International reciprocity in accounting: where in the world are we headed?

The 1980s saw a tremedous surge in global trading, which is expected to continue the future at a rapid pace. This dramatic expansion has led to the emergence of many new international accounting problems. This article deals with one such problem--evident to many but largely ignored--the lack of international licensure reciprocity to practice accounting.

RECIPROCITY

"Reciprocity," a term commonly used by professional and occupational licensing bodies in many countries, means mutual professional recognition. Two independent bodies guarantee each other's members certain commercial or professional privileges.

Reciprocity can be either absolute or conditional. Absolute reciprocity exists when two license-granting bodies enter into bilateral agreements recognizing each other's licenses in total, without requiring applicants from either jurisdiction to take additional tests or prove requirements have been met.

In conditional reciprocity, two license-granting bodies recognize each other's licenses only if some mutually agreed-on additional education, experience or examination requirements are satisfied. Internationally, reciprocity would recognize the license of a duly certified professional accountant from one county who seeks to practice in another.

CAUSES OF THE PROBLEM

The strong trend toward internationalization of profesional activities makes reciprocity in accounting practice a desirable goal. However, a number of practical problems impede this effort. The most serious barrier is widespread differences in qualifications for admission to the public accounting profession.

Education. There is considerable international diversity in accountants' educational backgrounds. While in most advanced countries a baccalaureate degree in accounting fro a recognized university is required, many countries accept less education or experience in lieu of education. Italy, for example, accepts 10 years' accounting experience as a substitute for a college degree. More extreme cases include Morocco and Uruguay, where there is no requirement for an auditor to be professionally qualified, much less to have any minimum education.

Practical experience. Diversity also exists in the nature of practical experience. In the United States, the United Kingdom, Canada and India, for example, experience outside of public accounting usually is not acceptable, while in Norway, Israel and Belgium, nonpublic accounting experience generally is considered sufficient. Countries such as Denmark and Norway also require accountants to have experience in internal and government auditing.

There are also differences in the length of experience required. In the United States, for example, a three-year requirement is rare, but Greece, Qatar and Switzerland require more than seven years' experience. In addition, procedures to certify the nature and length of a candidate's experience differ employer attestion while other rely on periodic reports by a candidate or on entries in his or her diary.

Professional examinations. The content, rigor, scope and length of professional examinations administered by license-granting bodies worldwide also vary. For example, a 1982 survey found that professional examinations for accountants in Australia, Canada, Denmark, France Japan, South Africa, the United Kingdom and West Germany stressed practical applications while in Fiji, India, Israel, New Zealand, Norway, the Philippines, Singapore and Turkey the emphasis was on theoretical or academic knowledge.

Continuing education. Minimum continuing education requirements for audit practitioners also differ. Some countries require as many as three to five days of formal continuing education per year while others do not require any continuing education at all; professional accounting licenses are granted for life without any periodical renewal requirements.

A WORLD OF DIVERSITY

Organizational structure. Another difficulty in promoting reciprocity is differences in the organizational structure of the profession. In Austria, Belgium, Denmark, Germany, India, the Philippines and the United Kingdom, for example, the profession is organized at the national level while in Argentina, Brazil, Canada, Ecuador and the United States it is organized at the provincial or state level.

In countries where the accounting profession is centralized, the license or certificate of practice usually is issued by one central agency, but countries with a decentralized profession have several license-granting bodies. Achieving reciprocity becomes all the more difficult because countries with a centralized system would have to negotiate with each provincial or state body separately. The United States alone has 54 separate state boards of accountacy, each with a separate and widely differing set of requirements.

Diverse standards. The diversity in accounting and auditing standards also impedes reciprocity. A country's accounting profession and its accounting and auditing standards grow in response to its changing social, economic, legal and political environment. As a result, accountants' perceptions and attitudes may differ from country to country. Accountants from one country, for example, may consider investing in a client's stock or lending money to a client entirely ethical, while such acts may be expressly forbidden in another country. Under such circumstances, countries with restrictive standards may be hesitant to let accountants from countries with "liberal" standards practice in their jurisdiction without requiring additional training.

Nationalism. The last, but not least, serious barrier to reciprocity is nationalism. Nationalism, or protectionism, may reveal itself as either a total unwillingness to recognize the qualifications of foreign nationals or an outright restriction on them from practicing in the host country. The Philippines, for example, restricts the practice of public accounting to Philippine citizens only, while Austria discourages its professional accountants from affiliating with CPA firms in other countries. Alabama, Guam, North Carolina, Puerto Rico, the Virgin Islands and West Virgnia require U.S. citizenship as a qualification for a CPA certificate and license to practice.

