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The A word: where do we go with it?

Enrolled Agents proudly use the designations "EA" and "Enrolled Agent," but many of us also use additional titles or designations to convey to the public what we do. And while we have come up with a multiplicity of trade styles, there's a fairly general consensus that none really fills the bill--except, of course, the term "accountant" which heretofore has been denied us.

But now, thanks to the California Association of Independent Accountants (CAIA), Bonnie Moore, the National Society of Public Accountants (NSPA) and others, we have a California Supreme Court ruling saying that yes, indeed, we can use the titles "accountant," "accounting" and "accounting services," provided we modify the "A" word with a qualified or disclaimer that eliminates potential likelihood that the public will confuse us with CPAs.

The purpose of this article is to provide insights to help you decide how to use the "A" word if it is your decision to do so. For those of our |CSEA~ members who prepare financial statements, this article will also explore the issue of transmittal letters, or more properly, reports on financial statements.

A word of caution: CSEA at this time is neither able to prescribe nor to recommend any particular or specific usage with respect to the "A" word and report letters. Many of the issues arising out of the Court decision are still unsettled from a legal point of view. Additionally, CAIA is petitioning the U.S. Supreme Court to review the case. And there is still the issue of how the State Board of Accountancy (SBOA) will respond to various modifiers, their placement on a page, type size, etc.

The Court decision did not change the role of the SBOA regarding enforcement of the Act and disciplinary proceedings. The SBOA has at its disposal (1) cease and desist orders which demand that a certain practice cease under threat of referring the issue to District Attorneys for possible criminal action, and (2) citations and/or fines of up to $2,500 under recently enacted regulations which CSEA opposed because they lack the legally required clarity.

While the final say belongs to the Courts rather than to the SBOA, the Board's authority is substantial and prudent practitioners will not ignore it. Accordingly, any decisions you make regarding the matters discussed in this article must be your own decisions for which neither CSEA, its officials nor staff can bear any liability.

Suggested Language

Now back to Bonnie Moore. The California Supreme Court did not prescribe specific language for the modifier or disclaimer, but it did suggest two as meeting the Court's standard: "unlicensed accountant," and "the services being offered do not require a state license." The current cease and desist letter being used by the SBOA contains a new paragraph citing the Supreme Court decision and quoting excerpts from the decision as follows:

"On July 2, 1992, the California Supreme Court upheld the State Board of Accountancy's authority to allow only California Certified Public Accountants to use professional titles such as 'accountant' or 'accounting' without other modifications, in connection with their businesses. The court ruled unlicensed persons may use such terms provided they are accompanied by a qualification or disclaimer 'stating that the advertiser is not licensed by the state or that the services being offered do not require a state license'."

Let's assume you decide to use the "A" word and choose as your trade style: "John (or Mary) Jones, Enrolled Agent and Tax Accountant." If you place an asterisk at the word accountant and another at the modifier, a succinct modifier such as "* No state license is required" may suffice. Without an asterisk the modifier probably should be more expansive, such as "The accounting services provided by us do not require a state license."

Section 5052 of the Accountancy Act defines the powers and scope of the unlicensed accountant. A valid modifier might be: "Accounting services are provided under the authority of Section 5052 of the California Accountancy Act for which a state license is not required."

Another modifier would place an asterisk at "Enrolled Agent" in our hypothetical firm name and two asterisks at "Tax Accountant" and the modifier could read: "* Licensed by the U.S. Treasury Department. ** No state license required."

Whatever modifier you select, it must appear wherever the word "Accountant" appears: financial statements, reports, letterhead, business cards, directory listing in your building, advertisements, signs, etc. You need not use the same modifier in all situations. Because there is less space on a business card to carry a wordy message, you may want to use a different, more succinct modifier on the card.

Report Letter Wording

Let's take a look now at Reports on Financial Statements. Section 5052 of the Act specifically authorizes nonlicensed accountants to prepare reports on financial statements. A Financial Statement could be a potential malpractice time bomb if, for example, your client defaults on a loan and the lender alleges he relied on your financial statement. The report letter is your first line of defense in such a situation.

A report letter has two objectives which we shall discuss in terms of the standard AICPA compilation letter prescribed for CPAs. The AICPA letter follows:

"I have compiled the accompanying balance sheet of XYZ Company as of September 30, 19xx, and the related statements of income and retained earnings and cash flow for the year then ended, in accordance with standards established by the American Institute of Certified Public Accountants.

"A compilation is limited to presenting in the form of financial statements information that is the representation of management. I have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them."

