of its kind to be hosted with-

out any correlation to an AICPA meeting.

Attendance included 123 state board members from 48

jurisdictions, compared to 125 members from 49 jurisdictions at the

1976 Philadelphia meeting hosted with the AICPA. In addition, 23 for-

mer state board members were added each year and the number

of board administrators increased from 14 in 1976 to 16 in 1977.

As a follow-up to this meeting, NASBA surveyed its members

addressing the decrease of NASBA membership attendance at the

AICPA’s annual meeting, the lack of choice in meeting locations

and facilities and the appearance of NASBA’s independence.

Responses indicated that there was no need to continue meeting

with the AICPA.

Grades Meet TechnologyIn 1980, NASBA began to develop and provide acomputerized grade reporting and statistical service for state boards.

Serving Two TermsJerome P. Solomon becamethe first person in half a centuryto serve more than one year inNASBA’s highest office, serving1990 - 1992.

International ExaminationNASBA continues to address the issue of the interntionalization of the

CPA Examination. Demand for the examination among foreign

nationals has been significant. The possibility of offering the exam

internationally has been discussed in recent years as other American

examinations have seen success, such as the Certified Internal

Auditor Examination and the Certified Management Accountant.

An initial meeting was held in 1998 to consider the merits of

allowing the CPA exam to be taken in foreign countries and eventu-

ally granting CPA certificates and licenses to successful candidates

meeting qualifications. It was noted that licenses and certificates

were already being granted by licensing boards in the Virgin Islands,

Puerto Rico and Guam.

NASBA and the AICPA participants agree that the eventual

ability to deliver a secure web-based Uniform CPA Examination any-

where in the world would make such a venture possible. Diane

Rubin, Past Chair, appointed a study group to readdress this issue

during her term. Then Chair Wesley Johnson, appointed task forces

to respond to international exposure drafts, to consider an interna-

tional conference and to take the examination to other countries.


REGULATIONFocusing on Mobility

Over the past 100 years, incredible changes haveoccurred in the accounting profession. State boardsof accountancy have adapted well to regulate theever evolving profession and fulfill their statutory roleto protect the public interest. Recent historicalevents such as the collapse of Enron and other cor-porate debacles have led boards to adapt furtherto regulate the profession. In essence, the land-scape of regulation has expanded and becomemore intricate. Today, state boards are partneringwith boards beyond their border states and workingin tandem with the Public Company AccountingOversight Board (PCAOB) and the Securities andExchange Commission (SEC). In the future, the reg-ulatory landscape will be sure to present a differentpicture of boards of accountancy.

CPA practice mobility, the ability of CPAs to practicefreely, but responsibly across state borders whileremaining accountable to the authority of stateboards of accountancy, is the future. In an effort toregulate the constantly changing profession, 11boards of accountancy have taken the future intotheir own hands by implementing the provisions ofthe UAA that provide for “No notice, No fee and Noescape.”

The revisions to Sections 5, 7, 14 and 23 of the UniformAccountancy Act (UAA) provide a comprehensivesystem for permitting licensee mobility while makingexplicit the boards’ authority to regulate all whooffer or render professional services within their juris-diction regardless of how those services are beingprovided. These changes enhance public protec-tion, facilitate consumer choice and support the effi-cient operation of the capital markets.

In November 2006, Chair Wes Johnson created the

CPA Mobility Task Force and appointed state boardvolunteers and NASBA staff to pursue the implemen-tation of mobility in accordance with the revisedUniform Accountancy Act (UAA).

At the time the Task Force began its work, four states(Ohio, Virginia, Wisconsin and Missouri) had imple-mented the equivalent of the UAA provisions andthere was little or no legislative activity in support ofmobility on the part of other boards. By October2007, 11 states boards adopted the provisions ofSections 7, 14 and 23 through rule or law and 19boards have formally voted to support and move toimplement mobility. Twelve additional states havean opportunity for success with mobility in the 2008-2009 timeframe. From a start of four states, mobilityhas gained traction in 42 states with others expectedto move in 2008 and 2009.

To assist state boards with the move towards mobili-ty a true collaborative effort was formed amongNASBA, the AICPA, CPA Society ExecutivesAssociation (CPA/SEA) and the AccountantsCoalition (TAC). Through TAC, legal services havebeen provided by Gibson, Dunn & Crutcher LLP toassist state boards with draft legislation and/or legalreviews. Additional resources have been devotedto Regional CPA/SEA Meetings, NASBA RegionalMeeting presentations and visits to 18 state boards ofaccountancy. NASBA leadership has worked tire-lessly, visiting boards and presenting the UAA provi-sions as the right solution to the issue of CPA mobility.

John F. Kennedy once said, “Change is the law oflife. And those who look only to the past or presentare certain to miss the future.” In 2007, state boardstook steps to not “miss the future” and additionalboards will continue the effort in 2008 and 2009.


WV

FL

AR

LAMS AL GA

WI

MN

IA

IL

MO

MI

KY

IN OH

TN NC

SC

VA

PA

NY

ME

NHVTMARICTNJDEMD

HIPR

AK

GUAM VICNMI

DC

NE

WA

CA

NV

OR ID

AZ

UT

MT

WY

NM

TX

ND

KS

OK

SD

CO

November 2006

Mobility

HI

WV

FL

AR

LAMS AL GA

WI

MN

IA

IL

MO

MI

KY

IN OH

TN NC

SC

VA

PA

NY

ME

NHVTMARICTNJDEMD

HIPR

AK

GUAM VICNMI

DC

NE

WA

CA

NV

OR ID

AZ

UT

MT

WY

NM

TX

ND

KS

OK

SD

CO

August 2007

Mobility

Legislative Action

HI

Targets for 07-08

Future

Target & Board Support

Board Support

Mobility began with four states in November 2006. By August 2007, seven new states passed languagethat implemented full mobility. Twenty-six state boards have either passed legislation or voted to supportthe concept of mobility. Nineteen new states have been targeted by NASBA for pushing legislation in2007 and 2008. Thirteen states have been identified as ‘Future’ states where no signs of movement orprogress toward implementation of mobility.

PROGRAMSBanking on ServiceCelebrating yet another year of achievement, NASBA continues to provide benefits to memberboards through its array of programs and services. New programs were launched and old pro-grams were retooled resulting in a wide range of offerings for member boards, CPA examinationcandidates, the accounting profession and the public.

CPA EXAMINATION SERVICESIn its 26th year of operation, NASBA’s Flagship Operation(CPAES) successfully served more than 70,000 candidates onbehalf of 31 boards of accountancy. CPAES processed appli-cations for over 60 percent of the total national CPA candi-date population during the year. In 2007, CPAES focused onimproving application processing timelines. Application pro-cessing times were reduced from 6-8 weeks to 2-4 weeks forfirst-time applications. Additionally, CPAES staff attended theExecutive Directors’ Conference and both Regional Meetingsto provide guidance and respond to questions from memberboards.

