The new uniform CPA examination.

Significant changes are in the works for the Uniform CPA Examination. The first entails a conversion to a computer-based test. The second is an expansion of the range of subjects and skills tested, to bring them in line with today's practice needs.

Over the years, the profession has become increasingly dependent on computerized research techniques and the use of other computer tools in general. For example, effectively solving clients' problems requires CPAs to perform research online. This evolution has limited the effectiveness of a written exam to test important skills. The change to a computer-based exam allows candidates to access authoritative literature in case-based simulations and to use computer technology to develop solutions, such as narratives or spreadsheets. In addition to changing the exam's format, broadening its content will more closely reflect the wide range of business knowledge expected of practicing professionals.

Computer-based testing can include the use of online tax reference material, archived financial reports and audiovisual clips. Candidates can also use other tools, such as spreadsheets, accounting packages, financial calculators and graphical analysis packages. In addition to mimicking traditional multiple-choice formats (using check boxes or radio buttons) and simple open-ended responses (using text boxes), candidates will be able to use case-based simulations to solve different business problems.

Background

The AICPA surveyed thousands of CPAS to identify the entry-level knowledge (e.g., standards and regulations) and skills (e.g., communication, research, analysis and organization, understanding and judgment) critical to effective accounting practice. Armed with the results, the AICPA and National Association of State Boards of Accountancy formed a joint Computer Implementation Committee (CIC) to develop a computer-based exam.

In January 2001, the Board of Examiners released an exposure draft, Proposed Structure and Content Specifications for the Uniform CPA Examination (available at www.aicpa.org/members/div/examiner/exposure.htm), and the CIC issued Briefing Paper #2: Computerizing the Uniform CPA Examination--Issues, Strategies and Policies: An Update (www.aicpa.org/ members/div/exanfiner/brief2.htm), providing the details for the transition to a computer-based exam, with a target launch date of November 2003. The comment period for these documents ended on July 1, 2001. The CIC is reviewing and summarizing respondents' comments and will probably publish the key findings and any revisions resulting from the responses before 2002.

Procedures

The CIC chose Prometric, Inc. to administer the computer-based exam. Prometric currently handles computer-based testing for other licensing exams (e.g., the U.S. Medical Licensing Examination, the National Council of Architectural Registration Boards and the National Association of Securities Dealers Regulation).The company has a network of more than 300 high-security testing sites across all 54 jurisdictions and operates test centers convenient to 90% of the U.S. population (see Briefing Paper #2, Appendix B, for a list of the cities in which Prometric has test centers). The computerized testing process would begin (as it does under the current system) when an individual applies to a state board to take the exam. The current application filing requirements, fee collection and other requirements are unaffected by the change in test format. Once a state board determines an individual's eligibility to take the exam, it would notify Prometric.

After a candidate receives state board authorization, he would make an appointment to take the exam via Prometric's call center or Website. The test will have four sections (Auditing and Attestation, Financial Accounting and Reporting, Regulation, and Business Environment and Concepts), which candidates could take in any order. However, first-time candidates for the exam would have to take all four sections within 30 days. The four sections differ in completion time (see Exhibit 1). The computer-based test will take less time to 0finish than the paper-based one. Total testing time is expected to be about 12 to 14 hours.

Initially, the computerized exam will be offered in four three-month windows. Within each window, candidates could take the exam for two of the three months. The remaining month would be reserved for data analysis, distribution of new question pools and other maintenance tasks. For security reasons, candidates could take the exam only once during a three-month window. This means that they could take the entire exam up to four times a year, having up to 200 different days on which to do so.

Also for security purposes, exams would be different (even though they would be equivalent). Each candidate's exam would consist of items drawn from a large pool of test questions. During an exam, a candidate would view only one question at a time. An entire test would never reside on the candidate's computer. A server would deliver questions unencrypted. After the candidate responded to the question, it would be returned to the server. The computer configuration prevents the candidate from copying information to a disk or storing it on the testing computer, for future retrieval.

The grading system would be the same as the current one, even though the scale might be different. Candidates would not immediately receive a grade on completing the exam; distribution of grades would still be the responsibility of the state boards. Advisory grades and diagnostic information would probably be available within two weeks. Each board would decide the frequency with which it approves and releases grades.

The boards would continue to establish the requirements for the conditions for passing an exam. The CIC recommends that candidates would have to pass all four sections within a two-year period (after they have attained conditional status), rather than the current three-year period. However, with the opportunity to take the exam up to four times a year, a two-year period would still provide two more testing opportunities than currently available.

The CIC expects to finalize specific policies and procedures in late 2001, based on responses to the briefing paper, town-hall meetings and focus groups. The AICPA intends to post familiarization materials to its Website. A CD-ROM version will be available to state boards, state societies, schools and candidates. The CIC expects to have prototypes by the third quarter of 2002.

Structure and Content

The AICPA Board of Examiners proposes an exam with four separately scored sections:

* Regulation;

* Financial Accounting and Reporting;

* Auditing and Attestation; and

* Business Environment and Concepts.

