NAFTA opens new markets for CPAs.

The North American Free Trade Agreement (NAFTA) will generate billions of dollars in additional trade, investment and economic growth in Canada, Mexico and the United States over the next decade. Clients and employers will rely

heavily on CPAs' advice in structuring the thousands of business transactions that will make up these gains. They will expect CPAs to be knowledgeable about financial practices, legal requirements and business cultures in all three countries and to be capable of delivering services throughout the region. Fortunately, the agreement anticipates these demands on professional service providers by making it easier for them to serve the entire North American market.

HOW NAFTA WILL AFFECT CPAs

Whether or not companies benefit from the agreement, it is clear that few will be unaffected by it. Those anticipating new export opportunities will have to organize to enter the Mexican market. Others concerned about new import competition on their home turf will want to cut costs and improve operational efficiency. Global companies will look for opportunities to integrate Mexican and U.S. operations or to team up with Mexican partners to compete more effectively with Asian and European companies.

CPAs will be called on to help their clients and employers capitalize on these opportunities or adjust to new competition. Increased economic activity will expand demand for traditional accounting and auditing services, but a premium will be placed on business planning and strategic advice.

The demand for such services already has increased as companies in all three countries consider mergers, acquisitions and joint ventures with partners across their borders. CPAs are being asked for assistance in identifying potential partners, valuing assets and financing joint undertakings. On the other side of the coin, companies anticipating new competitive pressures are turning to their accountants and business advisers for help in evaluating current operations, devising cost-saving strategies and redesigning operations.

NAFTA does not affect the tax systems of the three countries directly, but companies new to these markets will be looking to their accountants for tax planning services in areas such as business income, expatriate taxation and repatriation strategies, to name just a few. Inadequate or faulty tax planning in these areas could wipe out the benefits of lower tariffs.

Many businesses also will need advice on dealing with customs laws and import duties. The complex rules of origin, which determine whether products are eligible for duty-free treatment, must be interpreted and applied. Under the agreement, these rules vary significantly from industry to industry.

The challenge for many CPAs will be to provide such services in a multinational, rather than a domestic, market. To succeed in such a setting, CPAs must become knowledgeable about laws, professional practices and business cultures in all three countries. (For a discussion of one practitioner's experiences in this area, see "Positioning a Firm for International Opportunities," by Robert L. Israeloff, JofA, Feb.93, page 46.) They also must be able to serve clients throughout the region, wherever their operations are located. This may mean crossing borders, either by establishing new offices or teaming up with other CPA firms.

ELIMINATING BARRIERS FOR CPAs

Business barriers. Before NAFTA, CPAs, like other business service providers and enterprises, were restricted in their ability to enter new markets, repatriate earnings, move personnel across borders and protect proprietary information and technology (such as methodologies, training materials, publications and software) from appropriation by competitors or clients.

Many of these obstacles were eliminated by the Canada-United States Free Trade Agreement. In many cases, they also were eliminated in Mexico under a recent economic liberalization program. NAFTA made these improvements permanent. NAFTA

* Permits Canadian and U.S. investors to make direct investments in Mexican accounting firms and to acquire accounting and consulting firms valued at up to $25 million without prior approval by the Mexican National Foreign Investment Commission.

* Allows professionals to sell their services across borders without establishing a local presence. Of course, carrying out statutory functions, such as audits, or operating with local professional designation still requires appropriate certification in a local jurisdiction.

* Ends restrictions on cross-border payments and financial transfers such as profits, royalties, management fees, engagement fees and payments for technical assistance.

* Allows professionals from one country to cross freely into the others for business purposes. Border formalities will be dealt with expeditiously, documentary requirements will be simplified and any associated fees will be kept to a minimum. The United States immediately will add 5,500 to the quota of Mexican professionals permitted to enter under current law and will eliminate the quota entirely in 10 years.

* Contains extensive intellectual property rules that allow CPAs to protect proprietary technology and information.

Professional barriers. The agreement says licensing requirements must be objective and no more burdensome than necessary to ensure quality service. Citizenship and residency requirements for certifiCation are to be eliminated within two years.