INTERNATIONAL QUALIFICATION EXAMINATIONCPAES offers the International Qualification Examination (IQEX) toqualifying candidates each year. The purpose of IQEX is to facilitatethe US CPA qualification process for accounting professionals fromother countries whose professional bodies have entered into mutualrecognition agreements with NASBA and the American Institute ofCertified Public Accountants (AICPA). These agreements are recom-mended to the states for their adoption. Agreements have beenestablished with the Canadian Institute of Chartered Accountants,Instituto Mexicano de Contadores Publicos, Institute of CharteredAccountants in Australia, CPA Australia and the Institute of CharteredAccountants in Ireland. IQEX was administered to 321 candidatesduring a four week testing window beginning November 15, 2006 andending December 15, 2006 at Prometric Testing Centers in the US andCanada.



NASBA CENTER FOR THE PUBLIC TRUSTThe NASBA Center for the Public Trust (CPT) continues to lay astrong foundation in anticipation of an exciting future. CPTmapped out a strategic plan, continued development efforts,revamped communications and increased its staff.

Held in Nashville and co-sponsored with the LipscombUniversity Institute for Conflict Management, “BeyondCompliance: Transforming Ethical Dilemmas throughCourageous Leadership” attracted more than 70 attendees. The conference provided collaborative, con-flict resolution techniques applicable across all functions, especially those impacted by audits. A highlightof this event were the remarks of the inspirational breakfast speaker, retired Naval Commander ScottWaddle. During breakout sessions, participants developed conflict resolution techniques, appropriate meth-ods for disclosing ethical issues, guidelines for identifying ethical pitfalls, and ways to strategically preventethical issues from arising.

The CPT Trust Society is a group of industry-leading companies, organizations and institutions. Trust SocietyMembers have committed to supporting the activities of CPT. New members include the AccountantsCoalition, which is comprised of representatives of the big four accounting firms. Additional Trust membersinclude SunTrust Bank, Inc., one of the nation’s largest banking organizations, and Moss Adams LLP, the 12thlargest accounting and consulting firm in the US. Involvement in the society includes:

• Being recognized as leaders in business ethics and ethical leadership• Raising the standard of ethical behavior of businesses • Increasing the understanding and use of ethical business practices within their own companies• Joining a network of industry-leading companies, organizations and institutions• Restoring the hope, confidence and trust of the public

CPT continued the Founding Members program in 2007, which provides a unique opportunity for individualsto support the Center’s important work. As of September 30, 2007, 70 individuals had become supportingmembers at various levels.

In 2007, CPT’s Being a Difference Awards Program recognized five individuals and organizations. The pro-gram was implemented to honor those practicing high standards of social responsibility and ethical leader-ship. Recipients do not simply aspire to make a difference, they are being a difference by embodying thevery best in principled behavior in the face of difficult challenges. By demonstrating innovative responsesto ethical challenges, communities and individuals are inspired and motivated to emulate similar behavior.In 2006, CPT bestowed three awards. The program was so successful that in 2007 the program was expand-ed to include:

• S. Truett Cathy – Founder and CEO, Chick-Fil-A• Richard Cowart, Esq. – Head of the Health Care Practice of Baker Donelson, PC• Mitch D’Olier, Esq. – President and CEO of Kaneohe Ranch Ltd., and Harold K.L. Castle Foundation• Nathan Garrett, CPA, Esq. – NASBA Past Chair• Tammy Morreale – Director of Community Relations, PricewaterhouseCoopers


ACCOUNTANCY LICENSING LIBRARY (ALL)The licensing content for all 55 of the CPA licensing jurisdictions is now liveand available in NASBA's Accountancy Licensing Library (ALL). NASBAstaff has worked diligently to provide an effective and accurate licensingresource tool useful to individuals, State Boards, universities and publicaccounting firms. ALL provides a centralized location for current and reli-able information on the various types of licenses available to CPAs andfirms in each of the 55 jurisdictions. Users may view and print licensingrequirements, instructions, procedures and forms. The rules, regulations andprocedures are written in narrative form and all forms have been convert-ed to fill-in PDF versions.

Over 500 individual user subscriptions have been purchased. Recent mar-keting efforts targeting firms and universities has generated increased inter-est. As a result, a departmental subscription was purchased by VanderbiltUniversity and a small accounting firm. In addition, a Big Four accountingfirm has recently purchased an enterprise subscription opening up ALL toover 3,000 of their professionals.

NASBATOOLSThrough the combined efforts of NASBA departments, the idea of a com-prehensive Web site to cross-reference new and existing NASBA servicesevolved into a new approach for connecting NASBA with both its memberboards and the professionals they license. Since the launch ofNASBAtools.com, the site has received the Web Star of the Week awardfrom WebCPA. NASBAtools incorporates services into three main areas:Licensure, CPE Compliance and CPE Sponsors.

ACCOUNTANCY LICENSEE DATABASE (ALD)The Accountancy Licensee Database (ALD) serves as a centralized clear-inghouse of information on CPAs and firms in all jurisdictions. In August2005, the program launched to member boards with information fromLouisiana, Missouri, Tennessee and Texas. During fiscal 2006, informationfrom Idaho, Indiana, New Mexico, Oklahoma and Wyoming was added.During fiscal 2007, information from Alaska, Arkansas, Nevada, Puerto Ricoand West Virginia, was added. Colorado, Nebraska and Washington are inthe process of adding their information. License information is currentlyavailable only to member boards.

COLORADO LICENSUREOn behalf of the Colorado State Board of Accountancy, NASBA processesColorado CPA license applications and CPA firm registrations. In its ninthyear of operation, Compliance Services evaluated 1,114 individual andfirm applications and recommended 1,059 applicants to the board forapproval of licensure during fiscal 2007.


CPEMARKET In its sixth year of operation, CPEmarket continues to serve as a convenientand current resource for CPAs who seek continuing education creditsrequired to maintain and/or renew their professional licenses. CPEmarketprovides the ability to search a complex course database using specificcriteria such as subject area, credit hours, course location, dates andcourse format. CPEmarket offers current and updated information onstate-mandated continuing education requirements essential to meetingCPE requirements. In 2007, CPEmarket listed 150 sponsors, 3,500 coursesand 4,800 users.

CPETRACKINGCPEtracking enhances the ability of CPAs to manage continuing profes-sional education (CPE) compliance. It also allows for recording and main-taining CPE credits with ease and convenience. CPEtracking then com-pares CPE credits with each state board’s requirements and the require-ments of other organizations such as the AICPA and the GovernmentAccountability Office. In its fourth year of operation, CPEtracking addedeight firms and over 665 individual account users. Additionally, theLouisiana, Puerto Rico and Wyoming Boards accept CPE reporting throughCPEtracking.

