Licensure and regulation of the profession: a time for change.

In the August 1988 Journal of Accountancy, I suggested that "we need to reshape the profession's entire certification and licensing process." At the time, I was a member of the American Institute of CPAs special committee on governance and structure, which was exploring a wide range of issues concerning the governance of the Institute and profession in a fast-changing professional and business world. That 1988 article, "Our Profession in the Year 2000: A Blueprint of the Future," was my contribution to the debate on those issues, both within and outside the special committee.

The special committee issued a final report in 1990. One of its recommendations called for "a national qualifications service to establish and administer qualifications for individuals that the licensing jurisdictions could voluntarily substitute for their own licensing and relicensing requirements." That recommendation grew out of a study of then-current licensing systems in 54 separate jurisdictions, which revealed a wide disparity in licensing requirements. Such differences, the committee concluded, "cause redundant and inefficient recordkeeping and reporting systems for assuring compliance...and create reciprocity problems between jurisdictions."

To encourage greater uniformity, the committee explored two alternatives to the current CPA licensing system. The first, federal licensing, would involve a single, nationwide license granted either by a federal agency empowered to do so by federal legislation or by the AICPA, similarly empowered. Unfortunately, such enabling legislation would have led, in the committee's view, to undesirable federal regulation. Instead, the committee recommended an AICPA-administered national qualifications service which, as it gained recognition over time, might effectively serve as the basis for state boards of accountancy to grant licenses to those meeting its standards.

For whatever reason, the Institute never established such a national qualifications service. Moreover, in the five years since the committee's report, the various licensing and relicensing requirements among the 54 licensing jurisdictions have grown even more diverse. Consequently, this article urges serious reconsideration of a national qualifications service. In addition, it offers suggestions for reshaping the existing certification and licensing process to adapt successfully to the profession's changing environment as we prepare to enter the 21st century.

The time is ripe for sensible, real-world change. Much has happened in the past five years. In addition to the growing diversity in licensing requirements, practitioners now' confront more intense competition, the globalization of business and the professions, and enormous technological change. Moreover, our country has embarked on an information revolution that will exert wide-ranging effects on how we live, work and conduct business during the rest of this century and beyond. In this environment, we can no longer prosper with outdated, redundant regulatory processes that mirror a former reality, while creating unnecessary administrative burdens, waste and the stifling of innovation. All of these negative consequences are contrary to the public interest that our profession has singularly defended.

We are not the only group that is painfully rethinking the utility of how we are regulated. In a somewhat different context, Securities and Exchange Commission chairman Arthur Levitt recently noted that limited resources and advanced communications technology in the global marketplace were two "compelling reasons to seek a better alignment of state and federal responsibilities" for securities regulation. In his words, "There is no defense for duplication; there is no defense for waste; there is no defense for needless burdens on legitimate businesses." Similarly, former SEC commissioner Carter Beese, discussing the same subject, noted that "51 sets of state regulation fly in the face of the realities of today's national, indeed global, markets." He went on to state that "the structure that got us here today is not the structure that is going to enable us to compete over the next 10 years."

While the regulation of practicing accountants admittedly differs from the regulation of securities issuers and offerings, they have much in common. As a matter of fact, one of CPAs' principal roles is to serve as auditors of publicly owned companies subject to SEC regulation. It is in that role--more than any other--that CPAs are most closely associated with upholding the public interest.

EXISTING DIFFERENCES IN THE LICENSURE AND REGULATION OF CPAs

Before turning to specific proposals to modify the existing certification and licensing process, it is useful to summarize the nature and extent of existing differences in the licensure and regulation of the profession by the 54 local licensing jurisdictions. The extreme variation in how states regulate CPAs is significant indeed. The following summary highlights the more important differences on the critical issues of education, experience, examination, continuing professional education, use of tide, and the definition of public accounting.

Education. Requirements differ significantly among the states. For instance, while over 30 jurisdictions have passed 150-hour legislation, in some of those states the requirement is merely an additional option candidates can choose in addition to lesser requirements of a baccalaureate or two-year college degree combined with additional experience. Moreover, at least six states still have no mandatory requirements for a college degree in order to become a CPA.

