Provide high quality, effective programs and services....2 2006 ANNUAL REPORT 2006 ANNUAL REPORT 2 To enhance the effectiveness of state boards of accountancy. Provide high quality,

2 2006 ANNUAL REPORT 2006 ANNUAL REPORT 2

To enhance the effectiveness of state boards of accountancy.

� 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.

� 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.

2006 ANNUAL REPORT 1

Message from the Chair, CEO and COO 2

Committee Highlights 4

Programs and Services 14

Board of Directors, Officers and Staff 19

Remarkable 22

NASBA Meetings 24

Financial Statements 25

TABLE O

F CON

TENTS

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2 2006 ANNUAL REPORT

WWho’s remarkable? You, our member boards — and because of you, NASBA is! Fiscal 2006 represents a notableyear for NASBA, the state boards and the accounting profession. Highlighted throughout this report areNASBA volunteers, events, programs, services — and even wonders of the world that we find to be — remarkable.

At the 98th Annual Meeting, incoming Chair Diane Rubin challenged NASBA to:

� forge stronger bonds among state boards,

� foster increased consumer awareness of the state boards’ role and how they protect the public, and

� achieve greater state board influence in regulatory matters.

During the year, the dedication and diligence of state boards, committees, task forces and staff more thanfulfilled these goals. NASBA committees forged ahead with projects to enhance public protection. As you readthrough this report’s pages, their accomplishments will become clear. For example: the Uniform AccountancyAct (UAA) Committee developed rules to enhance information sharing, ethics education and mobility. TheCompliance Assurance Committee devised an oversight plan to improve the transparency of the peer reviewprocess. The Communications Committee implemented the state board visitation program which resulted innumerous visits to state boards over 10 months, a defined visitation process and documentation for future visits.Through a task force of the Education Committee, NASBA joined educators and accreditors to increase theirunderstanding of the state boards’ role in determining education requirements for candidates entering theprofession. Finally, NASBA representatives served on the Auditing Standards Board (ASB), InternationalFederation of Accountants (IFAC) International Public Sector Accounting Standards Board, InternationalAccounting Education Standards Board Consultative Advisory Group, Public Company Accounting OversightBoard (PCAOB) Standing Advisory Group and several American Institute of Certified Public Accountants(AICPA) committees.

The advent of NASBAtools and of the site redesign for NASBA.org, CPEmarket and the Center for the PublicTrust positioned NASBA to increase awareness of both NASBA and the state boards through promotionalcampaigns, trade shows and other forms of outreach.

NASBA’s operations provided a healthy revenue stream that supported the organization’s communicationsactivities and meetings. NASBA offered a variety of valuable programs and services including CPA ExaminationServices (CPAES), International Qualification Examination (IQEX), and NASBAtools including CPEmarket,CPEtracking, Accountancy Licensing Library, CredentialNet, National Registry of CPE Sponsors and QualityAssurance Service. NASBA’s wholly-owned subsidiary, Professional Credential Services, Inc., continued toprovide services to licensing, testing and certifying agencies in 50 professions and occupations with fieldsranging from athletic training to landscape architecture.

Wendy Wasserstein, playwright and winner of the Pulitzer Prize for drama, once said, “Don't live down toexpectations. Go out there and do something remarkable.” As we enter a new year for NASBA, we look forwardto working with our member boards to further our remarkable progress.

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Lorraine P. Sachs, CAEExecutive Vice President &

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The Administration and Finance Committee oversees andmonitors the fiscal operations of the Association. The Treasurerof NASBA serves as chair of the committee. The committee metfour times during the fiscal year and reviewed the financialpolicies, financial statements and projected operating results ofboth NASBA and its wholly-owned subsidiary, ProfessionalCredential Services, Inc. The committee also reviewed insurancecoverages, investments, internal controls and operating andcapital budgets.

Through the work of our committees, NASBA volunteers and staff spent thousands of hours considering anddeliberating topics ranging from the review of financial statements to the development of model rules for the memberboards’ consideration. NASBA’s committees continue to serve as a guiding force within the organization.

ADMINISTRATION AND FINANCE COMMITTEECChhaaiirr:: Samuel K. Cotterell (ID)

MMeemmbbeerrss:: John W. Clay (KY), Welling W. Fruehauf (PA), Wesley P. Johnson (MD),Donald R. Roland (GA), E. Kent Smoll (KS), R. Stanley Vaughan (NC), Harris W. Widmer (ND)

SSttaaffff LLiiaaiissoonn:: Robert E. Brosky

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The Awards Committee considered nominees during its Julyconference call and recommended Ronnie Rudd (TX) as therecipient of the William H. Van Rensselaer Public Service Awardand Jimmie Lee Mason (TX) as the recipient of the NASBADistinguished Service Award.

AWARDS COMMITTEE CChhaaiirr:: Janice B. Wilson-Marcum (CA)

MMeemmbbeerrss:: Clifton M. Fletcher (ME), John M. Greene (SC), Joe C. Lawrence (AL),Stephen S. McConnel (OR), George G. Veily (CT)

SSttaaffff LLiiaaiissoonn:: Kimberly C. Ellis

In July, the Bylaws Committee convened to deliberate proposedrevisions to the current Bylaws. Following its deliberation, thecommittee's draft was submitted to the NASBA Board ofDirectors for approval. After reviewing the proposal at its Julymeeting, the Board of Directors forwarded its approved changesto the committee. The revised draft was then disseminated to themember boards in August. During the 99th Annual BusinessMeeting, the designated voting representative of each memberboard will vote on the revised draft.

BYLAWS COMMITTEECChhaaiirr:: Robert A. Pearson (MO)

MMeemmbbeerrss:: Jimmy E. Burkes (MS), Patrick D. McCarthy (LA), Beryl C. Stover (MT),Dena G. Williams (NY)


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Operational examination issues continued to be the focus of theseeight executive directors — representing each of NASBA’s eightRegions — who sought input and comments from their colleagues.Highlights of their discussions included the need to encouragecandidates to provide demographic information essential tomeasuring the validity of the examination, and a recommendationfor increasing information collection will be sent to boards by theend of the year. Another issue addressed by the task force related toa retesting policy which is to be applied in the limited situationswhen it is needed. The availability of the task force members hasbeen particularly helpful to other executive directors as they considerexamination issues with which they are confronted throughout theyear.

CBT ADMINISTRATION TASK FORCECChhaaiirr:: Ken L. Bishop (MO)

MMeemmbbeerrss:: Robert N. Brooks (NC), Richard C. Carroll (KY), Daniel J. Dustin (NY),Barbara R. Porter (ID), Ronald J. Rotaru (OH),Carol Sigmann (CA), Patricia Soukup (NM)

SSttaaffff LLiiaaiissoonnss:: Denise Hanley and Patricia L. Hartman

The new Communications Committee focused on enhancingNASBA and state board communications with consumers andlegislative bodies as well as communications among member boards.The committee, charged with promoting best practices for stateboards and NASBA communications, including those to be used inthe event of a disaster, met to study and enhance the broad range ofcommunications methods available to state boards and NASBA.

The committee reviewed and evaluated NASBA Web sites including:NASBAtools.com, nasba.org and centerforpublictrust.org. Itestablished 40 benchmark items useful to visitors of board ofaccountancy Web sites. It evaluated each item’s accessibility andinclusion on every member board’s Web site and searched forinnovative online applications for member boards to emulate.

Following the distribution of NASBA’s Disaster Recovery Handbook,the committee reviewed board of accountancy responses to itsEmergency Management Questionnaire in order to evaluate andpromote recovery planning by our member boards.

Additionally, committee members reviewed board of accountancyplanning retreat agendas to construct a model for member boards toutilize. The committee continues to develop a strategy for theimplementation of a public awareness campaign for member boardsto implement in order to educate the public of the existence, roleand operations of state boards of accountancy.

COMMUNICATIONS COMMITTEE CChhaaiirr:: Mark P. Harris (LA)

MMeemmbbeerrss:: Ken L. Bishop (MO), Richard P. Bond (CT), Regina P. Brayboy (VA),Margaret A. Cartier (IL), Rona Cherno (NY), Nina B. Kavich (NE), John Steven Marcum (KY),Arnold Williams (MD), Viki A. Windfeldt (NV)

SSttaaffff LLiiaaiissoonn:: Thomas G. Kenny

TWO YEARS IN A ROW

In November 2005 and October 2006,NASBA was named by the NashvilleBusiness Journal as one of the best placesto work in Nashville. In 2005, NASBAreceived the first runner-up slot. In 2006,the Journal modified its format and didnot rank the final sevenwinners. Upon learning ofthe second consecutiveaward, NASBA PresidentDavid Costello remarkedto staff, “This is atremendousaccomplishment to be namedtwo years in a row. Thanks to all of youfor being part of the NASBA family.”


The Compliance Assurance Committee continued to develop theconcept of an independent oversight body, the ComplianceAssurance Review Board (CARB), through meetings, conference callsand “round table” calls with representatives of boards that havemandatory peer review programs in place. By closely monitoring therecent changes in the AICPA’s Peer Review Program and itsadministration, the committee was able to construct an outline forhow the state boards could effectively oversee compliance assuranceprograms.

At the July Board of Directors meeting, based on the work done bythe committee, initial funding for the CARB was approved. Arecruitment effort to identify the first CARB chair began andNASBA staff started formulating a business plan to ensure theproject’s viability.

