Practice privilege: California's implementation troubled.

California's longtime statute that allowed for incidental practice by foreign accountants and out-of-state CPAs was repealed Jan. 1, 2006.

It was replaced by a requirement that out-of-state CPAs obtain a practice privilege from the California Board of Accountancy for any service, other than preparation of individual tax returns and estate tax returns, when the individuals were clients at the time of death.

The first months of operation have revealed many problems for taxpayers and their out-of-state CPAs related to implementation and interpretation of practice privilege in California.

Good, in Concept

For years, CalCPA has supported the practice privilege concepts contained in the Uniform Accountancy Act, which would allow CPAs from outside California to provide accounting services to clients located in California by simply notifying the CBA that they were entering the state for that purpose.

The concept, when adopted by all states, would allow CPAs to provide services to out-of-state clients without obtaining a full license from every state in which they provide those services.

Such provisions would accommodate the need to expedite movement of partners to comply with SOX requirements for audit partner rotation as well as to respond to a Government Accountability Office study, which found that complying with different licensing requirements in different states makes it more difficult for smaller firms to compete with the very largest firms. The goals of practice privilege were ease of entry and consumer protection.

In Reality ...

So, when CalCPA participated in the practice privilege deliberations and supported legislation, we hoped that through the regulatory process, reasonable accommodations could be made to protect the public interest while facilitating cross-border accounting practices.

However, we now believe that implementation issues, misunderstandings and the impact of unintended consequences require immediate action to rectify what has become an untenable situation for California taxpayers, the entire CPA profession and its foreign counterparts. To this end, CalCPA is sponsoring legislation, AB 1868 (Bermudez).

Under a CBA interpretation, if services are provided by a firm (and most engagements are with a firm), the CBA is requiring the firm to register with the CBA. Firm registration requires that at least one partner be fully licensed in California. Further, if the firm is a corporation or an LLP, the firm must also register with the Secretary of State. The process is costly and time consuming.

While the application process is being completed, a firm may not provide any services to a California client. This is especially burdensome for businesses that have a March 15 filing deadline. Unlike many other state laws, California is requiring a practice permit, whether or not the CPA actually enters California. This is unacceptable as a matter of public policy, especially since there was no evidence that consumer protection was lacking prior to the creation of the practice privilege.

CBA is Creating Over-regulation

CPAs who provide tax services to California taxpayers already are regulated by the IRS, Franchise Tax Board and the accounting licensing board in their home state. Insertion of the CBA in this scheme becomes over-regulation.

The CBA was scheduled to meet Feb. 23 to consider implementation issues related to practice privilege and develop consensus on the corrective actions. At that meeting, CalCPA members were represented by Government Relations Committee vice-chairs Michael Ueltzen and Hal Schultz, as well as myself. For an update on the meeting's outcome, go to www.calcpa.org/members/GR.

Nationwide Furor 

While California's law is not unique, other states' laws are not as restrictive. The national furor created by California's law is causing many states and many state CPA societies to examine their own laws. We anticipate that other state laws will be reviewed and modified as a result of California's experience.

Professional Conservators and Guardians Licensing Proposed

AB 1363 (Jones) has been amended to require that individuals who, for compensation, act as conservators or guardians for two or more persons not related to the individual, obtain a license from the state. The bill establishes minimum requirements for licensing including examination and 15 hours of pre-licensing training.

The bill was amended in response to a series of articles last summer in the Los Angeles Times highlighting fraud, theft and other mistreatment committed by professional fiduciaries in California. The bill would establish a licensing board that would have the authority to discipline conservators and deny licenses.

The bill also requires probate courts to review conservatorships, including the financial records related to the conservatorship, within six months after appointment of the conservator and annually thereafter. Records would be subject to audit by the court and conservators could no longer use the assets of the individual to oppose petitions or other actions on behalf of the conservatee or ward unless the court determines that the opposition was made in the best interests of the conservatee.

CPAs who provide fiduciary services should be aware that these requirements are coming.

The initial license fees are expected to be $750 per year. The bill's author's office says that while AB 1363 was crafted to avoid requiring licensing of trustees, that is the next logical step. Historically, CalCPA has opposed requirements for trustees who already are licensed, such as banks, attorneys and CPAs, to obtain an additional license to provide this service.

Bruce C. Allen is CalCPA's director of government relations.