Experience. Currently, more than half the states grant a CPA certificate without requiring any practical work experience. The remaining states require experience for certification that varies between one and five years--with the exception of New York, which will grant a certificate to someone without a college education who has 15 years of experience. Required experience for a license to practice, however, is more common. In fact, only four states will grant a license with no experience. However, while 34 states require 2 years of experience, 9 require only 1 year, and 6 have requirements ranging from 3 to 6 years.

The types of experience that qualify in meeting the requirement also vary widely. Some states require highly specific auditing experience; others permit nonpublic accounting experience. In those states with highly specific experience requirements, individuals can encounter difficulty since not all firms can provide the required experience because of the limited nature of their practice.

Examination. While all jurisdictions employ the Uniform CPA Examination, the uniformity of the examination process ends there. The states differ in areas such as conditioning requirements, minimum grades for failed sections, and the time period within which candidates must pass remaining (unpassed) sections. In addition, 35 states require a special examination or course in professional ethics or the state's accountancy law and rules.

Continuing professional education. Again, while 52 jurisdictions demand some form of CPE, specific requirements vary greatly. As a matter of fact, there are 11 different types of basic CPE requirements, ranging from 20 hours a year to 120 hours every three years with a minimum of 24 hours each year.

Some states also mandate "specific subject" requirements or limitations as part of their CPE requirements. For instance, 11 states require a minimum number of accounting and audit hours, 2 states require a minimum number of hours in taxation, and 1 state requires government accounting and auditing CPE for those who audit government entities. Four states ban or limit "behavioral" or "soft" CPE courses.

Finally, states use 16 different CPE reporting dates. Excluding the 3 states that require reporting at the end of the month of one's birth, if someone was licensed in all jurisdictions, he or she would need to keep track of 17 different CPE reporting dates.

Use of title. All jurisdictions restrict the use of the CPA "title" to individuals who are properly registered as CPAs. Most states also restrict the performance of certain services (normally attest work) to CPAs. Yet three states, known as "permissive" or "title" states, allow nonlicensees (nonCPAs) to render accounting, including attest, services.

Definition of public accounting. States also vary in how they define the practice of public accounting. In most states, the practice is broadly defined to include a wide array of services including accounting, auditing, management consulting, financial planning and taxation. Nine jurisdictions, however, define public accounting in a much narrower sense, restricting it primarily to attest services.

Bottom line, The current system is seriously flawed and in need of major repair and realignment with today's realities. Although most CPAs have learned to live with the flaws and have found an acceptable way through the existing morass of diverse requirements, the situation will surely worsen as, with advanced telecommunications systems, more and more CPAs are in effect working cross-border-if not physically travelling from state to state--almost daily. All one has to do is ask the growing number of CPAs who have found serious difficulties in moving to another state to know- that we cannot live much longer with the current situation.

NEW FOCUS ON THE REGULATION AND STRUCTURE OF THE PROFESSION

Fortunately, last year, the AICPA created a new special committee chaired by J. Curt Mingle, with a mandate to focus specifically on the regulation and structure of the profession in the United States. I have attended almost every meeting since the committee began work in July 1995. Moreover, I believe this new initiative has the opportunity not only to move the profession to a national certification process but also to revisit the process of regulating the practice of public accounting--so that it can focus more sharply on those specific services in which the public interest is most apparent and let the marketplace regulate services in which CPAs compete with a wide range of nonregulated professionals.

One of the first activities of the special committee on regulation and structure of the profession was to develop criteria for evaluating regulatory alternatives. The specific criteria they' adopted included the need to

* Respect or protect the public interest.

* Require or mandate uniformity,.

* Use private instead of government institutions whenever possible.

* Ensure rights to practice in all jurisdictions.

* Enhance both the credibility and the value of the CPA certificate.

* Provide a credible enforcement process.

* Be administratively efficient.

* Anticipate and accommodate the profession's future.

* Be responsive to members' needs.

A "PERFECT WORLD" REGULATORY PROPOSAL

Armed with these criteria, the special committee quickly developed a so-called perfect world regulatory proposal that would separate individual CPA accreditation from firm registration/licensure, leaving as much as possible to the AICPA. Such a model would foster complete uniformity, national mobility and minimal, if any, government regulation. On the other hand, to adequately protect the public interest, the perfect world solution would still require independent oversight from a group similar to the existing SEC practice section Public Oversight Board or possibly the National Association of State Boards of Accountancy.

