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Territorial conflicts in the licensing of accountants.

Territorial Conflicts in the Licensing of Accountants

The restriction of licensure to a single classification of licensee prevents unlicensed persons from engaging in any aspect of the licensed profession. Licensed individuals rationalize this restriction under the semblance of "protection of the public."

Robert E. Ellyson, a Florida CPA speaking at AICPA's Annual Legislative Conference in New Orleans in 1981, said that the CPAs "must resist attempts by any groups seeking to be licensed to perform similar functions as CPAs but without being required to demonstrate similar qualifications." The key in this quotation is "to perform similar functions as CPAs."

The joint AICPA/NASBA Model Accountancy Bill adopted in 1984 extended the audit function to include professional services that do not strictly constitute an audit, thus prohibiting any individual not licensed as a CPA (or a public accountant) from rendering a compilation or review report "in standard form language."

The AICPA/NASBA model prohibits the unlicensed accountant from issuing a report using any form of language "conventionally used by licensees respecting a review or compilation statement." This phrase is clearly targeted to prevent unlicensed accountants from using so-called "standard" accounting language in their reports or transmittals.

Thus, AICPA and NASBA define the scope of practice for unlicensed accountants so rigidly as to eliminate all professional competition to the CPAs. This is not in the public interest nor in the interest of the small business entities who rely on the services of unlicensed accounting practitioners.

It is the position of the National Society of Public Accountants that the only accounting function that actually requires the highest degree of competency, expertise and regulation is the certification based on an audit, that is, the attest function. The CPAs argue that only a CPA licensee whose competency and expertise have been demonstrated by passing the CPA examination, should prepare any type of financial statement report, whether an audit report, a review report or a compilation report.

Further, the CPAs' doctrine holds that only a licensee of the board may refer to generally accepted accounting principles (GAAP) in a transmittal letter or report to a client. According to the CPAs' argument, only an individual who has passed the CPA examination knows what generally accepted accounting principles are. Maintaining that a student who has majored in accountancy and has received a baccalaureate degree does not know what GAAP is constitutes an indictment of a state's higher educational system.

Stated simply, unlicensed accountants are now prohibited under the accountancy laws of most states from making reference to GAAP in a review or compilation transmittal to their clients under the theory that only an individual who has passed the CPA examination knows what GAAP is.

Yet, reports on compilation and review accounting services convey no assurances regarding the financial statements themselves. Even the performance of a review (which is one cut above a compilation) does not involve any testing of financial data nor any confirmation of account balances, receivables or inventories nor any verification of the information provided by management. In fact, there is no difference between an unlicensed accountant's competence to perform compilation services and the same accountant's competence to perform review services.

At the NSPA Convention in New York in 1964, the National Council of Delegates adopted a policy on state legislation. One of the basic principles of the 1964 policy was the statement to regulate on a continuing basis persons offering various accounting services for the public.

The 1964 NSPA policy statement provided in part as follows:

"Where it is in the interest of

the public and all members

of the accounting profession,

legislation shall be adopted

to regulate on a continuing

basis those persons who, in

addition to certified public

accountants and grandfathered

public accountants, offer or

perform accounting services

for the public. Accountancy

legislation should regulate and

control the function or

services offered or performed by

such persons for the public

and grant a suitable

descriptive title clearly reflecting that

accounting services are being


Note that the 1964 NSPA policy statement advocated regulation of the accounting function to be performed by the additional classification of accountant as well as a suitable descriptive title. Accordingly, NSPA doctrine calls for the statutory registration of a classification of "registered accountants" with legislatively mandated qualifications to perform all accounting services that do not require expression of a formal professional opinion, e.g., the opinion audit. NSPA would reserve the audit function, that is, the certification of financial statements and the issuance of opinion audits on both publicly-held and privately-held companies, to CPA and licensed public accountants.

Thus, the issue of an additional classification of accounting licensee has been a part of NSPA doctrine for over 25 years. This is what distinguishes NSPA's position from the AICPA position. The CPAs would limit licensing to a single classification of accountant. The NSPA position would enlarge the single classification to a dual classification.

Exclusive licensing laws and the limitation of licensing to a single classification of accountant are not to protect the public. That ancient idea is subject to challenge. Protection of the public may have been an acceptable argument when there were relatively few licensed professions. However, additional categories of new professionals have developed in recent years as a result of expanded educational opportunities, new inventions, technologies and specializations. Strict scope of practice licensing laws and territorial conflicts seek to restrict the new professionals from serving in areas where they are qualified by education, training and experience to provide services. Moreover, many restrictive licensing laws are based on economics and competition and not on the public welfare.

The health related fields are excellent examples where newly-licensed professionals have experienced a tremendous growth. These new professionals include nurse practitioners, nurse anesthetists, nurse cardiologists, dental hygienists, denturists, nurse midwives and physician assistants (PAs) among others. These so-called "health extenders" are capable of providing greater services over larger geographical areas at lower cost to the consumer. In many places, however, physicians and dentists continue to oppose the expansion of the newly-lincensed medical practitioner. This opposition illustrates the territorial conflict between the primary care physician and the secondary medical licensees who are on the physician's turf.