All three countries agree to consider recommendations by their professional societies on reciprocity. As a result of the Canada-United States Free Trade Agreement, the Canadian Institute of Chartered Accountants, the American Institute of CPAs and the National Association of State Boards of Accountancy already have agreed on "principles of reciprocity" between the licensing jurisdictions in the two countries (see the sidebar titled "Making Reciprocity Work," below). NAFTA provides for similar negotiations with Mexico, although it recognizes that achieving reciprocity throughout North America is a long-term endeavor given national differences in education, experience and examination requirements.

NAFTA will make it easier for accountants to extend their services across the region to meet client demands. By liberalizing market access for the profession, the pact helps sole practitioners and small firms that may not have the resources to establish offices in the other countries. NAFTA makes it easier to provide more services directly across borders or to work with local firms in the other countries.

OPPORTUNITIES FOR CREATIVE CPAs

The agreement offers new practice opportunities for accountants in all three countries and will move the profession one more step down the path of globalization. But these opportunities won't materialize without effort. They require creativity in adopting the profession's traditional services to new circumstances. CPAs should be keenly aware of the inevitable cultural and business differences that must be overcome to achieve success in the new era of free trade in North America.

HOW NAFTA WORKS

NAFTA, when fully implemented, will create the largest free trade zone in the world--geographically, demographically and economically--stretching more than 6,000 miles from Canada's Arctic frontier to Mexico's Central American border and encompassing some 370 million people with a combined economic output in excess of $6.5 trillion. The agreement touches virtually every aspect of commerce by

* Eliminating all tariffs and customs duties on goods traded among the three nations as long as the merchandise originates in North America. For most products, tariffs are removed immediately or in equal annual installments over 5 or 10 years. For industries very sensitive to import competition, such as glassware and shoes, the phaseout may be as long as 15 years.

* Removing barriers to investment across borders and assuring equal regulatory treatment of foreign and domestic investors. It also guarantees that earnings, sales proceeds, loan repayments and other current payments can be transferred freely across borders. These rules cover all business sectors, except those explicitly exempted by the governments, such as energy production in Mexico, cultural industries in Canada and maritime transportation in the United States.

* Restricting government regulation of service industries and ensuring services provided across borders are regulated in a nondiscriminatory manner regardless of national origin.

* Directing the three governments to protect intellectual property rights.

* Easing the way for professional, technical and managerial personnel to cross borders in connection with marketing activities and business transactions.

* Reaffirming each country's right to set business and product standards, while laying out rules to ensure standards are not disguised trade barriers.

* Opening each country's government procurement to suppliers from the other countries, covering both government agencies and state-run enterprises.

EXECUTIVE SUMMARY

* THE NORTH AMERICAN FREE Trade Agreement (NAFTA) will generate billions of dollars in trade, investment and economic growth in the United States, Canada and Mexico in the next decade.

* AS MARKETS ADJUST TO NAFTA, CPAs will be called on to help clients and employers capitalize on new opportunities or react to increased competition. CPAs are being asked for assistance in mergers, acquisitions and new ventures and other companies are seeking advice from CPAs on cost-saving strategies in anticipation of new competitive pressures.

* NAFTA PERMANENTLY eliminated many cross-border barriers for CPAs. The agreement permits Canadian and U.S. investors to make direct investments in Mexican accounting firms, allows professionals to sell their services across borders without establishing a local presence, ends restrictions on cross-border payments and financial transfers, allows professionals from one country to cross freely into the others, contains detailed rules to protect intellectual property and provides that licensing requirements be objective.

* BECAUSE THE PACT MAKES it easier for CPAs to provide more services directly across borders or to work with local firms in other countries, NAFTA will help sole practitioners and small firms that do not have the resources to establish offices in other countries.

INDUSTRY WINNERS AND LOSERS

Leaders of most U.S. industries believe NAFTA will be good for business, according to comments business advisory committees submitted to the U.S. government before it was ratified. Among them:

* The automotive industry expects increased sales as a result of improved access to Mexico's relatively protected market and argues that integrating U.S. and Mexican operations will enhance its ability to compete against imports.

* The computer and electronics industries anticipate major gains in sales to Mexico. New investments there in labor-intensive operations will help them compete effectively with Asian producers.

* The forest products industry supports the agreement's elimination of Mexican tariffs, quotas and import licenses as well as its preservation of existing duty-free access for selected products.