In a nation accustomed to government regulation, assigning both individual certification and firm registration/licensure to the AICPA-- a private-sector professional association-could be viewed as a stretch. Yet the current public mood in the United States favors sensible deregulation, both philosophically and in order to cut the cost of government. Further, models of such private-sector selfregulation already exist outside the United States. For instance, in the United Kingdom--the very birthplace of the modern audit profession--accountants are not licensed at all. Rather, the Companies Act requires public companies to be audited by a member of one of four private-sector bodies--the Institutes of Chartered Accountants in England and Wales, Scotland and Ireland, and the Chartered Association of Certified Accountants. Moreover, it is these three Institutes and the Chartered Association that establish the accountants' education, examination and experience/training qualifications.

In addition, in our own country, accounting and auditing standard-setting, peer review and the establishment of ethical standards are all handled in the private sector by either the AICPA or the Financial Accounting Standards Board. Moreover, those standards are accepted and supported by a wide range of government bodies, including the SEC, which is primarily responsible for safeguarding investors' interests.

MOVING TO THE REAL WORLD

Despite these workable precedents, however, the special committee has preliminarily concluded that a proposal to shift responsibility for the entire certification and licensure process to the AICPA would be too dramatic and not sufficiently salable to colleagues and users within a reasonable time. Consequently, while the group believes it is important to retain the proposed separation between the certification of individual CPAs and the registration/licensure of practice entities, only the former responsibility would be assigned to the AICPA on a national basis. Shifting responsibility for individual CPA certification to the Institute is particularly important--as was clearly realized by the AICPA special committee on governance and structure--because the greatest, most unworkable diversity among states today exists with regard to individual licensing. Moreover, the national accreditation by the Institute is a natural extension of the existing AICPA responsibility for administering the Uniform CPA Examination.

ADVANTAGES OF NATIONAL ACCREDITATION OF INDIVIDUAL CPAs

Such an AICPA-sponsored national accreditation service would permit all individuals who earn the national certification--whether in public practice, industry, education or government-- to call themselves "CPAs" in any jurisdiction in the United States. Not only would this create total uniformity and complete mobility for individual CPAs, it would also resolve problems for those who are not in public practice. Why, for instance, should CPAs in industry not be permitted to use the title when they perform an important accounting or financial reporting function in their companies simply because they choose not to be licensed to practice public accounting? Similarly, why shouldn't the CPAs who teach accounting and auditing courses to the next generation of public practitioners also be able to use the title, although they similarly choose not to obtain a license to practice public accounting?

Obviously, a national accreditation service would be costly and require time and effort to sell to the 54 existing licensing jurisdictions. However, the Institute is already committed to establishing such a service to assure compliance with its 150-hour educational requirement for membership in the year 2000. Moreover, such a service--whose cost could be passed to new CPAs-- would surely cost far less than the combined costs incurred by current licensing jurisdictions to perform duplicate similar services. In addition, it is not unreasonable to think that state governments--all of which face new responsibilities with fewer funds-- would be pleased to cede one task to a responsible body such as the AICPA, on condition of adequate independent oversight (such as in the current administration of the Uniform CPA Examination). Especially so, since states would retain the right to license and regulate practice units performing those services in which there is a direct public interest.

CONTINUED STATE LICENSURE AND REGULATION OF PRACTICE ENTITIES

With this in mind, I would establish an independent oversight body (possibly NASBA itself) to oversee the national certification or accreditation process, and would continue to leave to the states--at least for the time being--the licensure of practice entities (including sole proprietorships) that perform certain "regulated services." I favor licensing entities instead of individuals because (1) it distinguishes more cleanly between AICPA and state responsibilities and (2) it reflects the reality that services requiring regulation--most notably, audits--are performed and controlled by firms, not individuals. For instance, audit opinions are signed in a firm's name and the system of quality control over audit services relates to the practice entity as a whole. That is, of course, why the existing peer review process also focuses on the firm, not the individual.