Exhibit 2 compares the content and weight of the current and proposed exams. Exhibit 3 presents the content for the tax portion of the Regulation section of the computerized exam. Exhibit 4 presents the content of the new Business Environment and Concepts section.

In the new exam:

* Taxation, professional responsibilities and law are combined in a section titled Regulation. (Certainly, this can be viewed as favorable; tax issues have more in common with these topics than with managerial, governmental and not-for-profit topics).

* The Financial Accounting and Reporting section includes financial accounting and reporting for business enterprises, governmental entities and not-for-profit organizations.

* Managerial accounting is part of the section titled Business Environment and Concepts. Approximately 40% of this section includes new content not included in the current exam.

For the new exam, knowledge of content covered primarily in one section may also appear in another section, to test a candidate's ability to integrate knowledge. For example, tax issues, tested primarily in the Regulation section, may come up in the Financial Accounting and Reporting section. Another suitable place for testing integration of taxation with general business is in the new Business Environment and Concepts section, under the business structure topic. For example, candidates might be expected to determine the tax implications of a choice of business entity and make a recommendation.

Content outlines for the new exam currently lack detail. Therefore, it is difficult to determine the depth of knowledge expected of candidates. For example, estate and gift taxation appears in the outline, but it is unclear whether candidates would be expected to know technical topics (such as the generation-skipping transfer tax). Hopefully, the CIC will provide detailed outlines at a later date.

Allowing candidates to use research took and access authoritative literature is a welcome change that reflects the real practice environment. This might be an indication that the new exam focuses less on memorizing details and more on the skills needed to research and interpret the literature.

Transition

The Content Oversight Task Force recommended that the current four sections of the exam be considered equivalent to the four sections of the new exam for purposes of transitioning candidates who have attained conditional status by the 2003 launch date. It would be unreasonable to recommend a transition model that would require a candidate to take more than a total of four sections. However, because of the significant differences in the two examinations, a perfect transition is not possible.

One of the main issues is determining which section of the current exam is equivalent to the new Business Environment and Concepts section. Of the content areas to be tested in that section, business structure, which has the most weight, is currently tested in the Business Law and Professional Responsibilities section. Therefore, the task force concluded that this section and the Business Environment and Concepts section should be considered equivalent for transitioning purposes. Exhibit 5 presents equivalent sections.

Implications for Educators

Until examples of the new exam's simulated-case questions become available, faculty can prepare their students for the new exam by including more case assignments or writing simulated cases. All of the changes in curricula proposed in the past few years reinforce the idea of moving away from the memorization of rules and toward an emphasis on improving students' abilities to conduct research, interpret findings and make sound recommendations to a client. Thus, educators should focus on research, planning and communication.

Faculty should encourage students to take advantage of as many opportunities as possible to get accustomed to a computer-based testing environment. Faculty with access to computer-based testing (such as through WebCT or Blackboard) may want to increase their use of practice quizzes administered through these systems. Publishers also frequently provide study guides with online quizzes for students. Moving some topics to computer-based assignments has the added advantage of freeing up valuable class time that can be used for case discussions or other active learning assignments.

Lack of sufficient opportunities to cover the necessary tax concepts and development of research skills may be a problem at some universities. Many of the tax topics listed in the proposed content outline are taught only in advanced courses, which are elective in many schools; some schools have even dropped these courses completely. The AICPA's Model Tax Curriculum (available at www.aicpa.org/members/div/ career/edu/introc.htm) states, "[w]e again emphasize at least six semester hours of tax should be included in programs preparing students to enter the accounting profession." Schools that currently offer only one tax course and have concern about preparing their graduates for the CPA exam should reconsider the inclusion of tax courses in their curricula.

Exhibit 1: Possible Time Breakdown
by Section

Section                      Exam length

Auditing and Attestation     4-41/2 hours
Financial Accounting
   and Reporting             31/2-4 hours
Regulation                   21/2-3 hours
Business Environment
   and Concepts              2-21/2 hours
Exhibit 2: Examination Structure

Current examination

Topic                                    Weight

Accounting and Reporting
   Taxation                                60%
   Governmental and not-for-profit         30%
   Managerial (measurement)                10%

Law and Professional Responsibilities
   Professional responsibilities           15%
   Business structure                      20%
   All areas of law other than             65%
     business structure

Financial Accounting and Reporting        100%

Auditing                                  100%

Proposed examination

Topic                                           Weight

Regulation
   Taxation                                        60%
   Professional responsibilities                15-20%
   Law                                          20-25%

Business Environment and Concepts
   Business structure                              20%
   Measurement (managerial)                        10%
   All areas other than business structure         70%
     and measurement (not separately tested
     on current examination)

Financial Accounting and Reporting
   Business enterprises                            80%
   Governmental entities                           10%
   Not-for-profit organizations                    10%

Auditing and Attestation                          100%
Exhibit 3: Content Outline for Tax Portion of the Regulation Section
of Proposed Exam

I.     Federal tax accounting issues (8-12%)
       A. Sources of Federal tax law (hierarchy of authority)
       B. Accounting periods
       C. Accounting methods, including cash, accrual,
          percentage-of-completion, completed contract and installment
          sales
       D. Inventory methods, including uniform capitalization rules