* The pharmaceutical industry is especially pleased with Mexico's agreement to protect intellectual property.

* The financial services industry stands to gain as a result of Mexico's agreement to eliminate all market-access barriers to banks, insurance companies and securities firms over the next 10 years.

Many leaders of other industries also view the agreement positively. These industries include aerospace, capital goods, chemicals, heavy equipment and paper. Service providers, too, are optimistic about the pact because it opens up new opportunities for everything from value-added telecommunications services to trucking to traditional business services such as advertising and counseling.

Generally speaking, the U.S. industries that will encounter the most difficulties are labor-intensive, low-technology producers. Some examples include household glassware, men's and women's apparel, footwear and leather goods.

MAKING RECIPROCITY WORK

The American Institute of CPAs, the Canadian Institute of Chartered Accountants (CICA) and the National Association of State Boards of Accountancy (NASBA) approved the Principles of Reciprocity Agreement on September 16, 1991. The agreement fulfilled a requirement in the Canada-United States Free Trade Agreement that the countries' professional societies consider reciprocity. The Principles of Reciprocity Agreement addresses the three principal elements considered in granting the Canadian chartered accountant (CA) and CPA designations: education, experience and examination.

REQUIREMENTS FOR RECOGNITION

The AICPA, NASBA and CICA agreed U.S. and Canadian educational credentials should satisfy the educational requirements for each other's designation. Applicants must meet the experience requirements of the jurisdiction granting a reciprocal designation. Canadian CAs who successfully complete the Canadian Uniform Final Examination and CPAs who pass the U.S. Uniform CPA Examination are not required to complete the other jurisdiction's examination to obtain reciprocity. All applicants seeking reciprocity, however, are required to pass a qualifying examination to ensure they have satisfactory knowledge of relevant local and national legislation, standards and practices.

CPAs may take the CA Reciprocity Examination administered by the CICA in lieu of the Canadian Uniform Final Examination. Canadian CAs who successfully complete the Canadian Uniform Final Examination may take the Chartered Accountant Uniform Certified Public Accountant Qualification Examination (CAQEX) in lieu of the U.S. Uniform CPA Examination. Since CPA certificates are awarded by one of the 50 states, the District of Columbia, Guam, Puerto Rico or the U.S. Virgin Islands, CAs must apply for reciprocity and meet the requirements of the appropriate state board of accountancy. In Canada, U.S. CPAs must meet the appropriate provincial requirements.

CAQEX is offered twice a year in each of the 54 U.S. jurisdictions. In 1994, CAQEX will be given on Thursday, May 5, and Thursday, November 3, from 1:30 P.M. to 6:00 P.M.

HOW IS CAQEX STRUCTURED?

CAQEX is a 4 1/2-hour, all-objective examination offered only in English. It is not disclosed: Questions and answers are not published after the examination. However, the objective questions are similar to those on the Uniform CPA Examination.

CAQEX's purpose is to assess Canadian CAs' knowledge of U.S. generally accepted accounting principles, generally accepted auditing standards, taxes and business law, emphasizing areas where U.S. and Canadian practices differ. The six parts of CAQEX and the approximate examination weight given to each are as follows:

1. Professional responsibilities (5%).

2. Business law (15%).

3. Auditing (25%).

4. Taxation (20%).

5. Accounting and reporting--governmental and not-for-profit organizations (10%).

6. Financial accounting and reporting-business enterprises (25%).

EARLY RESULTS

On November 4, 1993, 61 Canadian CAs took the first CAQEX in four different jurisdictions, with over 60% passing. The passing percentage was approximately five times higher than the Uniform CPA Examination's average passing percentage (when taken in its entirety).

For additional information on CAQEX, write the American Institute of CPAs Examinations Division, Harborside Financial Center, 201 Plaza III, Jersey City, New Jersey 07311-3881.

JAMES D. BLUM, CPA, Ph.D., is director of the AICPA examinations division.

Mr. Blum is an employee of the American Institute of CPAs and his views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.

CHARLES P. HEETER, JR., is associate partner in the office of government affairs of Arthur Andersen & Co., SC, in Washington, D.C. He is chairman of the American Institute of CPAs task force on international trade agreements.