Moreover, the licensure and regulation of practice entities, as opposed to individuals, would effectively solve the growing problem, particularly for small practitioners, of potentially unfair competition from CPAs performing "regulated services" while working for financial conglomerates, a situation that is contrary to the public interest. For instance, it is only because states have licensed individuals in the past to perform such services as audits and reviews that CPAs employed by such firms as American Express Tax and Business Services can argue that they have an equal right to provide such services. If the license was granted instead to the practice entity--which is really responsible and accountable to the public for such third-party services--there would be no debate, assuming that states continued to license only those firms that were at least two-thirds owned by appropriately accredited CPAs.

The key issue, of course, is deciding what services would be subject to state government regulation. I personally believe regulation should be limited to attest services because that is where the public interest--third-party users--lies. At the same time, I would define attest services broadly to include all engagements in which a CPA firm provides an opinion on an assertion made by one party for the benefit of another. On the other hand, I recognize that certain existing services that meet that definition currently are performed by nonregulated professionals whom it would be extremely difficult to suddenly bring under the existing regulatory system.

As an example, a number of years ago some of the larger CPA firms were regularly providing opinions on the financial forecasts of new and expanding health care institutions in tax-free bond offerings. Such "hospital feasibility studies," as they were known, were also performed by large consulting firms such as Booz Allen as well as some specialty health care consultants. While I would argue the rendering of such an opinion is an excellent example of an attest service that should be regulated, CPAs were not given a monopoly in the performance of such a service and, therefore, it was also performed by nonregulated professionals.

Two solutions exist to solve this dilemma within my proposed model. The first would be to regulate all attest services, as broadly defined, but somehow grandfather those firms that have performed them in the past on a nonregulated basis. The other would be to recognize the practical realities of today's political environment and limit the specific services requiring licensure/registration of a firm to audit, review and possibly compilation. While I am a purist at heart, I'm afraid the practical alternative is the most realistic in a real world marked by 54 separate licensing jurisdictions.

MOVING TOWARD FUNCTIONAL REGULATION OF CPA SERVICES

In this proposal, I strongly advocate a move toward functional (or service-based) regulation, focusing on areas where our profession has a monopoly (and related public responsibilities), while lifting the regulation of other services (for instance, personal financial planning and consultation) where we compete today against other professionals who are not similarly regulated. While this may seem drastic to some, the concept of functional regulation is nothing new to this country. As a matter of fact, it has been strongly advocated in recent years by a wide range of experts for the financial services industries. Does it make sense, for instance, to have one set of regulators for banks, another for insurance companies and a third for broker/dealers--when each competes today with the same products and services across old industry lines that are more and more blurred? Similarly, does it make any sense to regulate a CPA in the performance of a business valuation or appraisal for a client's internal needs, when others perform the same services without any regulation?

The truth is, the one protected area of practice for CPAs--the so-called attest function--is declining in importance in most CPA firms, and it will be virtually impossible to enlarge the future range of services reserved to CPAs by statute. As a result, our future well-being--both the profession's and Institute's--is in adopting a market-based model in which we broaden the AICPA's and profession's base economically rather than through regulation. Such a shift would completely jibe with the current emphasis on marketplace regulation in the United States as well as with the needs of the next generation of CPAs for a more level playing field, as they compete with others for an expanded scope of practice.

CHALLENGES AND OPPORTUNITIES OF A CHANGING MARKETPLACE

As noted earlier, this country is in the midst of a major information revolution. I believe the current explosion of information will place new and increasing demands on the data-gathering, analyzing and evaluation skills of every CPA. This new world will open real opportunities for new, value-added service offerings by the profession. If we meet this challenge thoughtfully and enthusiastically, there is no reason that today's CPA should not be recognized as the premier "independent information professional" of tomorrow. That was the key message of my August 1988 article in this journal. And I feel even more confident today that, if we migrate to the market-based model described above, the future vitality and viability of our profession will be assured.

I recognize, however, the risk in such an approach, realizing that some CPAs will view these proposals anxiously. Nevertheless, I believe most CPAs are intelligent, capable, hard-working professionals who inevitably figure out how to create value and wrest a good living from the marketplace. In the words of Bob Elliott, chairman of the AICPA special committee on assurance services, "Only the Institute will vanish if we fail to bring forth a bold new conception and effectively animate it."