NATIONAL REGISTRY OF CPE SPONSORS The National Registry of CPE Sponsors recognizes CPE sponsors who provideprograms in accordance with nationally recognized standards. The namesof approved CPE program sponsors are published in a listing distributedthroughout the country via the internet and in printed format. Currently inits 17th year of operation, 38 boards accept CPE credits from Registry spon-sors, five boards require them and six boards require that providers registerwith NASBA or the state board. There are 1,510 approved Registry spon-sors.

QUALITY ASSURANCE SERVICE (QAS) QAS provides assistance to state boards and their licensees through itsapproval of the highest quality CPE providers of self-study courses. In 2007,QAS had 35 sponsors. Twenty-one boards of accountancy accept CPEcredits from QAS sponsors and seven boards require them.

CREDENTIALNETCredentialNet streamlines the process for submitting individual substantialequivalency applications and notifications of intent to practice under sub-stantial equivalency. Through its Record Service, CPAs can retain, easilyaccess and update official documents and credentialing information with-out having to personally acquire and maintain it. During fiscal 2007,CredentialNet provided interstate practice services to Arkansas, California(practice privilege only), Kansas, New Mexico, New York, North Dakota,Oklahoma and Tennessee, reviewing in excess of 200 license applications.


PROFESSIONAL CREDENTIAL SERVICES, INC. (PCS) NASBA’s wholly-owned subsidiary, Professional Credential Services, Inc.(PCS), has provided a wide array of professional testing, licensing and cer-tifying services to various regulatory agencies.

With more than 50 different professions and occupations under the PCSumbrella, the past year has brought continued growth, most notably in ourcosmetology division. PCS has contracted with Arkansas, New Mexico andPuerto Rico, which brings the total number of states served by PCS to thir-teen. Another new client is the Federation of State Massage TherapyBoards (FSMTB), which has contracted with PCS to handle all of its backoffice operations.

In addition to the cosmetology services, PCS has recently been awardeda multi-board contract for the Department of State in Puerto Rico and setnew records for revenue and growth.

PCS provides examination and licensing services to state boards and asso-ciations, such as application processing, eligibility processing, paper/pen-cil and computer-based testing administration, score reporting and WallCertificate Service. PCS also provides complex test development servicesthat require an in-depth knowledge of testing standards for various clients.

With additional staff in place to promote and foster new and existing busi-ness, PCS will continue to build its reputation as experts in the fields of licen-sure and certification and will carry forward its success.

WALL CERTIFICATE SERVICENASBA's Wall Certificate Service is designed to enhance the quality oflicensing certificates of professional agencies and organizations by offeringcreative and professional design options. Using state-of-the-art technolo-gy and equipment, the Wall Certificate Service eliminates the time con-straints of manual production and offers time saving electronic signatureoptions, a tested verification process and timely processing and distribu-tion. During the 2007 fiscal year, Wall Certificate Service produced over1,000 certificates and launched a new Web site to further streamline theorder and fulfillment process.

October 2006NASBA’s 99th Annual Meeting in

Atlanta, GA attracts over 400 atten-

dees including state board represen-

tatives from 49 jurisdictions.

Proposed Uniform Accountancy Act

Model Rules, covering compliance

assurance and peer reviews, required

ethics continuing professional educa-

tion and a model code of conduct,

are approved by the NASBA Board for

an exposure period ending on April 30.

November 2006Uniform CPA Examination sees more

candidate participation than was

achieved prior to the conversion from

the paper-and-pencil to the comput-

er-based examination.

World Congress of Accountants in

Istanbul, Turkey, draws nearly 6,000

professional accountants. NASBA rep-

resentative presented a talk on com-

petencies and skills for the auditor of

the future.

December 2006Proposed revisions to Uniform

Accountancy Act released for com-

ment.

January 2007Ken Bishop, former Missouri Board

executive director, joins NASBA to

head CPA Examination Services and

Professional Credential Services.

NASBA Representatives meet with SEC

Chief Accountant Conrad Hewitt who

expresses eagerness to work with the

state boards to achieve their common

goal of protection of the public.

February 2007President David Costello and IQAB

Chair William Treacy meet with the

International Federation of Account-

ants President Fermin Del Valle and

IFAC Chief Executive Officer Ian Ball in

New York City to enhance the relation-

ships between the two organizations.

New Regulatory Response Commit-

tee Task Force on International

Professional Standards created by

Chair Johnson with Rick Isserman

appointed to serve as its chair.

March 2007Amended UAA revisions proposal

released with exposure period to end

May 15. New provisions would enable

easier CPA mobility among states

while ensuring boards have authority

over all CPAs practicing in their juris-

dictions.

April 2007NASBA Chair Johnson announces new

International Regulators Conference

Committee to establish contact with

non- U.S. government entities that reg-

ulate the practice of public account-

ancy.

Inner Mongolia Government Financial

Management Delegation visits NASBA

to learn about state board regulation.

May 2007NASBA/AICPA IQAB meets with Paul

George, Director of the United

Kingdom’s Public Oversight Board, as

well as representatives from mutual

recognition agreement partners and

the US Trade Representative’s office.

June 2007Nearly 400 state board members and

staff, and government and society

representatives attend Regional

Meetings to share views on mobility,

compliance assurance/peer reviews,

and the Uniform CPA Examination.

July 2007NASBA Regional Directors asked to

assist the Compliance Assurance

Committee in urging states to develop

their own committees to oversee

required review programs.

August 2007NASBA Joins IFAC KnowledgeNet for

Professional Accountants (“IFACnet”),

which is a global search engine to

give accountants access to articles,

management tools and guidance.

Compliance Assurance Committee

Chair Sadler attends AICPA Peer

Review Board meeting and states that

new AICPA Peer Review Standards

are in agreement with revised UAA

Model Rule 7-3.

September 2007President Costello announces staff

reorganization as NASBA grows to

close to 200 employees.


2006 - 2007Applauding the Fiscal Year


National Association of State Boards of Accountancy, Inc.And Related Organizations

Consolidated Financial Statements

July 31, 2007 and 2006


NATIONAL ASSOCIATION OF STATE BOARDS OF ACCOUNTANCY, INC.

AND RELATED ORGANIZATIONS

CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2007 and 2006


September 19, 2007

REPORT OF MANAGEMENT

The management of the National Association of State Boards of Accountancy, Inc. and Related

Organizations is responsible for the preparation, integrity and objectivity of the consolidated finan-

cial statements included in this annual report. These consolidated financial statements have been

prepared in accordance with accounting principles generally accepted in the United States of

America applied on a consistent basis and are considered to present fairly in all material respects

the Association’s financial position, changes in net assets and cash flows.