COMPLIANCE ASSURANCE COMMITTEECChhaaiirr:: Thomas J. Sadler (WA)

MMeemmbbeerrss:: Albert J. Cannon (OH), Charles W. Clark (ID), Jacob J. Cohen (MD),Virginia A. Powell (KS), David E. Scott (AL),Robert G. Zunich (OH)

SSttaaffff LLiiaaiissoonn:: Louise Dratler Haberman

The CPA Examination Review Board completed its second audit ofthe CBT program and presented its Annual Report at the 2006Regional Meetings. The audit resulted in the ERB reporting thatboards of accountancy could rely on the 2005 Uniform CPAExamination and the International Qualification Examination(IQEX) in carrying out their licensing responsibilities. Because theCBT is multifaceted, deeply complex and utilizes innovativetechnology, the ERB also provided a comprehensive managementletter with 32 recommendations for enhancements.

In addition, the ERB analyzed whether the charges to candidatesfrom both NASBA and the AICPA are reasonable. The NASBAreview occurred during the year and the ERB reported NASBA’scosts to candidates are reasonable and on target to recover costs onlyover the duration of the contract.

The AICPA review required another approach due to the number oftransactions, the amount of the set up costs and the complexity ofthe AICPA’s responsibility in the CBT systems. The ERB’s analysisof the AICPA’s projected future CBT operational expenses did notdetect any unreasonable assumptions in such projections.

CPA EXAMINATION REVIEW BOARD (ERB)CChhaaiirr:: Philip W. Gleason (MN), 2005-2006; Asa L. Hord (KY), 2006-2007

VViiccee CChhaaiirr:: Barton W. Baldwin (NC)

MMeemmbbeerrss:: Sheila M. Birch (OH)*,O. Charlie Chewning, Jr. (NC)*, Jerry A. Davis (TX), Donald E. Howard (MD),Will J. Pugh (TN), Lela D. “Kitty” Pumphrey (ID),Donald R. Roland (GA)**, David A. Vaudt (IA),Sandra R. Wilson (AK)**

PPssyycchhoommeettrriicc CCoonnssuullttaanntt:: Steven M. Downing, Ph.D.

TTeecchhnnoollooggyy CCoonnssuullttaanntt:: Michael W. Harnish

SSttaaffff LLiiaaiissoonn:: Lisa J. Axisa

*Term ended June 30, 2006 **Term Began July 1, 2006

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In February, the CPE Advisory Committee met to determine goals forthe year. The goals decided upon were:

� Increased focus on the quality of continuing professional education and

� Clarification in regards to the fields of study.

In May, the members discussed and approved interpretations of theStandards for CPE Programs that were subsequently posted on theNASBA Web site. The members suggested several items undergofurther research before submitting final committee recommendations.It is anticipated this work will carry over to the 2006-2007 committee.

CPE ADVISORY COMMITTEECChhaaiirr:: Walter C. Davenport (NC)

MMeemmbbeerrss:: Thomas S. Chambers (MD), Rick Elam (MS), Carole M. Hersch (VA), Adley E. Johnson (KS), John McManus (DE), L. Martin Miller (PA), John R. Rogers (IL), Willie B. Sims (MS), Michael W. Skinner (GA),Robert H. Sommer (NJ), Taling M. Taitano (GU),Douglas E. Warren (TN), Mark Weinstein (NM),Richard Zacharia (NE)

SSttaaffff LLiiaaiissoonn:: Yordanos A. Dumez

EDUCATION COMMITTEE

CChhaaiirr:: Billy M. Atkinson (TX)

MMeemmbbeerrss:: Beth A. Bialy (MI), Charles H. Calhoun (FL), Ruben A. Davila (CA),Janice L. Gray (OK), Patrick D. McCarthy (LA),Marianne Mickelson (IA), John P. Quon (MS),Douglas W. Skiles (NE), Melanie G. Thompson (TX), Joanne Vician (IL),Sharon T. Walters (KY), Penelope Yunker (IL)


In December 2005, a special task force was selected by CommitteeChair Atkinson with representation from NASBA, Association toAdvance Collegiate Schools of Business (AACSB), AmericanAccounting Association (AAA) and educators. The task force metnumerous times via conference call to develop a general “framework”draft that included various options. The draft framework wasdistributed to member boards and others in March with a responsedeadline of April. All responses to the draft were posted on theNASBA Web site.

The committee met in May to consider the 43 comments received onthe framework and to develop recommendations for future action.At the 2006 Regional Meetings, a summary of responses to theframework was presented along with the other considerations andpotential action items. During July and August, conference callswere held with both the accreditors and the task force members. InSeptember, the committee distributed a questionnaire to memberboards. The results of the questionnaire, to date, will be available atthe 99th Annual Meeting and will also be posted on the NASBAWeb site. The committee expects to submit revisions to UAA Rules5-1 and 5-2 in the spring of 2007 for discussion and feedback at the2007 Regional Meetings.

UAA FOURTH EDITION APPROVED

In December 2006, the Fourth Edition ofthe Uniform Accountancy Act wasapproved. It contained several significantrevisions: reference to the PCAOB as astandard setting body, definition of the“principal place of business,” amplificationof the definition of “substantialequivalency,” categorization of bodies thatthe board may cooperate with forinvestigations, clarification of confidentialtreatment of materials received by theboard, revision of the definition of “goodmoral character,” provisions related totransparency in the peer review processand notice of the board’s disciplinaryactions to other regulatory authorities, andprovisions that make substantialequivalency available to individualsthrough their firm’s agreeing to complywith board requirements set out in theAct.


The Ethics Committee reviewed comments received fromrepresentatives of the state boards about the need for additionalguidance in ethics continuing professional education. Further, thecommittee considered the recommendations of the IFAC’s August2006 research report. As a result, to ensure ethics, professionalconduct and regulation are covered both in the pre- and post-licensure education of accountants, Committee Chair Daggettappointed two task forces to: (1) consider the creation of a CPEregistry devoted to recognizing qualified courses in ethics,professional conduct and regulation; and (2) evaluate the need for arigorous pre-licensure ethics examination requirement to testadequate preparation for professional practice.

Two recommendations for Uniform Accountancy Act Model Ruleswere sent to the UAA Committee by the Ethics Committee. Onewould mandate CPE in ethics, professional conduct and regulation.The second would adopt the NASBA Code of Model Conduct.Both recommendations will be presented in the UAA Model Rulesexposure draft.

Throughout the year, Committee Chair Daggett reported tocommittee members on the work of the AICPA Professional EthicsExecutive Committee.

ETHICS COMMITTEE CChhaaiirr:: Michael T. Daggett (AZ)

MMeemmbbeerrss:: J. Coalter Baker (TX), Ronald Blanc (CA), Susan M. Harris (MS), Larry E. Nunn (IN), Ronald E. Nielsen (IA), Vicky Petete (OK), Roger L. Reinhart (MN), Wesley E. Stille (IA), Michael Weinshel (CT), Cecil G. Wood (MO)


The Examination Issues Task Force was created to study and addressthe concerns expressed in letters NASBA received from theCalifornia, Kentucky, New Hampshire, New York and NorthCarolina boards of accountancy in regards to various issues relatingto the Uniform CPA Examination and from the Illinois Board ofExaminers request that NASBA consider administration of theUniform CPA Examination at secure Prometric testing centers ininternational locations. The task force met in December 2005 anddetermined that the issues raised fell into two broad categories,domestic examination issues and internationalization of theexamination. Given the categories’ diverse nature, a CurrentExamination Issues Subcommittee and an InternationalExamination Issues Subcommittee were established.

The two subcommittees met in person and several times viaconference call. Preliminary reports of findings andrecommendations were submitted. Following that meeting,comments were solicited from NASBA Board members. Thesubcommittees held subsequent conference calls to review, discussand respond to the comments received. The subcommitteesprovided a final report at the July meeting of the Board of Directors.These findings and recommendations will be presented at the 99thAnnual Meeting.

EXAMINATION ISSUES TASK FORCECChhaaiirr:: Samuel K. Cotterell (ID)

CCuurrrreenntt EExxaammiinnaattiioonn IIssssuueess SSuubbccoommmmiitttteeee CChhaaiirr::Daniel J. Dustin (NY)

IInntteerrnnaattiioonnaall EExxaammiinnaattiioonn IIssssuueess SSuubbccoommmmiitttteeee CChhaaiirr::Michael D. Weatherwax (CO)

CCoommmmiitttteeee MMeemmbbeerrss:: Gary L. Fish (IL), Richard Isserman (NY), Wendy S. Perez (CA), WilliamTreacy (TX)

SSttaaffff LLiiaaiissoonn:: Maria-Lisa Caldwell


During the year, the committee focused on issues relating to thecomputerized Uniform CPA Examination that are of greatestconcern to member boards, in particular, the complex test scoringprocess. The need to understand how scores are derived continuedto receive considerable attention as boards must be able to explainthe scoring process to stakeholders, especially to candidates who raisemany questions. Another significant responsibility of the memberswas to review the recommendations in the ERB Management Letterand the responses from the three examination partners to which theywere directed, and to develop conclusions and plans to pursue thefindings. As in the past, the information will be distributed toboards prior to the 99th Annual Meeting.

EXAMINATIONS COMMITTEECChhaaiirr:: John E. Katzenmeyer (OH)

MMeemmbbeerrss:: O. Whitfield Broome (VA), Richard O. Hanson (NH), J. Lamar Harris (AL),Gary W. Heesacker (WA), John E. Peterson (SD),David C. Pippin (MS), Edward L. Summers (TX),Janice B. Wilson-Marcum (CA)

PPssyycchhoommeettrriicc CCoonnssuullttaanntt:: Robert L. Brennan, Ed.D.

SSttaaffff LLiiaaiissoonn:: Lorraine P. Sachs

In its continuing responsibility to offer an opportunity for stateboard executive directors to share their questions and concerns aboutissues they are facing, the members developed an agenda for the 24thExecutive Directors Conference that was held in Tucson, Arizona,with representatives from 36 jurisdictions participating. The excitingmeeting covered topics which ranged from compliance assurance tobusiness continuity planning to simulations on the computerizedCPA Examination. A new feature was the successful addition of“table topics” which enabled discussion leaders to guide participantsin dialogue about selected issues in an informal environment.