The model suggested in this article is far from perfect or complete. Leaving to individual states the responsibility to license/register practice entities that perform, for example, attest services, does not completely solve our quest for uniformity and private-sector regulation. I believe, however, that the AICPA could step up its efforts to achieve uniformity by more actively promoting model regulations, such as its own requirement that two-thirds of the owners of a registered CPA firm should hold CPA certificates issued by the Institute. After all, the 54 licensing jurisdictions already look to the AICPA for performance (generally accepted auditing standards), quality control, peer review and ethical standards.

In addition, our profession would clearly have to build a credible enforcement process for individual CPAs accredited by the Institute in order to obtain state support for national certification. However, the Institute already has a highly regarded Code of Professional Conduct and meaningful CPE requirements that could become the basis for ongoing monitoring and disciplinary proceedings to weed out bad apples. Moreover, the AICPA ethics division already maintains a meaningful disciplinary program that, it is hoped, should be adequate to satisfy the states that a transfer of their individual licensing authority to an AICPA accreditation service is appropriate and in the public interest.

Obviously, other issues remain unanswered. One is funding, both for the Institute and for state boards of accountancy, which will clearly need to revise the form and amount of certification and licensing fees. Another involves a personal desire on my part--spelled out in more detail in the 1988 article--to move toward different levels of certification that recognize the different unique specialties under the broad umbrella we call the practice of public accounting. However, these matters can wait for another day. The key is to begin a dialogue with the Institute's membership that will enable individual CPAs to look more carefully and optimistically at our collective future, including a new model for licensure and regulation that will prepare and better position us for the years ahead.

PROVOKING PROPHECY 

My 1988 article closed with a note on "provoking prophecy" which clearly remains relevant today: "Much of this article will be controversial, even upsetting. My purpose forthrightly is to provoke all of us in the profession to think ahead and plan realistically for the future that's at our door. We need to build a vision of the profession that matches its reality--and to keep it in mind as we review how we are structured and governed during the next few years. Even Edmund Burke, now considered a great historical conservative, saw the point when he warned, 'You can never plan the future by the past.' Our collective future may hinge on that advice"

EXECUTIVE SUMMARY

* A 1990 REPORT FROM THE AICPA SPECIAL committee on governance and structure called for a national certification process that would close the wide gap in state licensing requirements and erase the reciprocity problems that exist between jurisdictions.

* SINCE THEN, STATE LICENSING requirements have grown even more diverse, making it imperative the profession act now to deal with redundant regulatory processes that create unnecessary administrative burdens, waste and the stifling of innovation.

* ALTHOUGH MOST CPAs HAVE FOUND an acceptable way through the existing morass of diverse requirements, the situation will worsen as, through advanced telecommunications systems, more and more CPAs effectively work cross-border on a daily basis.

* A RECOMMENDED NEW REGULATORY model would include an AICPA-sponsored national accreditation service that would permit all individuals who earned the national certification--whether in public practice, industry, education or government--to call themselves CPAs in any U.S..jurisdiction, and leave to the states the licensure of practice entities that perform certain regulated services where the profession has a monopoly and related public responsibilities (the attest function).

* SUCH FUNCTIONAL (OR SERVICE-BASED) regulation would effectively lift the current regulation of those services (such as personal financial planning and consultation) where CPAs compete today against other, nonregulated professionals and thus create a more level playing field for the next generation of CPAs.

* MOREOVER, THIS MARKET-BASED MODEL should enable CPAs to more readily utilize, in the public interest, their data-gathering, analyzing and evaluation skills to create new, value-added services being increasingly demanded by decision-makers in today's information age. This will lead, it is hoped, to the day when we are truly recognized as the premier "independent information professionals" of our society.

ROBERT MEDNICK, CPA, is managing partner--professional and regulatory matters of Andersen Worldwide. Vice-chair of the board of directors of the American Institute of CPAs, he is also on its strategic planning and committee operations committees and previously served on the auditing standards board, accountants legal liability' task force, mission committee, special committee on governance and structure, and the Financial Accounting Standards Advisory Council.