Management has established and maintains internal controls designed to give reasonable assur-

ance of the integrity and objectivity of financial reporting, that assets are safeguarded, and that

transactions are executed in accordance with appropriate authorizations and recorded properly.

Internal controls include the careful selection of employees and members of the management

team, the proper segregation of duties, and the communication and application of formal policies

and procedures that are consistent with high standards of accounting and administrative practices.

The concept of reasonable assurance is based on the premise that the cost of internal controls

should not exceed the benefits derived.

The Board of Directors, through its Audit and Administration and Finance Committees, reviews

financial and accounting policies, practices and reports, and monitors the system of accounting

and internal controls and the competence of persons performing those functions. The Audit

Committee also oversees the scope and results of independent audits and any comments on the

adequacy of internal controls and quality of financial reporting. The independent auditors render

an objective, independent opinion on management's financial statements, and have direct access

to the Audit Committee with and without the presence of management.

The Board of Directors also has adopted and monitors personnel policies designed to ensure that

employees of the National Association of State Boards of Accountancy, Inc. and Related

Organizations are free of any conflicts of interest.

National Association of State Boards of Accountancy

150 Fourth Avenue North � Suite 700 � Nashville, TN 37219-2417 � Tel 615/880-4200 � Fax: 615/880-4290 � Web www.nasba.org


President and Chief Executive Officer


Chief Financial Officer

Joseph T. Cote, CPA

Chief Operating Officer

Troy A. Walker, CPA

Controller


NATIONAL ASSOCIATION OF STATE BOARDS OF ACCOUNTANCY, INC. AND RELATED ORGANIZATIONS

Management’s Discussion and Analysis

Fiscal 2007 was the third full year of CPA testing in the computer-based testing (“CBT”) examination environment. During this year, total sections processed into the national candidate database, the gateway to the computerized examination, amounted to approximately 251,000, an increase of 14.7% over the prior fiscal year.

This year, NASBA continued to develop product service areas that improve regulatory compliance. NASBAtools.com provides a centralized location for accountancy licensing and CPE compliance service products to assist users in licensing and other regulatory compliance. In addition, NASBA assumed aleadership role in the area of licensee mobility, and related legislative initiatives, by making explicit the boards’authority to regulate those practicing within their jurisdiction.

Professional Credential Services, Inc. (“PCS”), a wholly-owned for-profit subsidiary of NASBA, continues to service non-accounting-related entities in test development, administration, and licensing activities.

Program RevenuesRevenue on a consolidated basis was $24.5 million in 2007 compared to $20.9 in 2006, an increase of $3.6 million or 17.2%. The following table compares operating revenue by program for 2007 and 2006:

In millions 2007 2006 Change

Examination related $ 22.4 $ 18.8 19.1%Other programs 1.8 1.7 5.9%Member dues and other revenue 0.3 0.4 -25.0%Total $ 24.5 $ 20.9 17.2%

Examination related program revenue The following table compares the components of Examination related program revenues for 2007 and 2006:


CPA Examination Services $ 9.1 $ 8.6 5.8%PCS 6.7 5.8 15.5%CBT Contract Services 4.7 2.7 74.1%Guam Test Center 0.9 1.0 -10.0%Other 1.0 0.7 42.9%Total $ 22.4 $ 18.8 19.1%

The increase in PCS revenue resulted primarily from a full year of services performed under new contracts signed during 2006 with state cosmetology boards to administer examinations. In addition, candidate volumeincreased over the prior year across most other examination administration and licensing contracts.

The increase in CBT Contract Services revenue is related to both the 14.7% increase in section volume processed by the national candidate database and the increase in the related testing fees paid by candidates.

Member dues and other revenue The decline in revenue from the prior year was attributable solely to the NASBA Center for the Public Trust which hosted two conferences in 2006 but none in 2007.




Program ExpensesOperating expenses on a consolidated basis were $23.7 million in 2007 compared to $20.1 million in 2006, anincrease of $3.6 million or 17.9%. The following table compares operating expenses by program for 2007 and2006:


Examination related $ 20.2 $ 16.9 19.5%Other programs 2.1 1.8 16.7%Communications 1.4 1.4 0.0%Total $ 23.7 $ 20.1 17.9%

The components of the 19.5% Examination related program expenses increase were primarily the effect of: (1)additional examination administration costs for new PCS contracts; (2) payment of CBT Services contract partners’ increased testing fees in excess of what was collected from candidates; and (3) increases inpersonnel costs in 2007 resulting from an information services organizational structure review, additional project management personnel and new executive management personnel.

The increase in expenses for Other programs is attributable to new personnel and additional operational activities related to cpetracking, primarily marketing and existing client development.

Expense variations for 2007 from 2006 amounts by caption are presented in the following table:


Examination program costs 4.7 3.8 23.7%Salaries and related costs 12.0 9.8 22.4%Occupancy 1.1 0.9 22.2%Other captions 5.9 5.6 5.4%Total 23.7 20.1 17.9%

The reasons for the majority of these increases are explained above in the discussion of Examination related program expenses (examination program costs and salaries and related costs), and in Other programs (salaries and related costs). Occupancy related expenses increased primarily due to leases that were signedin the last two months of the fiscal year for additional Nashville office space and for leased property in New York to replace offices under an expired lease that the landlord would not renegotiate.

Other IncomeIn addition to operating revenues, NASBA had income of $0.7 million resulting from an outstanding trademark licensing issue with a CBT contract partner.

Investment IncomeTotal investment income in 2007 was $1.0 million greater than in 2006. Total long-term investment securities had a return of 14.5% for 2007 compared to 1.9% in 2006. Net gains and losses from long-term investment securities in 2007 were $0.8 million more than in 2006 attributable primarily to equity fund performance. In 2007, interest and dividends from long-term investments and from short-term investments of operating cash increased approximately $0.2 million. This resulted primarily from higher levels of operating cash available forshort-term investments as a consequence of increased testing fees paid by candidates.




Cash Flow and Financial PositionCash provided by operating activities was $1.9 million in 2007 as compared to $2.7 million in 2006. Cash used in investing activities was $2.1 million in 2007 as compared to $0.8 million in 2006. Investing activities included $1.0 million of certificates of deposit, with maturities ranging from four to nine months, purchased inJuly 2007. Financing activities in 2007 consisted solely of remaining payments on a capital lease that expiredin May 2007. In 2006, financing activities consisted of $0.2 million of payments to reduce long-term debt and the capital lease obligation. As a result of these operating, investing and financing activities, net cash decreased $0.3 million in 2007 compared to an increase of $1.6 million in 2006.

