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June 14, 2008

Overhauling archaic laws

While commentators suggest the advent and spread of IFRS could make accountancy one of the first truly global professions, it has only been in the past two years that momentum has been gathering to form a national profession in the world’s largest economy. Carolyn Canham investigates.

Each of the 55 licensing jurisdictions in the US has the ability to set its own standards for CPA licensure and practice, meaning CPAs and firms traditionally must be licensed separately in every state where they serve client interests. According to the American Institute of Certified Public Accountants (AICPA), gaining a practice privilege differs so much from state to state it is almost impossible for CPAs to navigate.

However, the battle to break down the state barriers is gaining pace. For about ten years the AICPA and the US National Association of State Boards of Accountancy (NASBA) have been advocating a single criterion called substantial equivalency.

AICPA vice-president for practice mobility and state regulatory and legislative affairs Sheri Bango says that until two years ago there had been little progress.

“Substantial equivalency had existed in the Uniform Accountancy Act since 1997, but every state had their own take on what that meant and they did not pass it in a uniform manner,” Bango says, explaining that this led to a patchwork of regulations where each state agreed that moving to a single requirement was in the best interest of the profession and the public, while believing it should be based on their own law.

The beginnings of change

Two years ago the situation came to what Bango calls “the critical point of realising that we had a true problem”. At this point the AICPA, the NASBA and the state accounting boards and societies agreed that something must be done.

In December 2006, the AICPA and NASBA approved an exposure draft of legislation that simultaneously removed the notification requirement for CPAs entering a jurisdiction and gave states regulatory authority over any CPA or firm practicing in their jurisdiction.

The exposure draft was so well received that despite it being open for comment until May 2007, many states introduced the legislation in draft form when the 2007 legislative sessions opened in January.

“By the end of 2007, we had 11 states that had removed their notification requirement,” Bango says. That number now stands at 27. A further two states are awaiting their governor's signature and three have legislation pending.

“We were trying to provide a uniform system, a state-based system but with national mobility… we are a little bit less than halfway there, but we hope that towards the end of the 2008 legislating sessions we will be able to say we’re at least half-way there,” Bango says.

Bango emphasises that by simultaneously removing the notification requirement and giving the state regulators greater power over CPAs practicing in their states, public protection has been increased.

Gaylen Hansen, a member of NASBA and the Colorado State Board of Accountancy, agrees. “Interstate licensing really does not add a whole lot to the protection of the public,” Hansen says. “It is pretty easy to find CPAs as they are not typically the types of people that don’t have websites and letterheads… I am not sure how you are really helping the public by going through all of this paper shuffling and permitting process.”

Small steps forward

The removal of the notification requirement is only one step towards breaking down state boundaries. When a jurisdiction has dropped the notification requirement, any CPA that is licensed in a jurisdiction that is considered substantially equivalent can automatically practice in the former jurisdiction.

For a jurisdiction to be considered substantially equivalent, it must offer the uniform CPA exam and require its licensees to complete 150 hours of education and at least one year of experience.

The only jurisdictions that are not considered substantially equivalent are California, Colorado, Delaware, New Hampshire, Vermont and the Virgin Islands, which have not passed the 150 hour education requirement; and Florida and Puerto Rico, which do not have the experience requirement, although Florida has recently passed legislation that will bring it up to speed. When a jurisdiction is not considered substantially equivalent, individuals can meet those requirements and then be considered substantially equivalent through a process NASBA has in place.

Sandy Rothe, the Denver office managing partner for Deloitte US, spoke at the testimony where the Colorado State Board of Accountancy decided to drop its notification requirement. As he was preparing for the testimony, Rothe heard that Deloitte US has up to 11,000 staff members travelling each week.

“Now all 11,000 of those would not require licensing, as they are not all CPAs, but there’s a large majority and the point is we have so many people travelling across the globe and across the United States every day that to comply with 50 different rules is really impossible,” Rothe says.

“My biggest concern is not so much about the time and the cost as much as it is just the sheer ability to be able to [comply with the licensing requirements].

“Clients call us literally Sunday night and want us in another state or country the next day, so what I was worried about is what I called a ‘foot fault’ in the sense that we want to comply, we will comply, but if you set up rules that just aren’t practical, somebody somewhere is going to trip up. Then we are going to be in trouble not because we did bad work, not because anything’s wrong, not because we didn’t try to comply, just because somebody didn’t know that Colorado had a different rule than Iowa.”

Colorado is one of the few states that is not substantially equivalent, which Rothe says “complicates our life”. “The restriction potentially limits the ability of Colorado’s CPAs to do business is other states, versus out-of-state CPAs doing business in Colorado,” he says.

On rare occasions the situation also arises where work is allocated to CPAs on the basis of which state they are licensed in.

“It’s the clients that potentially suffer,” Rothe warns. “If we don’t have free mobility, if we have to get licensed, then we are going to have to choose who is licensed verses who is best for the engagement. Especially if [the client] wants us on short notice and there is a lengthy licensing requirement.

“So it’s not so much that the accounting firm is being disadvantaged, it’s the clients that are disadvantaged if we can’t bring whoever is needed for that situation from wherever they are in the globe to bear as quickly as possible.”

Slow pace

Rothe is not happy with the pace at which Colorado is moving towards becoming substantially equivalent. “I think Colorado really needs to become substantially equivalent. It’s our next priority; it’s a priority of the profession,” he says.

In addition to his board duties, Hansen is director of quality assurance for Ehrhardt Keefe Steiner & Hottman (EKSH). The Leading Edge Alliance member has about 400 staff and 40 partners. It has three offices, all of which are in Colorado, and Hansen says the firm is the second largest in Colorado behind KPMG.

Despite being based only in Colorado, EKSH operates in about 20 to 25 other states and does some work internationally. Having to be registered in more than 20 states has a “big-time negative impact” Hansen says.

One of Hansen’s responsibilities at EKSH is taking care of licensing requirements. He said this consumes about a quarter of his time and about half the time of an assistant.

“It’s significant in terms of just our internal costs,” he says. “I wouldn’t hazard a guess as to how much we pay for inter-state licensing.”

The time-consuming process includes “finding out what the regulations are in the other states, which often means calling them or searching on the website, [and] finding the right form. Sometimes the other state requires confirmation of experience, exam grades and education,” he explains.

“Some of the states require a certificate of good standing indicating you don’t have any discipline that has been filed against you. So there are quite a few hoops that you can end up having to go through… it is pretty frustrating for our people.”

The timeframe for acquiring a licence varies from being instantaneous to two to three months. Typically, it is a matter of weeks.

Hansen names Florida, Texas, California and New York as states that have always been difficult. “Some of these states require that you not only meet all of their requirements, but they will have [continuing professional education] requirements that are unique to their states. Ethics is the prime example – [some states] won’t accept the ethics continuing education that we have here in Colorado,” Hansen says.

Layers of licensing

In addition to ensuring individual CPAs are licensed, some states require a firm licence.

“Sometimes that can take just as long because they want even more information. For example, some want a list of all the partners and they want you to have a registered agent so if there is ever any complaint, they can file that complaint with the registered agent,” Hansen explains.

Philip Politziner, the president and chief executive of Baker Tilly International member Amper, Politziner & Mattia, has also welcomed the move towards uniform practicing requirements. “We believe that it makes sense to have commonality. It is a logical way of the profession doing business so we are in support of that,” he says.

map USA CPA mobility

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