The adoption of SSARS I with its emphasis on compilation and review of financial statements carried with it a de-emphasis on the audit function. Rarely does a small business entity require a certified audit statement. Accordingly, there is intense competition between the CPA and the unlicensed accountant over the preparation of unaudited statements, e.g., compilation or review statements. There is a turf battle, and the CPA state societies have already demonstrated that they intend to capture every facet of the accounting profession by restricting the unlicensed accountant's scope of practice.

Small businesses are raising serious questions regarding their freedom of choice as consumers of accounting services. They are showing resistance to the demands of their bankers and creditors for "CPA only" prepared financial statements. CPA-prepared financial statements increase the cost of doing business without significant corresponding benefits.

NSPA believes the public interest and the interest of the millions of small business entities in the U.S. can best be served by a legislative policy that promotes the registration of a classification of independent practicing accountant who demonstrates the skill and competency associated with the compilation and review of financial statements of small business entities.

The first prerequisite to the registration of an additional classification of accountant is the establishment of competence. The state legislators have concerns about the ability of any registered accountant to provide professional and competent services. Additionally, the public wants legislative assurance that the accounting practitioners employed are competent and have the abilities to provide the services they are licensed to perform. Qualifications, then, are a primary prerequisite to the establishment of an additional classification of accounting licensee, and rightly so. The legislators are vitally concerned with the establishment of ability and the testing of competence and qualifications for the registered accountant. When qualified licensees perform their services competently and satisfactorily under a legislative qualification test, the legislators have then fulfilled their function of protecting the public.

The scope of practice controversy is more simplified in the accounting profession than in most other professions. The NSPA National Legislative Policy (upon which NSPA's Model Accountancy Law is based) recognizes that the only accounting function that actually requires the highest degree of competency and expertise is the certification (attest) function exercised in the certified audit. Accordingly, NSPA's Model Accountancy Law reserves the audit certification function to the CPAs and licensed PAs.

The National Society of Public Accountants is not aware of an overpowering need for restrictive scope of practice laws. The consumers of accounting services, that is, the small business entities that the unlicensed accountants serve, are generally satisfied with the cost and quality of those services.

The problem is not with the consumer, it's with the users of the accounting products prepared for the consumer. The users of financial statements -- creditors and the financial industry -- to whom the small business entity may submit financial data prepared by the unlicensed accountant are naturally governed by their self-interest. Financial statement users demand the most expansive and comprehensive data available because their objective is to minimize the risk when they extend credit to their customers.

Financial statement users are sophisticated in their knowledge of accounting and credit extension. They can easily recognize inadequate and incompetent accounting work, whether performed by a licensee or an unlicensed accountant. Accordingly, scope of practice restrictions are not for the protection of financial users, who establish their own criteria for acceptance or rejection of financial data regardless of the qualification of the accountant who prepared or verified the data. To maintain that scope of practice restrictions are for the protection of the public misses the mark as to what segment of the public requires such protection.

The National Society of Public Accountants will continue to oppose restrictive laws that curtail the public practice of accounting. Laws and regulations that restrict the scope of practice eliminate competition and cause prices to rise for the direct consumers of the accounting services and for the customers of those businesses. Such restrictions are the antithesis of consumer protection and cannot be justified.

A few of NSPA's affiliated state organizations feel that so long as their members may use the title "accountant" and perform a compilation statement with board "safe harbor" report language, there is no need for concern. This is a false sense of security. Unlicensed accountants, except in a very few places, have no property rights in either their title or their defined scope of practice. At any time the CPAs may introduce and lobby for legislation to rescind the privileges that unlicensed accountants enjoy. In a few states where only CPAs are licensed, the unlicensed accountants may not be unduly restricted regarding the availability of services they may perform. This situation of nonregulation, while subject to legislative and regulatory attack from time to time, results in an uneasy truce where the unlicensed accountant is permitted by sufferance to carry on his/her practice.

NSPA believes that its Model Accountancy Law which recommends the removal of scope of practice restrictions by the registration of an additional class of accounting licensee (the "registered accountant") will result in true harmony and uniformity within all segments of the profession.

William H. Sager is legal counsel for the National Society of Public Accountants. Prior to that he held positions as director of practice, U.S. Treasury Department, and deputy director, Executive Office for U.S. Trustees, Department of Justice. He also has served as a technical assistant in the Office of Chief Counsel, Internal Revenue Service, and chief counsel for revenue sharing, U.S. Treasury Department. A graduate of the University of Virginia, he holds BA, masters in economics and accounting and law degrees. He is a member of the Virginia State Bar and admitted to practice before the U.S. Supreme Court. The following is adapted from a paper delivered to the Florida Association of Independent Accountants at their 42nd Annual Convention, June 29-July 1, 1990.
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Author:Sager, William H.
Publication:The National Public Accountant
Date:Oct 1, 1990
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