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Safe harbor transmittal language - protection for unlicensed accountants.

"Safe harbor" transmittal language is language that aims to protect the unlicensed accountant against violation of the statute or regulation that reserves the financial statement reporting function to licensees (CPAs or PAs) of the Board.

State laws (or regulations) are framed to prohibit the unlicensed accountant from rendering a report on the performance of a compilation or review of a financial statement. This prohibition follows from court decisions holding that the states have the authority to regulate speech incidental to the services the accountant performs for the client. Under those judicial decisions the states, if they so wish, can prohibit an unlicensed individual from providing a compilation or review report in so-called standard form language, or in language conventionally used by licensees respecting a compilation or review statement. In the 26 states that continue to prohibit the use of the "A" word, unlicensed individuals may not sign a report or transmittal as an accountant.

While the states may clearly regulate the language in a report, it is highly questionable whether the states can prohibit the performance of a compilation or review by the unlicensed accountant. The prohibition on the performance of an accounting function may very well constitute an illegal restraint of trade or an infringement on the right of the individual to pursue a lawful occupation or profession. Accordingly, the states control the functions of the unlicensed individual by defining the term "report" and by regulation of the language, that is, the speech that may be used to describe the professional services performed.

However, the majority of the states are aware and recognize that complete and absolute prohibition on the speech of an unlicensed accountant in a report or transmittal, after the permissible accounting function has been performed, may not pass judicial tests on the freedom of commercial speech. For this reason, among others, the states have adopted so-called "safe harbor" language by law or by regulation. As stated earlier, such language aims to protect the unlicensed accountant against violation of the statute or regulation that reserves the reporting function to CPAs and PAs.

The use of safe-harbor transmittal language becomes particularly germane in those instances where the state boards exercise administrative penalty jurisdiction over non-licensees as well as licensees. Some state boards possess authority to fine unlicensed accountants as much as $5,000 for infractions of the board's rules, although a $1,000 maximum fine is the norm among boards that possess such authority.

It must be noted that a safe-harbor compilation transmittal does not constitute a report. Sophisticated users of financial statements may detect the omission of the key phrases contained in the SSARS language. Such phrases as "in accordance with standards established by the American Institute of Certified Public Accountants" may be noted as a significant omission from permissible safe-harbor language. Similarly, in almost all of the states (there are a half-dozen exceptions that readily come to mind) accountants who are not licensed may not say in a transmittal that they performed their accounting services using "generally accepted accounting principles" (GAAP).

According to AICPA legislative doctrine non-CPA (unlicensed) accountants are forbidden to refer to GAAP, presumably under the theory that only an individual who has passed the CPA examination knows what GAAP is. This is so regardless of the amount of formal collegiate education the non-CPA accountant has achieved.

Safe-harbor transmittal language is limited to compilation services. No state to our knowledge has permissive safe-harbor transmittal language especially designed for a review. The SSARS review report language is permissible for unlicensed accountants in the four permissive jurisdictions (Arizona, Kansas, North Carolina and Wyoming) joined by statutory permission in Mississippi and an Attorney's General opinion in Maryland.

In the case of compilation of financial statements, the safe-harbor language is, at the very least, half-a-loaf. But, a half-a-loaf is better than no loaf at all and where permissible safe-harbor language exists, it is better than no transmittal language at all. As we pointed out earlier, the absence of safe-harbor transmittal language exposes the unlicensed accountant to the state's penalty jurisdiction. It must be recalled that safe-harbor transmittal language is not report language. It is an exception to the statutory (or regulatory) definition of the term "report" that protects the unlicensed accountant from the penalty provisions of the accountancy laws. Moreover, the sophisticated users of financial statements fully recognize the differences.

In 1990, the National Society of Public Accountants published a brochure on "Safe-Harbor Transmittal Language for the Preparation of Financial Statements and Reports." That brochure listed 17 jurisdictions that have permissible safe-harbor language. The brochure is now being updated through 1992. NSPA members who wish a copy of the brochure (previously updated in 1991) may call or write NSPA's Legal Counsel.

By statute or by regulation several states permit safe-harbor language that very closely tracks the SSARS compilation report language except for the omission of the GAAP phrase. Louisiana by regulation, Texas by court order stipulation, Wisconsin by Attorney's General opinion, and Virginia and West Virginia by statute, are examples of the broad, permissible SSARS type language that appear in the NSPA brochure previously described.

If safe-harbor language is half-a-loaf designed to protect the unlicensed accountant from exposure to the board's penalty jurisdiction, and available only in about a third of the states, then what is a satisfactory resolution that involves the maximum satisfactions to all parties concerned including licensees and consumers of the accountant's services, especially the small business entities?

As we see it, the optimum resolution is the creation of a specially licensed class of accountants, subject to statutory testing qualifications, that gives that classification of accountant the statutory right to perform compilations and reviews and requires them to render reports thereon "in accordance with generally accepted accounting principles (GAAP)." Since the licensee must perform the services pursuant to GAAP there is no difficulty about saying so in the accompanying report. Hence, the newly licensed accountant has no need of "safe-harbor transmittal language. He/she, as a licensee of the board, may use the SAARS report in its entirety.

Licensing of an additional classification of accountant especially qualified to perform compilation and review engagements, not only satisfies the legislature that the public is protected, but also establishes an additional qualified class of accounting licensee to serve the public. Such licensing is NSPA legislative doctrine and is recommended by the National Society's Model Accountancy Law (MAL). Additionally, state regulation of the licensee assures integrity of the profession and protection of the public.

There is no reason for NSPA affiliated state organizations to settle for half-a-loaf. A full loaf is within reach if the affiliated state organization looks beyond the horizon.
COPYRIGHT 1992 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Washington Comment
Author:Sager, William H.
Publication:The National Public Accountant
Date:Dec 1, 1992
Previous Article:IRS finalizes payroll taxes.
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