CONSEQUENCES OF THE PROBLEM

By thwarting international reciprocity, accountants, like many other professionals, attempt to ensure themselves a sound economic base and earning potential. Such as attitude might be tolerable if the consequences affected only accountants. However, this territorial imperative is an obstacle to the internationalization of securities markets, trade and industrialization of developing countries.

The capital available for investment is limited. Its mobility--to increase its productivity--must be maximized. International reciprocity in accounting practice can facilitate the mobility of capital by providing investors with the option of having financial statements audited by auditors from their native countries. This cannot be done curently because auditors certified in one country are not allowed to practice in another unless the countries have reciprocal agreements.

RECIPROCITY--THE CURRENT SITUATION

The outlook for international reciprocity is not encouraging despite efforts by international and regional accounting organizations to reduce worldwide diversity.

European Community (EC). The EC has made the most significant effort in promoting accounting reciprocity among its member countries, taking the first step in 1984 when it approved the Eighth EC Company Law Directive. The directive addresses the professional qualifications and work of statutory auditors--auditors conducting audits in accordance with specific laws of the host country. It establishes minimum educational and practical experience, as well as professional examination requirements for professional accountants of each member country before they are permitted to engage in statutory auditing.

The eighth directive paved the way for even wider-ranging changes in the Directive on the Mutual Recognition of Professional Qualifications, endorsed by the EC Council of Ministers in December 1988 and effective in January 1991. It allows holders of higher education diplomas or professional qualifications to work anywhere in the EC. Under this directive, accountants no longer have to train and qualify again in another EC country to practice there. Even though the directive requires safeguards, additional training periods or aptitude tests to diminish significant differences in teaching or training from one country to another, its implementation is a major step toward a single accounting market within the EC.

Federation des Experts Comptables Europeens (FEE). FEE is the umbrella body for the accountancy profession in Europe. This body promotes enhancement and harmonization of accounting practice in Europe; it concentrates on

* Technical matters.

* Education, training and ethical considerations.

* The profile of the profession.

To achieve its objectives, FEE has proposed to the European Commission its own directive to supplement the EC mutual recognition directive. The key element is a written or oral test for candidates desiring recognition in another member state. The examination replaces the three-year period requirement in the mutual recognition directive. FEE also has called for international recognition of the respective standards issued by the International Federation of Accountants (IFAC) and the International Accounting Standards Committee (IASC).

International Congress of Accountants (ICA). The ICA is the most prestigious of all international accounting meetings. First held in St. Louis in 1904, congresses have been held every five years (except during the world wars). The 14th Congress will be held in Washington, D.C., in October of this year. (For more on the World Congress, see the article on page 41.)

Until 1972, the ICAs were concerned only with harmonization. However, prompted by a sense of urgency and cooperation, the International Coordination Committee for the Accountancy Profession (ICCAP) was formed. Among its objectives the ICCAP was to initiate, coordinate and guide work toward the reciprocal recognition of qualifications to practice accounting internationally. The ICCAP was replaced in 1976 by IFAC.

IFAC. This organization began operating fully in 1977 when 63 professional bodies from 49 countries signed an agreement for its establishment. Current IFAC membership consists of more than 100 accounting bodies from 79 countries. The major objective is development and enhancement of a coordinated worldwide accounting profession with harmonized standards.

To harmonize qualifications among its member bodies, IFAC's education committee has issued guidelines for designing education requirements for accounting candidates. The results of a recent IFAC survey indicate a number of members are following IFAC guidelines. For example, out of 42 responding accounting bodies, 29 have already adopted and 8 are considering the education guidelines as a basis for formulating their own standards.

Efforts by specific countries. In the United States, the National Association of State Boards of Accountancy (NASBA) and the American Institute of CPAs are negotiating reciprocity with Canada, primarily in response to the Free Trade Agreement (FTA), which encourages mutual recognition of licensing and certification requirements between the two countries. Representatives of the NASBA committee on reciprocity and an AICPA state legislation committee task force meet regularly with the Canadian Institute of Chartered Accountants (CICA) free trade monitoring group to discuss reciprocal certification. Reciprocity between the United States and Canada does not seem far off.