EXECUTIVE DIRECTORS COMMITTEE CChhaaiirr:: Ronald J. Rotaru (OH)

MMeemmbbeerrss:: Linda L. Biek (TN), Daniel J. Dustin (NY),Valerie M. Elliott (AZ),Edith Steele (OK), Daniel Sweetwood (NE), Viki A. Windfeldt (NV)


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With expanded membership to include attorneys who are not stateboard counsel, the new committee (formerly the Legal CounselCommittee) took on broader assignments. Committee Chair Smithappointed Michael Granen, counsel to the California Board ofPublic Accountancy, to chair a task force that developed andpresented the 2006 Annual Legal Counsel Conference. In addition,Ms. Smith directed the committee to consider an emphasis onenforcement of state laws and rules and particularly in acollaborative fashion such as interstate enforcement compacts. Suchan approach would, it is felt, give the state boards more assurancethat licensees could not avoid discipline by crossing state lines. Thecommittee met via conference call and developed a sample compactwith the assistance of Noel Allen, NASBA legal counsel.

Working in conjunction with the Regulatory Structures and IssuesCommittee, a second task force developed questions to pose to thePCAOB. These are to serve as a basis for further discussions withthe PCAOB to facilitate the boards’ getting more information fromthe PCAOB when they enter into investigations of auditors. Thegoal is to develop an information exchange equal to what currentlyexists with the Securities and Exchange Commission.

LEGAL AFFAIRS COMMITTEE CChhaaiirr:: Kathleen J. Smith (NE)

MMeemmbbeerrss:: Rebecca Connors (CO), Michael R. Granen (CA), Larry C. Hunter (ID),Frank Munoz (NY), John B. Peace (AR), William L. Raby (AZ)

SSttaaffff lliiaaiissoonnss:: Louise Dratler Haberman and Maria-Lisa Caldwell

Working with their AICPA counterparts, members of the NASBAIQAB carefully reviewed and then renewed for five years the mutualrecognition agreement (MRA) with CPA Australia. IQAB membersalso continued to evaluate pending applications for MRAs with othernon-US professional accounting entities. Communication with theUS Trade Representative Office (USTR) occurred throughout theyear, and information was exchanged regarding recognition ofaccounting professionals from Australia and India.

To facilitate the MRA process, a scoring system for evaluatingcredentials for non-US professionals is being completed. This willlook beyond education, examination and experience and include thebusiness environment in which the credentialed accountant operates.

IQAB joined with the AICPA’s Board of Examiners to revise thecontent specifications for the International QualificationExamination (IQEX). The new content will be reflected in theNovember 2006 Examination. It focuses on those areas that areunique to US accounting practice, including tax, law andgovernmental accounting.

NASBA/AICPA INTERNATIONAL QUALIFICATIONS APPRAISAL BOARD (IQAB)CChhaaiirr:: William Treacy (TX)

NNAASSBBAA MMeemmbbeerrss:: Doris Flores Brooks (GU),Gerald W. Burns (OR), Kay C. Carnes (WA),Ruben A. Davila (CA), Nathan T. Garrett (NC), Leonard R. Sanchez (NM)

SSttaaffff lliiaaiissoonnss:: Louise Dratler Haberman and Patricia Hartman

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The Nominating Committee had the difficult task of selecting a slateof nominees from an impressive pool of candidates. As in years past,the committee met in March to select its candidate for Vice Chair.To assist the committee in its deliberations, Vice Chair candidatescompleted a questionnaire. The members attended both 2006Regional Meetings in order to familiarize themselves with Boardnominees, following which they met to select their candidates forother Board positions. In accordance with the NASBA Bylaws, thecommittee submitted its report to the NASBA Chair in July.

NOMINATING COMMITTEE CChhaaiirr:: Michael D. Weatherwax (CO)

MMeemmbbeerrss:: J. Coalter Baker (TX), Robert B. Cagnassola (NJ), John G.D. Carden (AL),Alicia J. Foster (MD), Kenneth J. Hull (IL), Nina B. Kavich (NE), David L. Koerwitz (WY),Laurie J. Tish (WA)

SSttaaffff LLiiaaiissoonn:: David A. Costello

It was certainly remarkable to find such enthusiastic participation byso many past chairs in the meeting immediately preceding the 2005Annual Meeting. Discussions focused on the status of NASBA’snumerous and varied programs and their financial viability. Inaddition, with the approach of NASBA’s 100th anniversarycelebration in 2007, the members reviewed plans for the historypublication that is under development.

PAST CHAIR ADVISORY COUNCILCChhaaiirr:: Michael D. Weatherwax (CO)

MMeemmbbeerrss:: 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), Sam Yellen (CA)


In 2006, the Professional and Regulatory Response Committee metvia conference call. The committee monitored exposure drafts fromthe PCAOB, Financial Accounting Standards Board (FASB), AICPA,IFAC and others. Under the chairmanship of Rick Isserman,responses were drafted for NASBA leadership to several of thereviewed drafts and reports, including the FASB/AICPA PrivateCompany Financial Reporting Task Force’s Report, Accounting andReview Service Committee’s (ARSC) Survey on Independence inCompilation Engagements and the ASB’s Proposed Statement onStandards for Attestation Engagements.

PROFESSIONAL AND REGULATORY RESPONSE COMMITTEECChhaaiirr:: Richard Isserman (NY)

MMeemmbbeerrss:: Karen J. Bindl (WI), Alan J. Bronstein (VI), Stephen Epstein (MI), Anne B. Fosbre (NJ), James W. Goad (AR), Janice L. Gray (OK), James Hill, Jr. (IL), J. Sam Johnson (GA), Edwin G. Jolicoeur (WA),Lynda Lieberman (MO), Leslie A. Mostow (MD),Ray G. Stephens (OH), Robert H. Temkin (MA)



Two projects were tackled by the Regulatory Structures and IssuesCommittee this year, both suggested by NASBA Chair Diane Rubin.The first was the development of procedures to be used in exposingNASBA reports and policy statements. The draft was revised toinclude the Board of Directors’ comments and will be distributed tothe chairs of NASBA committees.

The second project involved a joint task force with the Legal AffairsCommittee. This group focused on the purpose of the PCAOB’sfirm inspection reports and how the state boards could use thereports. This information was reported to the boards at the 2006Regional Meetings. Currently the task force is working with thePCAOB on the protocols and procedures for a state board to receiveessential information from the PCAOB’s Division of Enforcementand Investigations.

For the coming year, it is anticipated that the committee will explorethe effectiveness of the coordination of state enforcement with theSecurities and Exchange Commission and the Department of Labor.

REGULATORY STRUCTURES AND ISSUES COMMITTEE CChhaaiirr:: Robert L. Gray (NY)

MMeemmbbeerrss:: Jim Abbott (ND), James S. Ciarcia (CT),Claireen L. Herting (IL), Robert J. Hyde (MN),Edward H. Rudert (GA), Arthur M. Winstead, Jr. (NC)

SSttaaffff lliiaaiissoonn:: Louise Dratler Haberman

To aid the member boards and NASBA with the interchange ofinformation, this year, the Committee on Relations with MemberBoards (composed of the Regional Directors and the ExecutiveDirectors’ Liaison) accomplished the following:

� Participated in numerous state boards’ meetings to further discuss mutual concerns;

� Initiated an executive summary report, which accompanies the quarterly focus question responses, to emphasize trends and outstanding events;

� Continued to develop relevant quarterly focus questions with the advice and support of the chairs of other NASBA committees;

� Retooled the formats for the Regional Meetings and New Baord Members Orientation to provide for more interactive discussionwith attendees on current issues.

The committee met quarterly and reviewed the results of their effortswith the NASBA Board.

RELATIONS WITH MEMBER BOARDSCChhaaiirr:: Theodore W. Long, Jr. (OH)

MMeemmbbeerrss:: Jacob J. Cohen (MD), Sally Flowers (CA), Gaylen R. Hansen (CO), Mark P. Harris (LA), Richard Isserman (NY),Robert A. Pearson (MO), Michael W. Skinner (GA)

EExxeeccuuttiivvee DDiirreeccttoorrss’’ lliiaaiissoonn:: Ronald J. Rotaru (OH)


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The Strategic Initiatives Committee, charged with identifyingemerging and significant issues that will impact state boardregulation and opportunities to enhance their relevance and proposeproactive measures, worked diligently throughout the year to discusssuch matters of concern to boards of accountancy. During itsdiscussions, the committee focused on strategic planning, standardsetting, compliance assurance, enforcement and legislative issues.

In May, the committee polled the boards of accountancy regardingmany of these issues and led breakout discussions at this year’sEastern and Western Regional Meetings. A total of 159 attendeesparticipated in the strategic initiative breakout sessions which led toa number of recommendations to NASBA’s Board of Directors.

STRATEGIC INITIATIVES COMMITTEE CChhaaiirr:: Gaylen R. Hansen (CO)

MMeemmbbeerrss:: Kent Bailey (OR), Sally Flowers (CA),Alicia J. Foster (MD), Harold Dean Graf (NE),M.C. “Princy” Harrison (MS), Harry O. Parsons (NV), Daniel J. Rieke (AR),Michael M. Vekich (MN), Lydia M. Washington (NY)

SSttaaffff LLiiaaiissoonn:: Thomas G. Kenny

To implement changes presented in the Fourth Edition of theUniform Accountancy Act (released in December 2005), the NASBAUAA Committee worked on developing model rules for the memberboards’ consideration. Committee Chair DuBoff divided thecommittee into three task forces to consider the many rules thatrequired review and enhancement. The task forces were:Enforcement (Chair - Michael Granen), Mobility (Chair – RobertPearson) and Professional Standards and Ethics (Chair – MarcelaDonadio). The rules were drafted by Noel Allen, NASBA legalcounsel, and then thoroughly reviewed by the task forces duringmany conference calls. Ultimately, the entire committee voted forthe proposed rules prior to their being presented to the NASBABoard of Directors for approval for exposure for comment.Throughout these sessions, AICPA committee members and staffoffered suggestions.