At July 31, 2007, NASBA and its related organizations have a strong financial position with adequate liquidityto meet the needs of its operations and the continued funding of new and developing projects and services. The CBT agreement provides for NASBA to breakeven on development, maintenance, and operation of its CBT activities. In 2006, $1.4 million of net expenses recognized in the Statement of Activities were to berecovered from future candidate fees. In 2007, $0.6 million of prior year net expenses were recovered through CBT operational activities and an additional $0.7 million was recovered through income from the contract issue. At July 31, 2007, NASBA has cumulative net expenses of $3.8 million which are expected to berecovered through future candidate fees. These amounts were expensed in the current and previous six fiscal years. Total unrecovered costs at July 31, 2007 were $5.7 million which includes $1.9 million of unamortized software development costs.

At July 31, 2007, NASBA had outstanding debt of $1.4 million remaining from the $3.0 million advanced byPrometric, Inc. in 2003 for software development. NASBA expects to fund the minimum annual debt payments over the remaining 4 years of the loan from cash provided by operating activities.

In 2007, NASBA celebrated its one hundredth year anniversary and reported record financial results. Unrestricted net assets increased $2.8 million in 2007 and $1.0 million in 2006. NASBA has experienced five consecutive years of growth in its unrestricted net assets—increasing from $4.7 million at the end of 2002 to $12.5 million at the end of 2007. Financial strength provides NASBA the wherewithal to act definitively whennew opportunities arise, as well as the ability to sustain operations in the event of challenging economic times or unforeseen environmental changes. Serving the member boards of accountancy, and, correspondingly, the public trust, and ensuring future organizational strength, requires a strong financial position and continuingfiscal stability. NASBA continues to strive for the highest in quality services in the CPA examination environment and has endeavored to serve the public and its member boards with additional compliance-related services such as cpetracking and the Accountancy Licensing Library. Because of NASBA’s fiscalstability, the organization is able to serve the boards, the examination candidates, the licensees and the public as the national voice of the regulators of the CPA profession.


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September 19, 2007

REPORT OF AUDIT COMMITTEE

The Board of Directors

National Association of State Boards of Accountancy, Inc.

The Audit Committee of the National Association of State Boards of Accountancy, Inc. for the year

ended July 31, 2007, was charged by the Board of Directors with the responsibility for oversight of

the annual independent audit of the consolidated financial statements.

In connection with the discharge of its responsibility,

• Prior to commencement of the year-end audit work, the Audit Committee, met via telecon-

ference with the independent auditors to discuss (1) the overall scope and specific plans

for the conduct of the audit and (2) the accounting, reporting and internal control process-

es and procedures of the National Association of State Boards of Accountancy, Inc., includ-

ing the safeguarding of assets and other resources against unauthorized acquisition, use

or disposition;

• After the completion of the audit, the Committee, along with members of senior manage-

ment, met with the independent auditors to discuss the results of the audit and, without

senior management present, the Committee had an opportunity to discuss privately with

the independent auditors any matters of concern of the independent auditors.

Based on the above, the Committee believes that the annual independent audit was properly com-

pleted, and that management has maintained adequate systems and controls and followed the

appropriate procedures related to financial accounting, reporting and safeguarding of assets for

the year ended July 31, 2007.

Respectfully submitted,

The Audit Committee


Carlos E. Johnson, CPA, Chair, on behalf of the Members of the Committee as follows:

P. Robert Fox, CPA

Bennie L. Hadnott, CPA

David P. Kassouf, CPA

Joe C. Lawrence, CPA

Edward H. Rudert, CPA




October 4, 2007

REPORT OF AUDIT COMMITTEE

The Board of Directors


The Audit Committee of the National Association of State Boards of Accountancy, Inc. for the year

ended July 31, 2007, was charged by the Board of Directors with the responsibility to recommend

to the Board of Directors the audit firm to undertake the annual audit for the following year.

In connection with the discharge of its responsibility, the Committee met privately via teleconfer-

ence to discuss and consider the credentials and performance of the independent auditors and

decided on a recommendation to the Board of Directors of an independent audit firm for the year

ending July 31, 2008.

Respectfully submitted,

The Audit Committee


Carlos E. Johnson, CPA, Chair, on behalf of the Members of the Committee as follows:

P. Robert Fox, CPA

Bennie L. Hadnott, CPA

David P. Kassouf, CPA

Joe C. Lawrence, CPA

Edward H. Rudert, CPA




INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Members


We have audited the accompanying consolidated statements of financial position of the National

Association of State Boards of Accountancy, Inc. and Related Organizations as of July 31, 2007

and 2006, and the related consolidated statements of activities, program expenses and cash flows

for the years then ended. These consolidated financial statements are the responsibility of man-

agement. Our responsibility is to express an opinion on these consolidated financial statements

based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United

States of America. Those standards require that we plan and perform the audits to obtain reason-

able assurance about whether the consolidated financial statements are free of material misstate-

ment. An audit includes consideration of internal control over financial reporting as a basis for

designing audit procedures that are appropriate in the circumstances, but not for the purpose of

expressing an opinion on the effectiveness of the internal control over financial reporting.

Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evi-

dence supporting the amounts and disclosures in the consolidated financial statements, assessing

the accounting principles used and significant estimates made by management, as well as evalu-

ating the overall financial statement presentation. We believe that our audits provide a reasonable

basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all materi-

al respects, the financial position of the National Association of State Boards of Accountancy, Inc.

and Related Organizations as of July 31, 2007 and 2006, and the changes in their net assets and

their cash flows for the years then ended in conformity with accounting principles generally accept-

ed in the United States of America.

Brentwood, Tennessee

September 19, 2007


See Accompanying Notes to the Consolidated Financial Statements

NATIONAL ASSOCIATION OFSTATE BOARDS OF ACCOUNTANCY, INC. AND RELATED ORGANIZATIONS

CONSOLIDATED STATEMENTS OF ACTIVITIESFor Years Ended July 31,

2007 2006Program Revenues Examination related $ 22,384,194 $ 18,798,699 Other programs 1,773,499 1,735,709 Member dues and other revenue 344,486 410,604

Total program revenues 24,502,179 20,945,012

Program Expenses Examination related 20,228,128 16,957,913 Other programs 2,113,233 1,770,055 Communications 1,338,322 1,401,222

Total program expenses 23,679,683 20,129,190

Excess of Program Revenues Over Program Expenses 822,496 815,822

Income from Contract Issue 714,280 -

Increase in Unrestricted Net Assets Before Investment Income and Income Taxes 1,536,776 815,822

