Texas adopts rules on CPA designation; AICPA to seek broad resolution.

In the midst of a growing controversy over the proper use of the CPA designation, one state has come to a resolution. The Texas State Board of Public Accountancy (TSBPA) has adopted licensing requirements it says will clarify regulations for the state's 58,260 CPAs and practice units and protect the interests of those who use CPAs' services. At the same time, recognizing its "responsibility to two constituencies, the public and the more than 400,000 CPAs practicing in the United States," the AICPA has established a special committee on regulation and structure of the profession to seek a solution to the thorny issue of regulating who call "hold out" is a CPA and under what circumstances, according to J. Curt Mingle, senior executive partner of Clifton, Gunderson & Co., Peoria, Illinois, and a member of the Institute's board of directors. Mingle is chair of the new committee, which is scheduled to meet July 25 in Washington, D.C. "The board of directors recognizes the seriousness of the problem and intends to provide leadership through this committee," he said. The committee is made up of 12 members from firms of all sizes and various other constituencies that are concerned with the issue, such as state boards of accountancy and state CPA society boards of directors. "If we can get this diverse group of people to agree on a solution--which I think should be a uniform law as opposed to state laws, which vary throughout the country--others including the state boards, state societies, the National Association of State Boards of Accountancy and the Institute) will probably buy into it as well. As chair, I am going to push for the committee to develop proposals as fast as possible. It won't be easy, but I think that ill a year to a year and a half, we should have a resolution to bring to the board of directors."

The Texas solution

The Texas state board has amended its accounting regulations in response to the growing number of CPAs who practice as employees of various types of business entities, rather than in CPA firms.

In revising the Texas rules of professional conduct, the TSBPA divided the practice of public accountancy into two categories--client practice and industry or government practice (sections 501,2, definitions, and 501.3, applicability.) Section 501.4 (practice of public accountancy) states that any licensee in good standing may use the CPA designation, regardless of whether he or she practices public accounting or is employed in industry or government accounting.

The most heavily debated of the rules, section 501.40) (licensing/registration requirements), describes when the CPA designation can be used and clarifies which firms are qualified to register with the Texas board as public accounting firms. It reserves attestation, including audits, reviews and compilation services, for CPAs in registered firms. It requires CPAs who practice public accounting in nonregistered entities and who use the CPA designation to add a disclamer next to the entity's name that would appear on business cards, stationery and in radio ads and other print or electronic material. Law firms and banks that offer some public accounting services are exempt from entity registration requirements. (See the exhibit on page 28 for a summary of the regulations' requirements.)

According to William Treacy, executive director of the state board, by adopting section 501.4, Texas is now in compliance with the U.S. Supreme Court ruling in Ibanez v. Florida Board of Public Accountancy. In that decision, the court said that under principles of commercial free speech, a CPA can use the CPA designation as long as he or she is licensed. "We believe it is fair to allow CPAs who don't work in traditional accounting firms to use their duly-earned designations as long as the public is not misled that the employer is a CPA firm," Treacy said.

The revision of the Texas rules of professional conduct also has relevance to recent developments in a pending Florida case, IDS Financial Services, Inc. v. Stuart. In that case, IDS (later renamed American Express Tax and Business Services Inc. has asserted that Florida regulations requiring CPAs to practice in CPA-owned firms when they hold out as CPAs while performing public accounting services violate the CPAs' free speech rights.

The AICPA has submitted briefs in support of the Florida state board of accountancy in both the Ibanez and IDS cases (see "AICDA Backs Florida Board in Lawsuit Filed by IDS," The CPA Letter, May95, page 1).

State boards are studying the Texas rules

The changes in Texas' accountancy regulations may have consequences for CPAs in other states. "A number of the Texas board's laws and administrative rules are quite similar to those in Ohio," said Tim Haas, executive director of the Ohio State Board of Accountancy. "We are planning to look very closely at what problems Texas may encounter during implementation of its new rules. If we decide to change any of our rules, we'll try to learn from their experience." If the Ohio accountancy board decides that similar changes are needed here, he continued, "it may be possible to have new rules in place before the end of the year. However, we may decide that Ohio's rules are sufficient now. In any event, we have started examining the possibilities now." The board expected to review all of the issues during its June 20 meeting, be added, and may have preliminary recommendations to consider during its July 31 meeting.

According to Mary E. Medley, executive director of the Colorado Society of CPAs, "The Colorado State Board of Accountancy is aware of the Texas change, and I expect its rules committee to study the issue. This is one more example of the challenge all state boards face when one changes. With different statutes, different rules and 54 different jurisdictions governing CPAs, no change is simple nor is its impact clear-cut. How something like this will play out in Colorado is anyone s guess.