While this year was originally termed “the year of the rules,” itbecame apparent that to achieve effective enforcement and licenseemobility, it would also be necessary to revise the statute. To this end,working as a joint committee with the AICPA UAA Committee,revisions to UAA Section 23 are being proposed.

UNIFORM ACCOUNTANCY ACT COMMITTEE CChhaaiirr:: Andrew L. DuBoff (NJ)

MMeemmbbeerrss:: Robert N. Brooks (NC), Marcela E. Donadio (TX), Ellis M. Dunkum (VA),Gary L. Fish (IL), Michael R. Granen (CA), J. Dwight Hadley (NY), Thomas J. Mulligan (OH),Robert A. Pearson (MO), Wendy S. Perez (CA),Laurie J. Tish (WA)


NASBA TAKES IMMEDIATE ACTION

To gauge accuracy of the June 6, 2006 AP story entitled “SEC Accountant FinesLargely Go Unpaid,” NASBA submits a quickpoll to all state board executive directors theday after the story broke. The author of theAP story inferred there had been insufficientfollow-through from state boards on SECreferrals. A total of 44 state boardsresponded to the poll. None of therespondents could identify any circumstancethat would cause them to ignoreinformation sent to them about theirlicensees from the SEC. While a few of theboards had not been contacted by the SECin years, others in more populated statesreported maintaining a good workingrelationship with the Commission. NASBAPresident and CEO David Costello plans todiscuss the results of the poll with SECChairman Christopher Cox.


CCPAES offers theInternationalQualificationExamination (IQEX)to qualifyingcandidates each year.

The purpose of IQEX is to facilitate the US CPAqualification process for those accounting professionalsfrom other countries whose professional bodies haveentered into mutual recognition agreements withNASBA and the American Institute of Certified PublicAccountants (AICPA). These agreements arerecommended to the states for their adoption. To date,agreements have been established with the CanadianInstitute of Chartered Accountants, the InstitutoMexicano de Contadores Publico, the Institute ofChartered Accountants in Australia, CPA Australia andthe Institute of Chartered Accountants in Ireland. TheIQEX was administered to 230 candidates during a threeand one-half week testing window in November 2005 atPrometric testing centers in the United States andCanada.

In its 25th year of operation,CPAES successfully servedmore than 60,000 candidatesand 31 boards ofaccountancy. CPAESprocessed applications for

approximately 60 percent of the total national CPAcandidate population during the year.

In 2006, CPAES focused on improving communicationswith candidates and boards. This included updatingprinted material and adding to the NASBA Web site. InApril, an application status program (OASIS) was launchedto provide candidates with immediate online access tocheck the status of their applications, educationalevaluations or scores. Additionally, CPAES staff attendedthe Executive Directors’ Conference as well as bothRegional Meetings to provide guidance and respond toquestions from member boards.

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Celebrating yet another year of achievement, NASBA continued to provide benefits to member boards through its array ofprograms and services. New programs were launched and old programs were retooled resulting in a comprehensive offeringto member boards, CPA exam candidates, the accounting profession and the public.

Mount EMount E vv erer estest


The NASBA Center for thePublic Trust’s (CPT) secondyear was as remarkable andexciting as its inaugural year.

2006 Conference“The Price of Conflict: The Power of Collaboration –Achieving Ethical Conduct by Encouraging ConflictCompetent Organizations,” was held on July 14, 2006 inMalibu, California and was co-sponsored by the PepperdineUniversity School of Law Straus Institute for DisputeResolution. Individuals from across the countryparticipated in a dialogue that advanced the understandingof how collaborative practices not only resolve conflictsethically, but also create an atmosphere where energies aredeflected proactively or harnessed to promote growth.

Trust SocietyThe Trust Society is a group of industry-leading companies,organizations and institutions that have committed tosupporting the activities of the CPT. The initial foundingcontribution is $50,000. Corporations and organizationsinvited to join the Trust Society are known for theirdedication to ethical business practices and following highstandards of social responsibility for performance andleadership.

SunTrust Bank, Inc., headquartered in Atlanta, was the firstTrust Society member. It is one of the nation's largestbanking organizations, serving a broad range of consumer,commercial, corporate and institutional clients.

Founding MembersIn 2006, the NASBA Center for the Public Trust continuedits Founding Members program. This program provides aunique opportunity for individuals to support theimportant work of the NASBA Center for the Public Trust.As of September 30, 2006, 70 individuals had becomesupporting members at various levels.

CPT Being a Difference Award In 2006, CPT implemented its “Being a Difference” Awardprogram to recognize individuals and organizations thatpractice high standards of social responsibility and ethicalleadership. Nominees have distinguished themselves bydemonstrating innovative responses to ethical challenges,which inspire and motivate others to emulate similarbehavior. The 2006 awardees are:

John Lovell, II, CPA and John Lovell (Johnny), III, CPACurrently, Johnny is ranked fifth in the world as skipper ofhis two-man Tornado Multihull Class team. The TornadoClass is the fastest of the Olympic sailing events and only sixof the top 100 ranked skippers are Americans. Whileothers list their occupations as “professional sailors” and aresupported by donations and sponsorships, Johnny is apracticing CPA. He works with his father in the NewOrleans firm of Lovell & Company.

John participated in the Olympic trials for the 1980 gamesin Russia that the U.S. did not attend. In addition, Johnmanages the accounting practice which facilitates Johnny’sworldwide sailing competitions. The unique twist here is torecognize John, the supporter, for humbly and graciouslyproviding the resources to enable Johnny’s extraordinaryaccomplishment.

Ken MelroseToro’s story can be reviewed in “The Grass is Greener” byKen Melrose, former CEO and Chairman. Toro chose tofocus on long-term value and success instead of short-termprofit. Consequently, Toro instilled and acted on valuesthat placed employees first, customers second andshareholders third. In doing so, shareholder value was bestprotected and proven by successive yearly ROI as befits a topmanufacturer of lawn and garden and snow removalequipment.

Among Toro’s implementations was a program thataggressively sought out and attempted to rectify productliability issues to the customers’ satisfaction before beingasked to do so or sued by injured parties. Above all, KenMelrose created a culture at Toro where "being a difference"became an integral aspect of long-term value-basedmanagement strategies.


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A centralized location forcurrent and reliableinformation on the varioustypes of licenses available toCPAs and their firms, theAccountancy Licensing

Library (ALL) was developed to simplify the complexity ofdetermining licensure requirements. From this site, usersmay view and print licensing requirements, instructions,procedures and forms. The rules, regulations, proceduresand policies are written in simple narrative form that is easyto understand.

Currently, ALL includes information on 21 states, with theremaining states to be completed by the end of thecalendar year. Since the launch date, 120 individual usersubscriptions have been purchased and VanderbiltUniversity has just agreed to purchase a full subscription tothe system to use as a guidance counseling tool for theirnew Master's of Accountancy program.

Through the combined effort of NASBA departments, the simple idea of a comprehensive Web site to cross-reference new andexisting NASBA services evolved into a new approach of connecting NASBA with both its member boards and the members ofthe profession. The result, NASBAtools.com, was launched in July 2006. By September, NASBAtools received its first Webaward—Web Star of the Week—from WebCPA. NASBAtools incorporates services into three main areas: Licensure, CPECompliance and CPE Sponsors.

CredentialNet streamlinesthe process for submittingindividual substantialequivalency applications andnotifications of intent topractice under substantial

equivalency. Through its Record Service, CPAs can retain,easily access and update official documents andcredentialing information without having to personallyacquire and maintain it. During fiscal 2006, CredentialNetprovided interstate practice services to Arkansas, California(practice privilege only), Kansas, New Mexico, New York,North Dakota, Oklahoma and Tennessee.

The Accountancy LicenseeDatabase (ALD) serves as acentralized clearinghouse ofinformation on CPAs andfirms in all jurisdictions. InAugust 2005, the program

launched to member boards with information fromLouisiana, Missouri, Tennessee and Texas. During fiscal2006, information from Idaho, Indiana, New Mexico,Oklahoma and Wyoming was added. Both Alaska andNevada are in the process of entering information. Thisinformation is available only to member boards.

On behalf of the ColoradoState Board of Accountancy,CPAES processes ColoradoCPA license applications andCPA firm registrations. In itseighth year of operation,

CPAES evaluated 1,004 individual and firm applicationsand recommended 910 applicants to the board for approvalof licensure during fiscal 2006.

LICENSURE TOOLS

SS erer engeti Dengeti D esereser tt


CPEtracking enhances the ability of CPAs tomanage continuing professional education (CPE)compliance. It also allows for recording andmaintaining CPE credits with ease andconvenience. CPEtracking then compares CPEcredits with each state board’s requirements and

the requirements of other organizations such as the AICPA and theGovernment Accountability Office. In its third year of operation, CPEtrackingadded 3 firms and 109 individual account users. Additionally, the LouisianaBoard will begin accepting CPE reporting through CPEtracking with theDecember 31, 2006 reporting period deadline.

The National Registry of CPE Sponsorsrecognizes CPE sponsors who provide programsin accordance with nationally recognizedstandards. The names of approved CPE programsponsors were published in a listing distributedthroughout the country via the internet and in

printed format. Currently in its 16th year of operation, 38 boards accept CPEcredits from Registry sponsors, five boards require them and six boards requireproviders to register with NASBA or the state board.