Investment Income 1,320,373 300,487

Increase in Unrestricted Net Assets Before Income Taxes 2,857,149 1,116,309

Income Tax Expense 26,100 76,100

Increase in Unrestricted Net Assets 2,831,049 1,040,209

Unrestricted Net Assets Beginning of Year 9,708,497 8,668,288

Unrestricted Net Assets End of Year $ 12,539,546 $ 9,708,497

12,539,5460




CONSOLIDATED STATEMENTS OF PROGRAM EXPENSES

Examination Otherrelated programs Communications Totals

Year Ended July 31, 2007

Examination program costs $ 4,693,341 $ - $ - $ 4,693,341 Salaries and related costs 10,853,283 975,287 199,633 12,028,203 Occupancy 882,444 134,971 25,478 1,042,893 Professional fees 771,184 485,229 386,238 1,642,651 Printing and postage 377,198 17,667 59,438 454,303 Travel and meetings 684,539 198,206 586,538 1,469,283 Depreciation and amortization 880,064 53,895 12,617 946,576 Telephone 172,540 17,942 16,640 207,122 Equipment rentals 336,457 51,095 18,612 406,164 Supplies 126,301 13,168 8,379 147,848 Miscellaneous 450,777 165,773 24,749 641,299Totals $ 20,228,128 $ 2,113,233 $ 1,338,322 $ 23,679,683

Year Ended July 31, 2006

Examination program costs $ 3,821,157 $ - $ - $ 3,821,157 Salaries and related costs 8,835,593 853,828 154,939 9,844,360 Occupancy 773,171 106,428 25,288 904,887 Professional fees 672,295 473,953 328,555 1,474,803 Printing and postage 319,807 25,166 97,325 442,298 Travel and meetings 630,351 58,583 711,136 1,400,070 Depreciation and amortization 870,138 48,589 11,363 930,090 Telephone 155,980 10,748 16,892 183,620 Equipment rentals 371,460 49,209 12,581 433,250 Supplies 105,951 14,218 9,579 129,748 Miscellaneous 402,010 129,333 33,564 564,907Totals $ 16,957,913 $ 1,770,055 $ 1,401,222 $ 20,129,190




CONSOLIDATED STATEMENTS OF FINANCIAL POSITIONJuly 31,

2007 2006AssetsCurrent Assets Cash and cash equivalents $ 5,034,920 $ 5,300,500 Certificates of deposit 958,655 - Receivables 1,423,066 1,124,788 Prepaid expenses 326,212 278,727 Deferred income taxes, net of allowance 119,700 52,300

Total current assets 7,862,553 6,756,315

Investments and Other Assets Investment securities, at fair value 8,002,297 6,988,956 Deferred income taxes, net of allowance 246,300 317,100 Other 54,552 17,124

Total investments and other assets 8,303,149 7,323,180

Property and Equipment 3,962,369 3,560,698 Less accumulated depreciation and amortization 2,529,215 2,389,428

Net property and equipment 1,433,154 1,171,270

Software Development Costs 3,604,526 3,590,000 Less accumulated amortization 1,752,262 1,239,405

Net software development costs 1,852,264 2,350,595

Total assets $ 19,451,120 $ 17,601,360

Liabilities and Unrestricted Net AssetsCurrent Liabilities Accounts payable and accrued expenses $ 4,626,966 $ 5,038,744 Deferred examination fee revenues 628,330 476,836 Long-term debt, current portion 142,862 428,571 Capital lease, current portion - 56,035

Total current liabilities 5,398,158 6,000,186

Long-Term Liabilities Long-term debt 1,285,718 1,714,289 Other long-term liabilities 227,698 178,388

Total long-term liabilities 1,513,416 1,892,677 Total liabilities 6,911,574 7,892,863

Unrestricted Net Assets 12,539,546 9,708,497

Total liabilities and unrestricted net assets $ 19,451,120 $ 17,601,360




CONSOLIDATED STATEMENTS OF CASH FLOWSFor Years Ended July 31,

2007 2006Operating Activities Increase in unrestricted net assets $ 2,831,049 $ 1,040,209 Adjustments to reconcile increase in unrestricted

net assets to net cash provided by operating activities: Depreciation and amortization of property and equipment 433,719 416,994 Amortization of software development costs 512,857 513,096 Income from contract issue (714,280) - Net (gains) losses on investment securities (557,557) 211,861 Deferred income taxes 3,400 - Changes in assets and liabilities

Decrease in: Receivables (298,278) (309,675) Prepaid expenses and other non-current assets (84,913) (30,245)

Increase (decrease) in: Accounts payable, accrued expenses, and other long-term liabilities (362,468) 850,103 Deferred examination fee revenues 151,494 (35,751) Net cash provided by operating activities 1,915,023 2,656,592

Investing Activities Property and equipment additions (699,946) (455,365) Capitalized software development costs (14,526) - Proceeds from disposal of fixed asset 4,343 - Purchases of certificates of deposit (958,655) - Purchases of investment securities (777,758) (346,300) Redemptions of investment securities 321,974 -

Net cash used by investing activities (2,124,568) (801,665)

Financing Activities Reduction of long-term debt - (142,860) Principal payments on capital leases (56,035) (65,725)

Net cash used by financing activities (56,035) (208,585)

Net (Decrease) Increase in Cash and Cash Equivalents (265,580) 1,646,342Cash and Cash Equivalents, Beginning of Year 5,300,500 3,654,158

Cash and Cash Equivalents, End of Year $ 5,034,920 $ 5,300,500

Supplemental Cash Flow Information Interest paid $ 1,176 $ 4,649 Income taxes paid $ 67,502 $ 110,438

Non-cash Investing and Financing Activities Debt reduction from contract issue $ 714,280 $ -


NATIONAL ASSOCIATION OF STATE BOARDS OF ACCOUNTANCY, INC. AND RELATED ORGANIZATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization The National Association of State Boards of Accountancy, Inc. (the "Association") is a voluntary membership association of the boards of accountancy (or their equivalent) in the fifty states of the United States, the Districtof Columbia, Guam, the Commonwealth of the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands. The Association’s assets are limited to use or distribution in accordance with its Articles of Incorporation.

The Association’s Examination related activities include programs and services related primarily to the testing and licensing of Certified Public Accountants in compliance with the requirements of boards of accountancy. Examination related activities also include the programs and services of Professional Credential Services, Inc.(“PCS”). PCS is a wholly-owned, for-profit subsidiary that offers testing, including examination development, licensing and certification services to various professions and occupations. Communication programs provide information, facilitate discussion and determine appropriate actions related to issues that concern boards of accountancy. Also included in these programs are the activities of the NASBA Center for the Public Trust (“NCPT”), a related nonprofit, public benefit corporation whose mission is to spotlight ethical business practices and to foster the public’s trust in American institutions and the professions that serve them. Other programs consist primarily of activities related to assisting boards of accountancy and licensees in identifyingquality continuing professional education providers that meet nationally accepted standards for development,presentation, measurement and reporting of educational programs.

Note 2. Significant Accounting Policies Basis of accounting

The Association and related organizations follow the accrual basis of accounting under which revenue is recognized when earned and expenses when incurred. All material intercompany accounts and transactions have been eliminated from the consolidated financial statements.