Medley noted that Colorado law permits only "active" certificate holders (those who have met all the state's requirements for being in public practice-primarily continuing professional education) to use the CPA designation, regardless of whether they work in public accounting, industry or another area. The state has 10,600 certificate holders, of whom approximately 7,410 are active.

CPAs' reactions are mixed

In addition to accounting organizations, CPAs and the diverse entities that employ them have been watching developments in Texas and often are not sure how they will be affected.

"It's an acceptable compromise, given recent court decisions," said sole practitioner J. David joiner, CPA, of Dallas. "I don't want to prohibit any CPA from using the CPA designation in appropriate circumstances, such as with prospective employers, but I have a problem when people use their CPA credentials to help sell products or services to the general public and they don't have to follow the same rules the rest of us have to follow or when the CPA designation really has nothing to do with what they are selling," Joiner said. "I really believe there needs to be some differentiation between CPAs engaged in public accounting and those not engaged in public accounting, because the public is confused. I've had clients who have been approached by CPAs who are full-time employees of insurance or financial services companies, and they thought they were dealing with someone who would give them an unbiased, independent evaluation of their financial needs, which was not the case' "

Monica Dahlhausen, CPA, works in Texas as an accounting research analyst with United Services Automobile Association (USAA), an insurance and financial services group of companies that employs more than 200 CPAs. She said the new rules may affect only a few of USAA's CPA employees, "because the majority are clearly in the industry category." Nevertheless, she finds the rules "ambiguous" and mentioned two issues that concern the company.

"Some of the CPAs employed in one of our insurance companies may be considered to be in the practice of public accountancy when, for example, they have contact with a policyholder and may give some financial advice on benefit structure," she said. "We are uncertain of how to consider our employees in those cases, but if we consider them to be in the client practice of public accountancy, we'll have to use the disclaimer. We believe the disclaimer could reflect incorrectly on the employee, rather than the employer, and we'd prefer not to use it." The company will probably request some guidance from the state board on that issue, she said.

USAA testified before the board about another issue: CPAs who might be considered in violation of the rules because of volunteer work they do. "A number of our employees volunteer in an income tax assistance program sponsored by the Texas Society of CPAs, in which they help prepare tax returns for people who can't afford to hire a CPA. If you interpret the new rules strictly, an unregistered CPA might be in violation. We suggested that the definition of 'client' should specifically refer to a compensated relationship, but the revised rules don't seem to clarify this." Worries about the ramifications to CPAs of such volunteer activities might make them stop volunteering, she said. "We want to be in compliance with the board's rules, but we don't have all the answers vet."

The AICPA will seek a national solution

Speaking as the head of the new special committee on regulation and structure of the profession, Mingle said Texas' rule is not good for CPAs. "The idea that a CPA has to hand someone a business card with `not qualified' on it will be confusing to the general public." However, he added, "American Express Tax and Business Services is in a number of states so far, challenging the existing state law in two of them, and will be in other states sooner or later. The profession will have to recognize that and get a uniform national resolution on who can hold themselves out as a CPA."

There are 54 jurisdictions with different rules and, depending on the courts' decisions, he said, "We could end up with great confusion because so many CPAs practice in more than one state and internationally. Texas' action is a notice that we have to resolve this issue at the national level."

In a letter to the Texas board's Treacy written before the new rules were enacted, then AICPA president Philip B. Chenok stated the Institute's opposition to the proposal that allowed some CPAs to use the CPA designation--with a disclaimer--even when working for a nonlicensed entity.

"We have concluded that requiring CPAs to control the firms in which they practice public accounting is integral to assuring compliance with the highest ethical and professional standards," he said. Not doing so will "confuse and mislead the public and is therefore not in the public interest."

Chenok also noted the Institute's concern that use of the proposed disclaimer would result in some AICPA members being in violation of its council resolution under Rule 505 of the AICPA Code of Professional Conduct, which requires that all members who practice public accountancy while holding out to the public as CPAs practice only in firms owned by a two-thirds CPA majority.

Richard I. Miller, AICPA general counsel, said that he was disappointed with Texas' final decision. "These rules represent an abdication of regulatory responsibility by the Texas state board," he said. "It seems that the board's answer to the problem of upholding the law is to change the law. This leaves it to consumers to figure out whether they are dealing with someone who maintains the integrity and objectivity of the profession."

Texas' new rubs at a glance

According to the new rules:

* Whenever a commercial entity employs CPAs to perform public accounting services, a disclosure of the CPA des by the CPA employee or employer must be accompanied by a disclaimer concerning the employer, to be placed next to the business entity's name, which reads: "Not qualified to register with the Texas State Board of Public Accountancy to practice public accountancy in Texas."

* Only CPAs and CPA firms that are wholly owned by CPAs can perform audits, reviews and compilations.

* CPAs providing any service other than the "client practice of public accounting" can freely identify themselves as CPAs to the public, regardless of their place of employment.