QAS provides assistance to state boards and theirlicensees through its approval of the highestquality CPE providers of self-study courses. In2006, QAS had 32 sponsors. Twenty-one boardsof accountancy accept CPE credits from QASsponsors, and seven boards require them.

In its fifth year of operation, CPEmarketcontinues to serve as a convenient and up-to-dateresource for CPAs who seek continuingeducation credits required to maintain and/orrenew their professional licenses. CPEmarketprovides the ability to search a complex course

database using specific criteria such as subject area, credit hours, courselocation, date and course format. CPEmarket offers current and updatedinformation on state-mandated continuing education requirements essential tomeeting CPE requirements. In 2006, CPEmarket listed 150 sponsors, 3,500courses and 4,200 users.

CPE COMPLIANCE TOOLS

CPE SPONSOR TOOLS

WEB SITES LAUNCH

NASBA launched the new site,NASBAtools.com, in July 2006and the revamped NASBA.orgsite in August 2006. NASBAtoolsevolved from a simple idea ofcross-referencing new andexisting NASBA services to awhole new approach ofconnecting NASBA with bothregulators and members of theprofession.

The updated NASBA.org siteoffers enhanced graphics andarchitecture developed in aneffort to make the site moreuser friendly, informative andattractive. The improved siterepresents one of two majorplatforms of communication.NASBAtools focuses onmembers of the accountingprofession while NASBA.orgfocuses on member boards, CPAcandidates and the public.

Concurrent with the launch ofNASBAtools.com, a newlyrevised version ofCPEmarket.com was introduced.The revised site features aredesigned homepage for easiernavigation and new tools forCPAs to locate and manage CPEwith ease.

Prior to the above Web sitelaunches, a redesigned NASBACenter for the Public Trust sitewas unveiled in March 2006.The CPT site features upcomingconferences, news, a list offounding members andinformation on its Trust Society.


NASBA’s wholly-owned subsidiary, Professional Credential Services, offers a variety ofservices for testing, licensing and certifying professionals. PCS now serves licensing, testingand certifying agencies in 50 professions and occupations, including athletic training,auctioneering, barbering, body piercing, chiropractor, cosmetology, drinking water specialist,electrology, engineering, esthetics, fire protection, explosives, LP gas dealing, manufacturedhomes, funeral directing, geology, healthcare interior design, healthcare philanthropy, health

officer, hearing aid dispensing, land surveying, landscape architecture, lead abatement, nail technician, natural hairbraiding, nursing, long term care administrator, occupational therapy, optometry, osteopathic medicine, parking facilitymanagement, pharmacy, physical therapy, podiatry, podiatric radiology, polygraph examining, professional planning,psychology, tattooing, veterinary technicians and wastewater treatment operation.

In its eight years of operation, PCS has built a strong reputation with its expertise in examination administration services,building on NASBA’s CPA Examination Services’ experience in serving boards of accountancy.

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BOA

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FF2005 - 2006 BOARD OF DIRECTORSOFFICERS

Diane M. Rubin, CPAChair

Wesley P. Johnson, CPAVice Chair

Michael D. Weatherwax, CPAPast Chair

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

Samuel K. Cotterell, CPADirector-at-Large/Treasurer

Billy M. Atkinson, CPADirector-at-Large

Michael T. Daggett, CPADirector-at-Large

Walter C. Davenport, CPADirector-at-Large

Andrew L. DuBoff, CPADirector-at-Large

Ellis M. Dunkum, CPADirector-at-Large

John E. Katzenmeyer, CPADirector-at-Large

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

REGIONAL DIRECTORS

Jacob J. Cohen, CPAMiddle Atlantic Regional Director

Sally FlowersPacific Regional Director

Gaylen R. Hansen, CPAMountain Regional Director

Mark P. Harris, CPASouthwest Regional Director

Richard Isserman, CPANortheast Regional Director

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

Robert A. Pearson, CPACentral Regional Director

Michael W. Skinner, CPASoutheast Regional Director

EXECUTIVE DIRECTORS’ LIAISON

Ronald J. Rotaru

Seated (left to right): R. Pearson, W. Johnson,L. Sachs, D. Costello, D. Rubin, M. Weatherwax,N. Allen, T. Sadler. Middle row (left to right):

R. Rotaru, R. Isserman, S. Flowers, A. DuBoff, M. Daggett, K. Smith, G. Hansen, T. Long, Jr.,

M. Skinner. Top row (left to right):E. Dunkum, M. Harris, J. Katzenmeyer,

B. Atkinson, S. Cotterell, J. Cohen, W. Davenport.


PCS BOARD OF DIRECTORS

Milton Brown, PAChair

Andrew L. DuBoff, CPA

Wesley P. Johnson, CPA

John B. Peace, CPA, Esq.

Diane M. Rubin, CPAEx-Officio

CENTER FOR THE PUBLIC TRUST BOARD OF DIRECTORS

Milton Brown, PAChair

Noel L. Allen, Esq.

Quinton Booker, DBA, CPA

Larry Bridgesmith, Esq.

Tim Chavez

Linda Galindo

Mark P. Harris, CPA

Susan J. Reinardy, CPA

Leonard R. Sanchez, CPA

VV icic tt oria Foria Fallsalls


STAFF DIRECTORS AND MANAGERSAlfonzo AlexanderVP Development, Center for thePublic Trust

Lisa J. AxisaVP, Center for the Public TrustDirector, ERB and Special Initiatives

Carla BlakeManager, Compliance Services

Pam BergeronManager, Web Development

Andrea T. BledsoeDirector, PCS Examination Operations

Michael R. Bryant, CPADirector, Accounting and FinancialReporting

Maria-Lisa Caldwell, Esq.Director, Business Development andLegal Counsel

Bridget CandlerManager, Instructional Review

Dean CarrollManager, Information Systems

Matt J. CookManager, PCS ExaminationOperations

Lisa DampfManager, Benefits

Stacey DouglasManager, CPEtracking

Yordanos A. Dumez, CPADirector, Compliance Services

Kimberly C. EllisManager, Communications

John D. GillespieManager, CBT Accounting

Stacey GroomsManager, Regulatory Affairs

Meritta M. GrantManager, Accounts Payable

Louise Dratler HabermanDirector, Information and Research

Denise HanleyDirector, Information Services

Patricia L. HartmanDirector, CPA ExaminationOperations and National CandidateDatabase

Adam HerjeczkiManager, Special Accommodations

Karen HillDirector, Project Administration

Anita HoltPresident’s Executive Assistant

Wendee HowellSenior Project Manager, BusinessDevelopment

Randy JungManager, Operations Guam ComputerTesting Center

Linda A. KellnerDirector, PCS ExaminationDevelopment

Thomas G. KennyDirector, Communications

Claus H. LangVice President, PCS Marketing

Christy LewellenManager, Human Resources

Angel S. LunnChief People Officer

Jose A. Manzon, IVManager, Guam Computer Testing Center

Chel NelsonManager, Candidate Services

Rebecca RodriguezManager, Licensee Services

Anne E. RussellManager, PCS Site Administration

James O. “Butch” ThomasManager, Development Systems

Francine A. TilleyManager, PCS Cosmetology

Penny A. VernonManager, Candidate Care

Troy A. Walker, CPAController, PCS

Jan WinslettManager, Quality Assurance

EXECUTIVE STAFF

David A. Costello, CPAPresident and Chief Executive Officer

Lorraine P. Sachs, CAEExecutive Vice President andChief Operating Officer

Robert E. “Gene” Brosky, CPAChief Financial Officer

Joseph T. Cote, CPAPresident, PCS and Director, CPA Examination Operations

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Remarkable is the first word that comes to mind when thinking about the people who make up our organization, NASBA. Eachand every NASBA volunteer is truly remarkable, but sometimes they go above and beyond our expectations. At our RegionalMeetings, we accepted nominations from our member boards for remarkable people within the accounting profession and NASBA.Showcased on these two pages are a few examples of how our extraordinary volunteers not only live up to expectations, but do thingsthat are truly remarkable.

ADOPTING A BRIGADEMichael Weinshel of the Connecticut Board and his wife Carol(along with her sister) adopted the 159th Aviation Brigade,comprised of 2,850 soldiers in 2005. When these soldiers weredeployed to Iraq in October, the three purchased, packaged andshipped a Christmas gift for each of the soldiers. Theycontinued supporting this brigade with monthly gifts by themes(such as Valentine’s day, Spring, Baseball and Patriotism) untilthe soldiers returned home a year later.

OUTSTANDING INSTINCTS

In August 2006, Carol and Jon Mielke were honored withthe Outstanding Foster Parent award at the North DakotaDepartment of Human Services’ Annual Children andFamily Services Conference. Nominators praised them forbeing active team members and for supporting andrespecting birth families and welcoming them into theirown home.

As licensed foster parents for babies and toddlers (birththrough two years old), Carol and Jon brought home theirfirst child in 2003 – a two-day-old newborn. Since then,the Mielkes have strived to make a positive differencethrough their efforts and meet the goal of the foster caresystem, which is to reunite children with their birthparents if at all possible. Carol and Jon have worked hardto exceed the responsibilities of the kids they care for, thebirth parents, social workers, courts, other foster parents,etc. They have had birth families visit children inside theirhome, driven children to other communities for visits,and written letters and sent pictures to birth families. TheMielkes hope that with the love and stability they provide,the children they care for will always remember theirefforts and strive to attain and provide such in their ownlives.