Cash and cash equivalents Cash equivalents include investments in marketable securities, certificates of deposit and U.S. Government obligations with original maturities, or remaining maturities when acquired, of 90 days or less.Cash and cash equivalents are maintained at a level to meet anticipated operating needs, and cash is maintained in FDIC insured financial institutions. At times such amounts may exceed the FDIC insurancelimits.

Receivables and credit policiesAccounts receivable are uncollateralized obligations arising from contractual agreements with customersand the Association anticipates collection within 30 days unless otherwise specified. The carrying amount of accounts receivable is evaluated and reduced by a valuation allowance if necessary. The need for anallowance is determined based on management’s knowledge of its customers, historical loss experience and existing economic conditions. No allowance is required at July 31, 2007 or 2006.

Prepaid expensesPrepaid expenses consist primarily of prepaid insurance premiums, prepaid equipment maintenance contracts and payments to reserve testing facilities for future examinations.

Investment securitiesThe Association and related organizations generally invest all resources in excess of anticipated workingcapital requirements in U.S. Treasury and other Federal Agency obligations, corporate obligations and fixed income and equity mutual funds. Investments are made in accordance with an investment policyapproved by the Board of Directors. Investments in equity securities with readily determinable fair valuesand all investments in debt securities are recorded at fair value. Derivative financial instruments are not permitted investments under the Association’s policy. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associatedwith investment securities, it is reasonably possible that changes in the value of investment securities will occur in the near term and that such changes could materially affect the amounts reported.



Note 2. Significant Accounting Policies (Continued) Property and equipment

Property and equipment are stated at cost. Assets are either depreciated using the straight-line methodover their estimated useful lives or, in the case of leasehold improvements, amortized over the shorter of their useful life or the term of the lease. Repairs and maintenance are expensed as incurred.

Software development costs The Association capitalizes and is amortizing certain costs associated with the development of softwarefor internal use. The costs are amortized over the period of time that services, which utilize internally-developed software, are provided under respective contracts.

Realization of long-lived assets Long-lived assets are reviewed for impairment and, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, appropriate expense adjustments are made.

Revenue recognitionExamination related program fees are recognized as revenue when the services to which they relate have been completed. Fees for conferences and meetings are deferred until such events occur. Licensing fees are recognized as revenue when received.

Management, general and administrative costs Management, general and administrative costs are allocated to program expenses based principally onthe program’s contribution to revenue of the Association.

Income taxes The Association is exempt from federal and state income taxes under the provisions of Internal Revenue Code Section 501(c)(6) and applicable state tax statutes. NCPT is exempt from federal and state income taxes under the provisions of Internal Revenue Code Section 501(c)(3) and applicable state tax statutes. PCS accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Reclassification Certain prior year information has been reclassified to conform to the current year presentation.

Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Contributed services Many individuals contribute significant amounts of time to the Association’s activities. The value of theseindividuals’ services is not recorded in the financial statements because such services would typically notbe purchased by the Association if they had not been provided by contribution. Meeting and travelexpenses for these individuals are reimbursed by the Association and included in the financial statements.

New Accounting Pronouncement In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109 (“FIN 48”),which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December15, 2006, and therefore the Association expects to adopt FIN 48 at the beginning of fiscal year 2008.



Note 3. Investment Securities, at fair valueInvestment securities at July 31 consisted of the following:

2007 2006

U.S. Treasury and other Federal Agency obligations $ 2,176,424 $ 1,771,298

Corporate and other debt obligations 692,987 645,827

Equity securities 5,132,886 4,571,831

Total Investment Securities $ 8,002,297 $ 6,988,956

Net investment income for the years ended July 31 consisted of the following:

2007 2006

Interest and dividends $ 762,816 $ 512,348

Net gains (losses) on investments 557,557 (211,861)

Total Investment Income $ 1,320,373 $ 300,487

Note 4. Property and Equipment Property and equipment consists of the following:

2007 2006

Office and computer equipment $ 2,225,558 $ 2,180,445

Furniture 929,818 893,093

Building and leasehold improvements 806,993 487,160

Total Property and Equipment 3,962,369 3,560,698

Accumulated depreciaton and amortization (2,529,215) (2,389,428)

Net Property and Equipment $ 1,433,154 $ 1,171,270

Note 5. Contract to Provide Examination Services On May 31, 2002, the Association entered into an agreement (the “Agreement”) with Prometric, Inc.

(“Prometric”), a company that provides technology-enabled testing services, and the American Institute ofCertified Public Accountants (“AICPA”) to jointly deliver a computerized uniform Certified Public Accountant

examination. The Agreement extends for seven years from the administration of the first computer-based

examination on April 5, 2004. The Agreement has extension options of up to three years, the exercise of

which is contingent upon the achievement of certain performance measures by the parties to the Agreement.

Under the terms of the Agreement, the Association has developed and is required to operate and maintain a

National Candidate Database which serves as a gateway for all examination candidates. The Agreement allows for the Association to recover, through fees charged directly to CPA examination candidates, all

National Candidate Database costs and the costs of providing grade reporting and examination review

services. In addition to the unamortized software development costs of $1,837,738 at July 31, 2007 (see Note

2), the Association has incurred and expensed through July 31, 2007 costs of approximately $16,248,000, of

which approximately $12,399,000 has been recovered.



Note 5. Contract to Provide Examination Services (Continued) The following table shows the amount of unrecovered costs at July 31:

2007 2006

Current year expenses: Amortization of software development costs $ 512,857 $ 513,096 Other expenses 3,611,538 3,550,936

Total current year expenses 4,124,395 4,064,032

Current year recovered costs: Costs recovered through fees 4,759,270 2,675,805 Costs recovered from contract issue 714,280 -

Total current year recovered costs 5,473,550 2,675,805

Net current year (recovered) unrecovered expenses (1,349,155) 1,388,227Amortization of software development costs (512,857) (513,096)

Net change in current year unrecovered costs (1,862,012) 875,131Unrecovered costs, beginning of year 7,581,671 6,706,540Unrecovered costs, end of year $ 5,719,659 $ 7,581,671

The Association also collects from candidates the Prometric and AICPA fees related to the examination. These funds are held in escrow accounts in the names of the respective parties and are disbursed whenservices are provided. At July 31, 2007 and 2006 escrowed funds amounted to $17,756,646 and $12,858,373, respectively. The escrowed funds and the related obligations are not included in the financial statements because they do not represent assets or obligations of the Association.

Note 6. Long-term Debt The aforementioned Agreement provided for Prometric to advance up to $3,000,000 to the Association undera non-interest bearing line of credit for funding the development of the software. During fiscal year 2003, the Association received $3,000,000 per the terms of the Agreement. Under the original terms of the agreement,the total debt incurred would be repaid annually over a maximum period of seven years beginning in April of 2005 with minimum annual payments of approximately $429,000. However, as discussed in Note 10, the minimum annual payment for April of 2006 was reduced to approximately $143,000. No payment was made in April 2007. The anticipated April 2008 payment has been reduced to $142,863 as a result of the same contract issue.