II.    Federal taxation of properly transactions (8-12%)
       A. Types  of assets
       B. Basis of assets
       C. Depreciation and amortization
       D. Taxable and nontaxable sales and exchanges
       E. Income and expenses
       F. Capital gains and losses

III.   Federal taxation--individuals (12-18%)
       A. Gross income--inclusion and exclusions
       B. Reporting passthrough entities
       C. Adjustments and deductions to arrive at taxable income
       D. Filing status and exemptions
       E. Tax computations, credits and penalties
       F. Alternative minimum tax (AMT)
       G. Retirement plans
       H. Estate and gift taxation

IV.    Federal taxation --entities (22-28%)
       A. Similarities and distinctions in tax reporting among such
          entities as sole proprietorships, general and limited
          partnerships, corporations, S corporations, limited liability
          companies (LLCs) and limited liability partnerships (LLPs)
       B. Corporations
          1. Determination of taxable income and loss, and
             reconciliation of book income to taxable income
          2. Tax computations, credits and penalties, including AMT
          3. Net operating losses
          4. Consolidated returns
          5. Contributions and distributions
       C. S corporations
          1. Eligibility and election
          2. Determination of ordinary income, separately stated items
             and reconciliation of book income to taxable income
          3. Basis of shareholder's interest
          4. Contributions and distribution--liquidating and
             nonliquidating
          5. Built-in gains tax
       D. Partnerships
          1. Determination of ordinary income, separately stated items
             and reconciliation of book income to taxable income
          2. Basis of partner's interest and basis of assets
             contributed to partnerships
          3. Partnership and partner elections
          4. Partner dealing with own partnership
          5. Treatment of partnership liabilities
          6. Distribution of partnership assets
          7. Ownership changes and liquidation and termination of
             partnership
       E. Trusts
          1. Income and deductions
          2. Determination of beneficiary's share of taxable income
       F. Exempt organizations
Exhibit 4: Content Outline for New Business Environment and Concepts
Section of Proposed Exam

I.     Business structure (17-23%)
       A. Legal structure for business--sole proprietorships,
          partnerships, LLCs, LLPs, C and S corporations, joint
          ventures and unincorporated associations
       B. Formation, operations and termination of businesses
       C. Financial structure, capitalization, profit allocation and
          distributions
       D. Rights, duties, legal obligations and authority of owners and
          management (directors, officers, stockholders, partners and
          other owners)

II.    Economic concepts (8-12%)
       A. Business cycles and reasons for business fluctuations
       B. Inflation measures, such as the Consumer Price Index and
          interest rates
       C. Competitive factors in the marketplace
       D. Market influences on selling strategies, such as pricing
          and returns
       E. Global economy and foreign currencies and exchange

III.   Financial management (22-28%)
       A. Decisionmaking factors, such as financial indexes, taxes and
          opportunity costs, and models, such as economic value added,
          cashflow, net present value, discounted payback and internal
          rate of return
       B. Characteristics of loan rates (fixed vs. variable) and loan
          covenants
       C. Implications of electronic commerce and electronic data
          interchange, including electronic fund transfers,
          point-of-sale transactions and Internet-based transactions
       D. Optimal capital structure and strategies for short- and
          long-term financing options, including cost of capital
       E. Cash management, including management of accounts receivable,
          accounts payable and inventories

IV.    Information technology (IT)(17-23%)
       A. Role of business information systems
       B. Roles and responsibilities of IT department
       C. Technology fundamentals
          1. Hardware and software
          2. Networks
          3. Data structure, analysis and manipulation
       D. Operation of systems
          1. Transaction processing modes
          2. Application processing phases
       E. IT controls
          1. Control objectives
          2. Control activities and design
          3. Electronic commerce controls
          4. Physical access controls and security
       F. Disaster recovery and business continuity

V.     Planning and budgeting (10-15%)
       A. Planning techniques, including strategic and operational
          planning
       B. Forecasting and projection techniques
       C. Budgeting and budget variance analysis

VI.    Measurement (10-15%)
       A. Performance measures
          1. Organizational performance measures, including score
             cards
          2. Benchmarking, including quality-control principles, best
             practices and techniques
       B. Cost measurement
          1. Concepts (standard, joint product and by-product costing)
          2. Accumulating and assigning costs (job order, process and
             activity-based costing)
          3. Factors affecting production costs
Exhibit 5: Current Exam and Proposed Exam Equivalencies

If not passed on the current exam:
   Accounting and Reporting
   Business Law and Professional Responsibilities
   Financial Accounting and Reporting
   Auditing

Need to take on revised exam:
   Regulation
   Business Environment and Concepts
   Financial Accounting and Reporting
   Auditing and Attestation

Editor's note: Dr. Dennis-Escoffier is a member of the AICPA Pre-certification Education Executive Committee. For more information about this article, contact Dr. Dennis-Escoffier at [e-mail] or [phone].

Author: Shirley Dennis-Escoffier, Ph.D., CPA Associate Professor University of Miami Coral Gables, FL