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From left to right: Carol and Michael Weinshel

Seated from left to right: Carol and Sarah MielkeKneeling from left to right: Jon and Matt Mielke


Mark Harris is an example of perseverance and of promise.During the aftermath of Katrina, he was a lantern of lightpiercing through devastation and despair. He found me atmy in-laws and quickly, and enthusiastically, madearrangements to rendezvous with me back in myhometown. He later arrived at my home with powerequipment, saws and tools, accompanied by his 20-year-oldson and friend. All were wearing big smiles, excited andready to clear fallen trees, patch leaky roofs, haul awaydebris, etc. Mark and the two men spent hours in the hotLouisiana sun and heavy humid air helping me repair andclear damage around my home. When we finished, theydrank some water, loaded up the truck and headed off tohelp some other fortunate acquaintance.

“I didn’t ask Mark to help me that day – in fact, he askedme if he could come help – like it would be a wonderfulway to spend his weekend. Mark doesn’t talk about theremarkable things he does – he just keeps doing them, andthat’s enough for him. He is so remarkable – it is part ofhis name!” - Mike Henderson, Executive Director State Boardof CPAs of Louisiana

HELPING HEARTS

Bill Nuckolls was named the Nebraska Press Association’s 35th MasterEditor-Publisher April 21, 2006 at their annual meeting. This is thehighest professional honor bestowed within the Nebraska PressAssociation. It is a lifetime achievement honor for exemplifyingeverything a newspaper editor and publisher should be. Bill’s familyhas been in the newspaper business since 1897.

He is also retired from the Nebraska Air National Guard where heachieved the rank of major. Bill was appointed as a public member ofthe Nebraska Board of Accountancy by Governor Mike Johanns (whois now the US Agriculture Secretary) in 1999. Bill was reappointed toserve a second four-year term in 2003. He is also Nebraska’s boardsecretary, member of the Board’s Executive Committee and Chair ofthe Board’s CPE Committee, which he has held since 2002.

APPOINTMENTBRINGS MEMBERHIGH HONORS

Bill Nuckolls

Clockwise from top: Mark Harris; Mark Harris and MikeHenderson; Andrew Harris, Mark Harris and MikeHenderson


AAs part of our mission, to enhance the effectiveness of state boards of accountancy, NASBA conducts meetings throughout the year tofacilitate cooperation and communication among our member boards. The combination of plenary sessions, interactive breakoutsessions and regional breakout sessions provides the perfect backdrop for attendees to discuss how best to protect the public.

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98TH ANNUAL MEETING“Staying Connected” was the theme of NASBA’s 98thAnnual Meeting, held in Tucson, Arizona, from October30-November 2, 2005. “What the public expects mostfrom the state boards of accountancy is that they preventsub par performance by their licensees when possible,”said Lynn Turner, managing director of Glass Lewis &Co., LLC, and former chief accountant of the SEC,during his keynote address. Approximately 412individuals attended the Annual Meeting withrepresentatives from 49 states. NASBA providedscholarships and/or financial assistance for 56individuals to attend the meeting.

EXECUTIVE DIRECTORS AND LEGAL COUNSELCONFERENCESAccountancy boards’ staff from 36 jurisdictions attendedNASBA’s 24th Annual Conference for ExecutiveDirectors held February 13-16, 2006 in Tucson, Arizona.NASBA’s 11th Annual State Board Legal CounselConference was held from February 14-15, 2006 inTucson, Arizona, with representatives from 27jurisdictions. Michael Stevenson, Public CompanyAccounting Oversight Board’s Associate GeneralCounsel, remarked to attendees of both meetings, “Wetake seriously the role of the state boards. That’s why Iam here today.”

REGIONAL MEETINGSNASBA’s Regional Meetings occurred from May 31-June2, 2006 in San Francisco, California, and June 21-23,2006 in San Juan, Puerto Rico with a combinedattendance of 463 individuals from 53 jurisdictions.Interactive sessions enabled attendees to discusscontinuing professional education, the Uniform CPAExamination, strategic initiatives and the UniformAccountancy Act’s changes. As in previous years, thehighest rated sessions were those interactive sessions andthe Roll Call of States. NASBA provided scholarshipsfor 33 new state board of accountancy members and for44 others to attend one of the two Regional Meetings.

CENTER FOR THE PUBLIC TRUSTNASBA’s Center for the Public Trust (CPT) and thePepperdine University School of Law Straus Institute ofDispute Resolution presented CPT’s second program onJuly 14, 2006. The program attracted attendees fromacross the country and from many disciplines. CPTBoard member Larry Bridgesmith remarked, “From theAir Force to UPS, organizations that set themselves apartfrom their competitors have learned how to harnessconflict in order to promote opportunities to be found.Clearly, ethical businesses and organizations don’t stifleconflict, they welcome it.”

StSt onehengeonehenge


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NATIONAL ASSOCIATION OF STATE BOARDS OFACCOUNTANCY, INC.

AND RELATED ORGANIZATIONS

CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2006 AND 2005

September 27, 2006

REPORT OF PRESIDENT AND CHIEF EXECUTIVE OFFICERAND OF CHIEF FINANCIAL OFFICER

We, David A. Costello, CPA, President and Chief Executive Officer and Robert E. Brosky, CPA, Chief Financial Officer, of theNational Association of State Boards of Accountancy, Inc. (“NASBA”), jointly and severally, do hereby state and attest that:

To the best of our knowledge and belief, based upon a review of the Consolidated Financial Statements of the National Associationof State Boards of Accountancy, Inc. and Related Organizations at and for the years ended July 31, 2006 and 2005, including theNotes thereto, as reported on by NASBA’s independent auditors, Lattimore, Black, Morgan & Cain, P.C., such financial statementsdo not contain an untrue statement of a material fact as of the date hereof nor do such financial statements fail to state a materialfact necessary to make the financial statements, in light of the circumstances under which they were prepared, not misleading.

We have reviewed the contents of this statement with the Chairman of the Audit Committee of NASBA.

David A. Costello, CPA Robert E. Brosky, CPAPresident and Chief Executive Officer Chief Financial Officer


National Association of State Boards of Accountancy

September 27, 2006

REPORT OF MANAGEMENT

The management of the National Association of State Boards of Accountancy, Inc. and Related Organizations is responsible for thepreparation, integrity, and objectivity of the consolidated financial statements included in this annual report. These consolidatedfinancial statements have been prepared in accordance with accounting principles generally accepted in the United States ofAmerica applied on a consistent basis and are considered to present fairly in all material respects the Association’s financialposition, changes in net assets and cash flows.

Management has established and maintains internal controls designed to give reasonable assurance of the integrity and objectivityof financial reporting, that assets are safeguarded and that transactions are executed in accordance with appropriate authorizationsand recorded properly. Internal controls include the careful selection of employees and members of the management team, theproper segregation of duties, and the communication and application of formal policies and procedures that are consistent withhigh standards of accounting and administrative practices. The concept of reasonable assurance is based on the premise that thecost 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 performingthose functions. The Audit Committee also oversees the scope and results of independent audits and any comments on theadequacy of internal controls and quality of financial reporting. The independent auditors render an objective, independentopinion on management's financial statements, and have direct access to the Audit Committee with and without the presence ofmanagement.

The Board of Directors also has adopted and monitors personnel policies designed to ensure that employees of the NationalAssociation of State Boards of Accountancy, Inc. and Related Organizations are free of any conflicts of interest.

David A. Costello, CPA Lorraine P. Sachs, CAEPresident and Chief Executive Officer Executive Vice President and Chief Operating Officer

Robert E. Brosky, CPA Michael R. Bryant, CPAChief Financial Officer Director of Accounting and Financial Reporting



Fiscal 2006 was the second full year of CPA testing in the computerized examination environment. During this year, total sections processed into the national candidate database, the gateway to the computerized examination, increased approximately 13% over the prior fiscal year.

This year, NASBA has expanded into service areas that improve regulatory compliance by providing internet-based services. NASBAtools.com provides a centralized location for accountancy licensing and CPE compliance service products to assist users in accountancy compliance.

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

Program RevenuesRevenue on a consolidated basis was $20.9 million in 2006 compared to $17.0 in 2005, an increase of $3.9 million or 22.9%. The following table compares operating revenue byprogram for 2006 and 2005:

In millions 2006 2005 Change

Examination related $ 18.8 $ 15.5 21.3%Other programs 1.7 1.2 41.7%Member dues and other revenue 0.4 0.3 33.3%Total $ 20.9 $ 17.0 22.9%

Examination related program revenue The following table compares the components of Examination related program revenues for 2006 and 2005:


CPA Examination Services $ 8.6 $ 7.1 21.1%PCS 5.8 5.0 16.0%CBT Contract Services 2.7 2.3 17.4%Guam Test Center 1.0 0.7 42.9%Other 0.7 0.4 75.0%Total $ 18.8 $ 15.5 21.3%

An increase of 16.6% in the volume of examination applications processed for state boardsserviced accounted for the revenue increase for CPA Examination Services.

The increase in PCS revenue results primarily from new contracts with state cosmetology boards to administer examinations.

The increase in CBT Contract Services revenue is related to the increase in section volume as processed by the national candidate database. The Guam Test Center increase in


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

MANAGEMENT’S DISCUSSION AND ANALYSIS

revenue is mainly attributable to additional revenue earned on the number of testing hours administered for CPA examinations.

Other programs revenueIn 2006, Other programs revenue increased 41.7% or $0.5 million as a result of an increase in fees charged to sponsors approved to be listed on the CPE registry and, from an increase in revenue from CPETracking.

Other income In 2005, in addition to operating revenues, NASBA had income resulting from a settlement agreement with a CBT contract partner to waive repayment of $0.7 millionowed to the partner by NASBA. The settlement stemmed from an outstanding trademark licensing issue of the partner and the acquirer of certain of the partner’s assets which resulted in an incomplete divestiture under the terms of the CBT contract.

