Recently, the California Board for Public Accountancy instituted what has already become a controversial new regulation.Dubbed "Practice Privilege," the regulation requires out-of-state CPAs to pay California a small fee before using the CPA designation in the state, regardless of whether the CPA is preparing a California tax return or simply working for a client in California.
The fee has caused considerable debate, but in my mind, all the hubbub is missing the point. The validity or fairness of the fee masks a deeper issue - an issue the profession needs to seriously consider and resolve.
The issue? The scope of the accounting profession is international, yet it is still regulated by the various states. That is why, in the end, California's Practice Privilege is just another reason why the profession should consider throwing its support behind an interstate compact.
In 2003, in these pages, I presented for discussion the concept of an interstate compact to enable the various states to set consistent multistate or nationwide accounting standards. An interstate compact is a contract among states (and occasionally involving the federal government, as well) that allows them to solve multistate, regional and national problems through voluntary agreement.
Because the government already regulates the profession through the Public Company Accounting Oversight Board, the Securities and Exchange Commission and the Government Accountability Office, Congress would need to authorize the compact so that it also encompasses regulation by these entities. Compacts carry the force of law, and compacting states are bound to observe the terms even if they are inconsistent with other state laws, much like treaties between nations.
The concept remains the most effective alternative to the current chaos, as we continue to address who sets accounting standards for public companies, the private sector, and nonprofit and government entities.
In addition to being the only mechanism that engages the sovereign powers of the states and the federal government, the compact concept can also address problems in areas such as practicing across state lines, substantial equivalency standards of professional conduct, accountant-client privilege and peer review.
Massive changes to standards-setting and regulation were triggered in 2001, when the corporate scandals began.
As often happens, addressing one crisis presents an opportunity to make broader changes. For example, the profession is now re-examining peer review, and is looking at professional discipline and standards of ethics.
Notably lacking is a mechanism that balances the needs of the public with the needs of the profession, and that coordinates the states and the federal government.
Licensing standards are set by the states. The PCAOB sets standards for audits of public companies, while the American Institute of CPAs and the GAO set standards for the balance of entities. The profession's standards-setting authority is being challenged by some, including a number of states.
Where the integrity of financial reporting is concerned, the public and both state and federal governments justifiably expect the profession to follow the highest standards. The investing public and the courts may question the validity of lesser standards, and will be unsympathetic toward squabbles over authority. An interstate compact for accounting regulation would focus on states' commonalities, and its statutory basis would help strengthen credibility for the profession's self-regulation.
Historically, the objectives of compacts include implementing common laws and exchanging information. Each state adopts the terms of a compact by statute; other states can then adopt identical language. Upon adoption by a specified number of states, the compact is activated. For example, in 1997 the National Council of State Boards of Nursing adopted a professional licensing compact that addressed disciplinary issues and multistate licensure.
Traditionally, the CPA profession has not pursued an interstate compact approach to achieve regulatory uniformity. Instead, it has tried to plug the Uniform Accountancy Act. This past December, the AICPA and the National Association of State Boards of Accountancy released the fourth edition of the UAA, a model-bill approach to providing uniform regulation for the profession.
The "uniform" in the UAA's name is a bit misleading.
The UAA should not be confused with the Uniform Commercial Code or the Uniform Commercial Credit Code, both of which are enacted throughout the country with a high degree of uniformity. The UAA, on the other hand, is treated like a smorgasbord by state legislatures, who pick up bits and pieces of the UAA that they find useful locally, and reject the rest.
One reason for the different levels of success (with success gauged by uniform passage throughout the country) of the UAA and many other uniform acts is that the UAA has never been exposed to the vigorous scrubbing imposed by the National Conference of Commissioners on Uniform State Laws (see www.nccusl.org/update/). As a result, the UAA is little more than a wish list composed by the CPA profession.
Furthermore, the various UAA drafts would do nothing to solve the problems that have arisen as a result of California's actions. An interstate compact would establish a formal, legal relationship among states to address their common problems. We would be able to craft uniform regulations and address multistate licensing, disciplinary and other issues. Within an interstate compact, for example, CPA firm peer-review programs could possibly draw on a multistate pool of reviewers, allowing a closer match between reviewers' expertise and reviewed firms' practices.
Substantial equivalency, CPA client privilege, standardizing the definitions of peer review and ethics, and now California's Practice Privilege - these are all issues on a growing list of reasons why the profession should investigate an interstate compact. How many more issues need to be added to the list before the profession chooses to look at the best option for its future?
Lou Grumet is the executive director of the New York State Society of CPAs and publisher of The CPA Journal.