Minimum annual debt payments are set forth below. Total

Fiscal 2008 142,863Fiscal 2009 428,571Fiscal 2010 428,571Fiscal 2011 428,576Total Long-term Debt $ 1,428,581



Note 7. Retirement Plans and Other Postretirement BenefitsA noncontributory defined contribution pension plan that covered all full-time employees meeting specified requirements was terminated January 1, 2007. The NASBA 401(k) Plan, previously funded solely by employeecontributions, was amended effective January 1, 2007 to allow employer contributions and on January 3, 2007 the employee account balances from the terminated pension plan were transferred into the plan. Expenses related to the Association’s funding of the previous and current retirement plans amounted to approximately$501,000 for 2007 and $421,000 for 2006. The Association funds its obligation through annual contributions made after the end of the December 31 plan year. The Association pays fees related to the plan.

The Association has made available limited postretirement medical benefits for certain management-level employees with five years of service and a minimum age of 60. At July 31, 2007, the accumulated postretirement benefit obligation was determined by actuarial valuation to be $94,425 of which $90,840 is included in other long-term liabilities and $3,585 is classified as a current liability in the ConsolidatedStatements of Financial Position. The following table sets forth the components of net periodic postretirement benefit cost and the change in the benefit obligation:

2007 2006Components of net periodic cost:

Service cost $ 7,223 $ - Interest cost 4,650 - Actuarial loss 8,150 -

Net periodic postretirement benefit cost 20,023 -Benefit obligation at beginning of year 74,402 -Actuarial valuation of obligation at adoption - 74,402Benefit Obligation at end of year $ 94,425 $ 74,402

The discount rate used to value the obligation was 6.25%. The assumed health care cost trend rate is 7.5% declining to 4% over a period of 7 years. The effect on the accumulated postretirement benefit obligation of a one percentage point change in the assumed health care cost trend rate is shown below:

1% Increase in Rates

1% Decrease in Rates

Accumulated Postretirement Benefit Obligation Effect $ 9,584 $ (8,235)

The obligation will be funded on a cash basis through partial payment of medical insurance plan premiums fora five-year period at each eligible employee’s retirement date. No funding was required during the current fiscal year. The following table shows actuarial projections of expected future postretirement benefit payments:

Total

Fiscal 2008 $ 3,585Fiscal 2009 7,421Fiscal 2010 8,073Fiscal 2011 9,363Fiscal 2012 10,619Fiscal 2013 through 2017 29,074



Note 8. Lease CommitmentsThe Association and PCS lease office space under operating leases that expire at various dates through 2017.In July 2007, the Association amended its Nashville office lease to extend by four years the remaining six-year term on the existing leased space and to lease an additional floor for the same term. Total scheduledrent payments under these leases are amortized to rent expense on a straight-line basis over the terms of theleases. Minimum lease payments are as follows:

Total

Fiscal 2008 $ 1,182,354Fiscal 2009 1,275,336Fiscal 2010 1,287,338Fiscal 2011 1,233,702Fiscal 2012 1,207,001Thereafter 6,049,693Total Minimum Lease Payments $ 12,235,424

Rent expense charged to operations for office space in 2007 and 2006 totaled approximately $1,043,000 and$905,000, respectively.

The Association leases office equipment under various operating lease arrangements. Minimum lease payments remaining for equipment leases are approximately $126,000 in fiscal 2008, $67,000 in fiscal 2009, and $62,000 in fiscal 2010. Expenses charged to operations under these leases in 2007 and 2006 totaled approximately $172,000 and $184,000, respectively.

Note 9. Income Taxes Income tax expense comprises the following:

2007 2006CurrentPuerto Rico $ 21,200 $ 75,700State 1,500 400

DeferredU.S. federal (400) -State 3,800 -

Income Tax Expense $ 26,100 $ 76,100

In 2007 and 2006, income tax expense includes a benefit of $100,000 ($83,100 federal and $16,900 state)and $27,400 ($22,200 federal and $5,200 state), respectively, from the utilization of net operating loss carryforwards.

The actual income tax expense differs from the amounts computed by applying the U.S. federal income tax rate of 34% to income before taxes as a result of the following:

2007 2006Statutory federal income tax $ 89,200 $ 30,700Puerto Rico income tax, net of U.S. federal benefit 14,000 50,000State income taxes, net of U.S. federal benefit 15,200 2,800Change in valuation allowance (98,500) (10,700)Other 6,200 3,300Income Tax Expense $ 26,100 $ 76,100



Note 9. Income Taxes (Continued) The deferred income tax asset consists of the following:

2007 2006Deferred income tax asset - current $ 128,700 $ 65,000Deferred income tax asset - long-term 274,700 440,300Valuation allowance (26,300) (124,800)

Total deferred income tax asset 377,100 380,500

Deferred income tax liability - long-term 11,100 11,100

Net Deferred Income Tax Asset $ 366,000 $ 369,400

At July 31, 2007, PCS had federal and state net operating loss carryforwards of approximately $968,000 and $699,000, respectively. The carryforwards expire at various dates from July 31, 2021 through 2025 for federal tax purposes and July 31, 2008 through 2025 for state tax purposes. The valuation allowance relates to federal and state net operating loss carryforwards that may expire before being realized. Although realizationof the other deferred income taxes is not assured, management believes it is more likely than not that the recorded deferred income taxes will be realized.

Note 10. Income from Contract Issue Due principally to an outstanding trademark license with the purchaser of certain assets of a former related entity, Prometric did not fully divest itself of those assets under the terms of the Agreement. As a result of thisincomplete divestiture, Prometric agreed in April of 2005, to reduce the Association's $3,000,000 liability to them by the cumulative amount of the Association’s payments over the number of months the aforementioned trademark license issue remained outstanding. Per this agreement, a total of $714,280 was recorded as income in Fiscal 2005 which represented a specified reduction of the liability equal to the twenty-month periodending November 2005. Prometric also agreed to automatically forgive, forego and waive futurereimbursements of the balance of the liability pro rata for each month or part thereof in which the trademark issue remained outstanding beyond the date certain in the third-party license. In April of 2007, the Association determined that the situation relating to trademark license issues had not been resolved, and as a result, did not pay the annual debt payment. As of July 31, 2007, the trademark license issue remained unresolved. Thus, in accordance with the April 2005 agreement with Prometric, the Association recorded income of$714,280 for the twenty-month period from December 2005 through July 2007 which represents the periodthat the contract issue remained outstanding through the end of Fiscal 2007. See Note 5 for more details.

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