Program ExpensesOperating expenses on a consolidated basis were $20.1 million in 2006 compared to $17.1 million in 2005, an increase of $3.0 million or 17.5%. The following table compares operating expenses by program for 2006 and 2005:


Examination related $ 16.9 $ 14.9 13.4%Other programs 1.8 1.1 63.6%Communications 1.4 1.1 27.3%Total $ 20.1 $ 17.1 17.5%

The components of the 13.4% Examination related program expenses increase wereprimarily the effect of: (1) additional examination administration costs for new PCS contracts; (2) additional CPA examination administration expenses related to the payment of CBT contract partner’s testing fees in excess of what was collected from candidates due to the timing of testing fee increases; (3) additional credit card fees related to increased volume and (4) increases in personnel costs in 2006 for activities devoted to examination project management to improve application and processing functions and to provide enhanced candidate services. The increase in expenses for Other programs is attributableprimarily increases in professional fees and, secondly, to the commitment of additional personnel to the development and enhancement of CPETracking services and the development of new services such as the Accountancy Licensing Library. The increase inCommunications operating expenses is due primarily to additional travel and meeting expenses related to annual and regional conferences.




Expense variations from 2005 to 2006 by caption are presented in the following table:


Examination program costs 3.8 3.1 22.6%Salaries and related costs 9.8 8.5 15.3%Professional fees 1.5 1.3 15.4%Travel and meetings 1.4 1.1 27.3%Other captions 3.6 3.1 16.1%Total 20.1 17.1 17.5%

The reasons for these increases are explained above in the discussion of Examination related program expenses (examination program costs and salaries and related costs), Other programs (professional fees and salaries and related costs), and Communications (travel and meetings).

Cash Flow and Financial PositionCash provided by operating activities was $2.7 million in 2006 as compared to $2.2 millionin 2005. Cash used in investing activities was $0.8 million in 2006 whereas investing activities operated essentially at breakeven in 2005. In 2005, investing activities included $0.5 million of cash provided from redemptions of long-term investment securities. Financing activities utilized $0.2 million in 2006 for payments on long-term debt and capital lease obligation reductions and utilized $0.1 million in 2005 solely for thereduction of capital lease obligations. As a result of these operating, investing and financing activities, net cash increased $1.6 million in 2006 as compared to an increase of $2.1 million in 2005. The primary reason for the difference was the redemption of investment securities in 2005.

At July 31, 2006, NASBA and its related organizations have a strong financial position with adequate liquidity to meet the needs of its operations and the 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 millionof net expenses are included in the statement of activities which will be recovered from future candidate fees. In 2005, the amount included was $0.8 million. At July 31, 2006 NASBA has cumulative net expenses of $5.2 million which will be recovered through future candidate fees that have been expensed over the previous six fiscal years. Totalunrecovered costs at July 31, 2006 are $7.6 million which includes $2.4 million of unamortized software development costs.

Unrestricted net assets increased $1.0 million in 2006 and $1.5 million in 2005. Serving the member boards of accountancy, and correspondingly the public trust, and ensuringfuture organizational strength, requires an adequate amount of net assets. NASBA has furthered its commitment to improving its services in the CPA examination environment and has endeavored to serve the public and its member boards with new compliance-related services via NASBAtools.com. Because of NASBA’s fiscal stability, the organization is able to serve the boards, the examination candidates, the licensees and the public trust in remarkable ways, and to stand prepared for future challenges and opportunities.




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September 27, 2006

REPORT OF AUDIT COMMITTEE

The Board of DirectorsNational 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, 2006, wascharged by the Board of Directors with the responsibility for oversight of the annual independent audit of the consolidatedfinancial statements and recommending to the Board of Directors the audit firm to undertake the annual audit for the followingyear.

In connection with the discharge of its responsibility,

• Prior to commencement of the year-end audit work, the Audit Committee, met via teleconference 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 processes and procedures of the National Association of State Boards of Accountancy, Inc., including 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 management, 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;

• The Committee met privately 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, 2007.

Based on the above, the Committee believes that the annual independent audit was properly completed, and that management hasmaintained adequate systems and controls and followed the appropriate procedures related to financial accounting, reporting andsafeguarding of assets for the year ended July 31, 2006.

Respectfully submitted,

The Audit CommitteeNational Association of State Boards of Accountancy, Inc.

Sandra R. Wilson, Chair, on behalf of the Members of the Committee as follows:Bennie L. HadnottCarlos E. JohnsonDavid P. KassoufNicholas J. Mastracchio, Jr.


INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and MembersNational Association of State Boards of Accountancy, Inc.

We have audited the accompanying consolidated statements of financial position of the National Association of StateBoards of Accountancy, Inc. (the “Association”) and Related Organizations as of July 31, 2006 and 2005, and the relatedconsolidated statements of activities, program expenses and cash flows for the years then ended. These consolidatedfinancial statements are the responsibility of management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement. An audit includes consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in theconsolidated financial statements, assessing the accounting principles used and significant estimates made by management,as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis forour opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financialposition of the National Association of State Boards of Accountancy, Inc. and Related Organizations as of July 31, 2006and 2005, and the changes in their net assets and their cash flows for the years then ended in conformity with accountingprinciples generally accepted in the United States of America.

Brentwood, TennesseeSeptember 11, 2006


2006 2005Program Revenues Examination related $ 18,798,699 $ 15,520,741 Other programs 1,735,709 1,207,833 Member dues and other revenue 410,604 301,539

Total program revenues 20,945,012 17,030,113

Program Expenses Examination related 16,957,913 14,944,631 Other programs 1,770,055 1,116,321 Communications 1,401,222 1,085,874

Total program expenses 20,129,190 17,146,826

Excess (Deficiency) of Program Revenues Over Program Expenses 815,822 (116,713)

Income from Resolution of Examination Contract Issue - 714,280

Increase in Unrestricted Net Assets Before Investment Income and Income Taxes 815,822 597,567

Investment Income 300,487 1,029,860

Increase in Unrestricted Net Assets Before Income Taxes 1,116,309 1,627,427

Income Tax Expense 76,100 84,200

Increase in Unrestricted Net Assets 1,040,209 1,543,227

Unrestricted Net Assets Beginning of Year 8,668,288 7,125,061

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



CONSOLIDATED STATEMENTS OF ACTIVITIESFor Years Ended July 31,

Examination Otherrelated programs Communications Totals

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 9,844,360Occupancy 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 11,363 930,090Telephone 155,980 10,748 16,892 183,620

Equipment rentals 371,460 49,209 12,581 433,250Supplies 105,951 14,218 9,579 129,748Miscellaneous 402,010 129,333 33,564 564,907

Totals $ 16,957,913 $ 1,770,055 $ 1,401,222 $ 20,129,190

Year Ended July 31, 2005

Examination program costs $ 3,056,011 $ - $ - $ 3,056,011

Salaries and related costs 7,773,974 629,098 109,437 8,512,509Occupancy 769,945 89,722 23,361 883,028

Professional fees 740,790 161,886 371,808 1,274,484

Printing and postage 257,348 18,657 96,954 372,959 Travel and meetings 622,340 99,314 438,688 1,160,342 Depreciation and amortization 863,247 27,624 10,580 901,451Telephone 123,241 5,393 11,064 139,698

Equipment rentals 282,770 27,854 3,507 314,131Supplies 88,299 8,442 5,769 102,510Miscellaneous 366,666 48,331 14,706 429,703

Totals $ 14,944,631 $ 1,116,321 $ 1,085,874 $ 17,146,826



CONSOLIDATED STATEMENTS OF PROGRAM EXPENSES

2006 2005Assets

Current Assets Cash and cash equivalents $ 5,300,500 $ 3,654,158 Receivables 1,124,788 815,113 Prepaid expenses 278,727 252,558 Deferred income taxes, net of allowance 52,300 16,500

Total current assets 6,756,315 4,738,329

Investments and Other Assets Investment securities, at fair value 6,988,956 6,854,517 Deferred income taxes, net of allowance 317,100 352,900 Other 17,124 13,048

Total investments and other assets 7,323,180 7,220,465

Property and Equipment Office and computer equipment 2,180,445 1,757,794 Furniture 893,093 876,733 Leasehold improvements 487,160 487,160

3,560,698 3,121,687 Less accumulated depreciation and amortization 2,389,428 1,988,788

Net property and equipment 1,171,270 1,132,899

Software Development Costs 3,590,000 3,590,000 Less accumulated amortization 1,239,405 726,309

Net software development costs 2,350,595 2,863,691

Total assets $ 17,601,360 $ 15,955,384

Liabilities and Unrestricted Net Assets

Current Liabilities Accounts payable and accrued expenses $ 5,042,618 $ 4,296,094 Deferred examination fee revenues 472,962 512,587 Long-term debt, current portion 428,571 143,288 Capital lease, current portion 56,035 65,999

Total current liabilities 6,000,186 5,017,968

Long-Term Liabilities Capital lease - 55,761 Long-term debt 1,714,289 2,142,432 Other long-term liabilities 178,388 70,935

Total long-term liabilities 1,892,677 2,269,128 Total liabilities 7,892,863 7,287,096

Unrestricted Net Assets 9,708,497 8,668,288

Total liabilities and unrestricted net assets $ 17,601,360 $ 15,955,384



CONSOLIDATED STATEMENTS OF FINANCIAL POSITIONJuly 31,

2006 2005Operating Activities Increase in unrestricted net assets $ 1,040,209 $ 1,543,227 Adjustments to reconcile increase in unrestricted

net assets to net cash provided by operating activities: Depreciation and amortization of property and equipment 416,994 387,642 Amortization of software development costs 513,096 513,809 Income from resolution of examination contract issue - (714,280) Net (gains) losses on investment securities 211,861 (764,887) Changes in assets and liabilities (Increase) decrease in: Receivables (309,675) (234,577) Prepaid expenses and other non-current assets (30,245) 631,872 Increase (decrease) in: Accounts payable, accrued expenses,

and other long-term liabilities 853,977 746,810 Deferred examination fee revenues (39,625) 63,561 Net cash provided by operating activities 2,656,592 2,173,177

Investing Activities Property and equipment additions (455,365) (307,383) Capitalized software development costs - (20,000) Purchases of investment securities (346,300) (213,270) Redemptions of investment securities - 500,000

Net cash used by investing activities (801,665) (40,653)

Financing Activities Reduction of long-term debt (142,860) -

Principal payments on capital leases (65,725) (62,526)

Net cash used by financing activities (208,585) (62,526)

Net Increase in Cash and Cash Equivalents 1,646,342 2,069,998

Cash and Cash Equivalents, Beginning of Year 3,654,158 1,584,160

Cash and Cash Equivalents, End of Year $ 5,300,500 $ 3,654,158

Supplemental Cash Flow Information Interest paid $ 4,649 $ 7,827

Income taxes paid $ 110,438 $ 67,397Non-cash Investing and Financing Activities

Debt reduction from examination contract issue resolution $ - $ 714,280



CONSOLIDATED STATEMENTS OF CASH FLOWSFor Years Ended July 31,

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 District of Columbia, Guam, theCommonwealth 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 identifying quality 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 obligationswith 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 insurance limits.