The outlook for agreement between the United States and other countries is not as promising. Exhibit 1, page 53, summarizes the states' requirements for foreign accountants to practice public accounting. None of the state boards has any explicit reciprocity agreement with foreign countries, although some allow foreign accountants to practice temporarily under certain conditions and some states also grant a CPA certificate, provided the applicants' educational qualifications and examination requirements are compatible with their own.

Canada's pursuit of reciprocity is much more advanced than the United States's. There, the public accounting profession is organized on both a national and provincial level. Each of the provincial CA institutes has its own individual membership requirements. Membership in the CICA (the national board) derives automatically from membership in one of the provincial institutes. Those institutes, with the CICA, created the International Qualifications Appraisal Board, which studies foreign jurisdictions and makes recommendations about which foreign jurisdiction members can be exempted from taking the Canadian uniform final examination.

In the United Kingdom, the Institute of Chartered Accountants in England and Wales (ICAEW) has made significant progress in reciprocity. The ICAEW has reciprocal membership agreements with the CA institutes in Australia, Canada, Ireland, Scotland and New Zealand (conditional reciprocity: candidates from Canada and New Zealand must pass examinations on local law and taxation) in addition to some EC countries. Since all U.S. state boards consider U.K. qualifications inadequate for applicants wishing to sit for the Uniform CPA Examination, the British Department of Trade and Industry also does not recognize U.S. CPAs for purposes of carrying out statutory audits as well as insolvency practice in the United Kingdom.

A number of other countries have taken unilateral initiatives both within and outside their regions; exhibit 2, page 54, summarizes these efforts. It shows South American countries, as a region, are attempting to increase cross-border mobility of professional accountants. Although their efforts do not match EC initiatives, they should not be ignored. The exhibit reveals very little has been done in terms of unilateral or reciprocal efforts to increase the mobility of professional accountants in countries in Asia, Africa, the Middle East or the West Indies.

WHERE DO WE GO FROME HERE?

Since international reciprocity can no longer be ignored due to the rapidly changing global business environment, it would be appropriate to aim for immediate conditional reciprocity between various countries. Conditional reciprocity can be achieved by encouraging greater cooperation among licensing authorities, educational institutions and governments. National professional licensing bodies can take a leading role by initiating negotiations to develop a mutual understanding and recognition of each others' professional licensing prerequisites. Educational institutions and individual governments can cooperate with their respective licensing authorities by harmonizing accounting curriculums as well as by enacting legislation to regulate the public accounting profession in light of recommendations made by various licensing authorities.

Any long-term strategy to achieve reciprocity also would require the cooperation of regional accounting organizations such as the Confederation of Asian and Pacific Accountants, Asoociacion Interamericana de Contabilidad, ASEAN Federation of Accountants and the Association of Accountancy Bodies in West Africa. In addition to working to harmonize accounting and auditing standards within their regions, these organizations also should follow the EC's example and work toward "one market, one community, one region."

International bodies such as IFAC and the Organization for Economic Cooperation and Development also can contribute to the efforts of regional groups by providing financial and technical help in surveying differences in their respective regions and finding possible solutions or models to imitate. International organizations also can call on member bodies from developed countries to undertake a program of accounting aid for developing nations--a program that includes adequate technical training and assistance in strengthening their professional societies and license-granting bodies.

For the short-term, the United States, Canada and other countries where the profession is organized at the state or provincial level should attempt to reduce differences within their own boundaries. Greater intracountry uniformity would certainly make it easier for foreign accountants to obtain reciprocity.

Much remains to be done in international accounting reciprocity before it truly can be said "accounting internationalization" has occurred. It is important to prevent the debate from descending to the level of "If I can't play in your backyard, you can't play in mine." Rather, it should concentrate on reconciling national differences in licensing prerequisites and promoting cross-border mobility for internationally active professional accountants. Appropriate national, regional and international bodies, as well as governments, must devise a coherent strategy if reciprocity in international accounting practice is to become a reality.

PARVEEN P. GUPTA, PhD, is assistant professor of accounting at Lehigh University, Bethlehem, Pennsylvania. He is a member of the American Accounting Association.

The author wishes to thank James E. Thomashower of the National Association of State Boards of Accountancy, Virgil Webb of the AICPA, John Hegarty of the Federation des Experts Comptables Europeens, Gary Meek of Oklahoma State University and participants at the 1990 Canisius College Accounting Conference for many helpful comments on earlier versions of this article.