Receivables and credit policies Accounts receivable are uncollateralized obligations arising from contractual agreements with customers and 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 an allowance is determined based on management’s knowledge of its customers, historical loss experience and existing economic conditions.

Prepaid expenses Prepaid 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 working capital requirements in U.S. Treasury and other Federal Agency obligations, corporate obligations and fixed income and equity mutual funds. Investments in equity securities with readily determinable fair values and all investments in debt securities are recorded at fair value. Investment securities, in general, are exposed to various risks, such as interest rate,credit, and overall market volatility. Due to the level of risk associated with 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.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Property and equipment are stated at cost. Assets are either depreciated using the straight-line method over 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 costsThe Association capitalized and is amortizing certain costs associated with the development of software for internal use. The costs are amortized over the original seven-year term of the contract underlying the software development of the National Candidate Database. (See Note 4).

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 adjustments are made.

Revenue recognition Examination 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 on the program’s contribution to revenue of the Association.

Income taxesThe 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.

Use of estimatesThe 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 financial statements do not reflect the value of these services primarily because the services would typically not be purchased in the absence ofthe individuals’ contributions. Meeting and travel expenses for these individuals are reimbursed by the Association and included in the financial statements.




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

2006 2005

U.S. Treasury and other Federal Agency obligations $ 1,771,298 $ 1,720,764 Corporate and other debt obligations 645,827 620,947Equity securities 4,571,831 4,512,806

Total Investment Securities $ 6,988,956 $ 6,854,517

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

2006 2005

Interest and dividends $ 512,348 $ 264,973Net gains (losses) on investments (211,861) 764,887

Total Investment Income $ 300,487 $ 1,029,860

Note 4. 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 of Certified 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 $2,350,595 at July 31, 2006 (see Note 2), the Association has incurred and expensed through July 31, 2006 costs of $11,934,716, of which $6,703,640 has been recovered.

The following table shows the amount of unrecovered costs at July 31:

2006 2005

Current year expenses: Amortization of software development costs $ 513,096 $ 513,809 Other expenses 3,550,936 3,361,915

Total current year expenses 4,064,032 3,875,724

Current year recovered costs: Costs recovered through fees 2,675,805 2,324,515 Costs recovered from examination contract issue resolution - 714,280

Total current year recovered costs 2,675,805 3,038,795

Net current year unrecovered expenses 1,388,227 836,929Capitalized software development costs - 20,000Amortization of software development costs (513,096) (513,809)

Net change in current year unrecovered costs 875,131 343,120Unrecovered costs, beginning of year 6,706,540 6,363,420

Unrecovered costs, end of year $ 7,581,671 $ 6,706,540




Note 4. Contract to Provide Examination Services (Continued) 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 when services are provided. At July 31, 2006 and 2005 escrowed funds amounted to $12,858,373 and $9,271,535, 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 5. Long-term Debt The aforementioned Agreement provided for Prometric to advance up to $3,000,000 to the Association under a 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 payments for April of 2005 and 2006 were reduced to $ -0- and approximately $143,000 respectively.

Minimum annual debt payments are set forth below.

Total

Fiscal 2007 $ 428,571Fiscal 2008 428,571Fiscal 2009 428,571Fiscal 2010 428,571Fiscal 2011 428,576

Total Long-term Debt $ 2,142,860

Note 6. Retirement Plans and Other Postretirement BenefitsA noncontributory defined contribution pension plan covers all full-time employees meeting specified requirements. Pension expense amounted to approximately $421,000 for 2006 and $332,000 for 2005. The plan is funded by annual contributions made after the end of the December 31 plan year.

The Association also maintains a 401(k) plan that is funded entirely by employee contributions. The Association pays fees related to the plan. The plan has no provision for employer matching of employee contributions.

In the last quarter of fiscal 2006, the Association 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, 2006, the accumulated postretirement benefit obligation was determined by actuarial valuation to be $74,402 and is included in other long-term liabilities in the Consolidated Statements of Financial Position. The discount rate used to value the obligation was 6.25%.The assumed health care cost trend rate is 8% declining to 4% over a period of 8 years. The effect on the accumulatedpostretirement benefit obligation of a one percentage point change in the assumed health care cost trend rate is shown below:

1% Increase inRates

1% Decrease inRates

Accumulated Postretirement Benefit Obligation Effect $ 8,084 $ (6,968)

The obligation will be funded on a cash basis through partial payment of medical insurance plan premiums for a five-year period at each eligible employee’s retirement date.




Note 6. Retirement Plans and Other Postretirement Benefits (continued) The following table shows actuarial projections of expected future postretirement benefit payments:

Total

Fiscal 2007 $ 3,585Fiscal 2008 7,421Fiscal 2009 8,073Fiscal 2010 9,363Fiscal 2011 10,618Fiscal 2012 through 2016 29,075

In July 2005, the Association distributed the fully-funded balance of a non-qualified deferred compensation arrangement tothe executive for whom the plan was provided. Under this arrangement, compensation in the amount of $38,000 was deferred in 2005. Other assets and other long-term liabilities were equally reduced by the distribution.

Note 7. Capital Lease The Association is obligated at July 31, 2006 under a capital lease for office equipment with future minimum lease payments as follows:

Fiscal 2007 $ 57,519Less imputed interest 1,484

Current Obligation $ 56,035

The depreciated cost of the office equipment under the capital lease is approximately $47,700 and $111,400 at July 31, 2006 and 2005, respectively.

Note 8. Lease CommitmentsThe Association and PCS lease office space under operating leases that expire at various dates through 2013. Total scheduled rent payments under these leases are amortized to rent expense on a straight-line basis over the terms of the leases. Minimum lease payments are set forth below.

Total

Fiscal 2007 $ 883,064Fiscal 2008 813,323Fiscal 2009 825,027Fiscal 2010 834,156Fiscal 2011 774,774Thereafter 1,732,913

Total Minimum Lease Payments $ 5,863,257

Rent expense charged to operations for office space in 2006 and 2005 totaled approximately $905,000 and $883,000, respectively.

The Association leases office equipment under various operating lease arrangements. Minimum lease payments remainingfor equipment leases are $161,177 in fiscal 2007and $58,650 in fiscal 2008. Expenses charged to operations under these leases in 2006 and 2005 totaled approximately $184,000 and $125,000, respectively.




Note 9. Income TaxesIncome tax expense of PCS comprises the following:

2006 2005Current

Puerto Rico $ 75,700 $ 84,200State 400 -

Income Tax Expense $ 76,100 $ 84,200

In 2006, income tax expense includes a benefit of $27,400 ($22,200 federal and $5,200 state) 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 (loss) before taxes as a result of the following:

2006 2005Statutory federal income tax $ 30,700 $ (33,900)Puerto Rico income tax, net of U.S. federal benefit 50,000 55,600State income taxes, net of U.S. federal benefit 2,800 (10,300)Change in valuation allowance (10,700) 69,700Other 3,300 3,100

Income Tax Expense $ 76,100 $ 84,200

The deferred income tax asset consists of the following:

2006 2005Deferred income tax asset - current $ 65,000 $ 16,500Deferred income tax asset - long-term 440,300 503,200Valuation allowance (124,800) (135,500)

Total deferred income tax asset 380,500 384,200

Deferred income tax liability - long-term 11,100 14,800

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

At July 31, 2006, PCS had federal and state net operating loss carryforwards of approximately $1,212,000 and $960,000 respectively. The carryforwards expire at various dates from July 31, 2020 through 2025 for federal tax purposes and July 31, 2007 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 realization of 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 Resolution of Examination 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 this incomplete divestiture, Prometric agreed 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 remains outstanding, or a totalof $714,280. See note 5 for more details.





Front Cover from top left: Great Pyramids of Giza, Kiyomizu Temple, Grand Canyon, the Colosseum, Taj Mahal, the Great Wall of China and Mount Everest.

Page 1: Great Wall of ChinaPage 4: Great Pyramids of GizaPage 6: The Harbor of Rio de JaneiroPage 9: Kiyomizu TemplePage 10: Empire State BuildingPage 12: Grand CanyonPage 14: Mount EverestPage 16: Serengeti DesertPage 18: Taj MahalPage 20: Victoria FallsPage 24: Stonehenge

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Provide high quality, effective programs and services....2 2006 ANNUAL REPORT 2006 ANNUAL REPORT 2 To enhance the effectiveness of state boards of accountancy. Provide high quality,