The two objectives of the AICPA report letter are to shield the CPA from liability and to inform and place the reader on notice as to the nature, scope and methodology of the financial statement so the reader, presumably, will be able to make an informed judgment.

The report letter accomplishes its objectives by:

* defining the scope of the engagement, thereby insulating the CPA from being held to a different or higher performance, by saying "I have compiled ... " and also by saying "A compilation is limited to ... "

* identifying the guidelines the CPA followed, thereby establishing a defense against being held to a different or higher standard, by saying "in accordance with the standards established by the AICPA."

* further limiting the CPA's liability in saying, "I have not audited or reviewed the accompanying financial statement, and, accordingly, do not express an opinion or any other form of assurance on it."

We, as unlicensed accountants, have exactly the same needs in a report letter as does a CPA. Does it follow then that we can satisfy those needs by using the standard AICPA compilation letter? Well, let's look at some of the issues the AICPA letter raises when used by nonlicensees. There are certain words and phrases in the standard compilation letter which when used by nonlicensees give the SBOA heartburn. One such word is "compiled."

The position of the SBOA is that "compiled" is not only proprietary to the AICPA but also implies a level of skill tantamount to a CPA. However, in a number of states the Courts and the Attorney Generals have ruled that the preparation of a compiled, and in some instances a reviewed, financial statement is not the practice of public accountancy for which a license is required. Additionally, since Generally Accepted Accounting Principles (GAAP), as established by the AICPA and which include compilations, are freely taught in schools and used in private industry throughout the nation, a rational argument can be made that the whole system of GAAP is in the public domain.

A nonlicensee's use of the phrase "in accordance with the standards established by the American Institute of Certified Public Accountants" will likely result in a cease and desist order alleging that nonlicensees may not invoke any term or phrase that includes the words "certified public accountant" in any form because such would mislead the public into thinking it was dealing with a CPA. How about the phrase "in accord with generally accepted accounting principles"? This is softer. How about the phrase "GAAP"? This is a bit less soft. Incidentally, the issue is not whether unlicensed accountants can keep books in accordance with GAAP or any other system. We can. The problem, if there is one, is in whether we can say we do.

If a nonlicensed accountant states: "I have not audited the financial statement and accordingly do not express an opinion or any other form of assurance" the position of the SBOA is that the statement is misleading because there is an implication that the writer has a legal right to conduct a certified audit but merely elected not to do so.

Additional Accounting Standards

In addition to the AICPA standards there are others available for the preparation of financial statements. One is Generally Accepted Tax Accounting Principles (GATAP), a thoroughly codified set of standards by the National Society of Public Accountants. The accounting standards of GATAP are based on the accounting standards of the Internal Revenue Code. NSPA publishes a detailed manual that leads one through the process. If you cite as your standard "Generally Accepted Tax Accounting Principles," you are making a softer statement than if you cite the title more fully as "Generally Accepted Tax Accounting Principles as established by the National Society of Public Accountants" because the latter citation includes the term "Public Accountants," a title prohibited to nonlicensees.

Both GAAP and GATAP have very specific procedures and checklists a practitioner is expected to follow in preparing financial statements under those standards. If you invoke either standard in your report letter, you are bound to comply with the requirements.

Another standard is the Internal Revenue Code itself without the intervention of a third party such as GATAP. The Code is replete with tax accounting requirements and standards. When you prepare an income tax return for a business entity you prepare it in conformity with the Internal Revenue Code. Since most of us also prepare financial statements on the same tax basis, why not simply so state in your report letter? The AICPA also recognizes and authorizes tax basis financial statements. The system is not a part of GAAP but of another class which they call Other Comprehensive Basis of Accounting.

Sample Report Letter

We offer below a sample tax basis report letter which you might use, modify or reject at your option. Note that the letter contains within its body an "A" word modifier. Note also that the letter avoids the hot button words that are known to trigger the Board--simply to illustrate what a report letter without their use looks like. Can we therefore assume the Board will not object to this letter? Who knows?

"The accompanying Balance Sheet for XYZ Co. as of September 30, 19xx, and the related Statements of Income, Retained Earnings and Cash Flows for the nine months then ended have been prepared by me in accordance with the tax accounting principles of the Internal Revenue Code and attendant Rules and Regulations thereto. No state license is required for this presentation.

"My engagement is limited to organizing in the form of a tax basis financial statement the accounting and financial data of management as reflected in its books and records. Accordingly, the accompanying Financial Statement is a representation of management. I can undertake no responsibility for its accuracy.

"In my capacity as an Enrolled Agent, licensed by the Treasury Department to practice before the Internal Revenue Service, I declare I am not aware of any material adjustments that need be made to the accompanying Financial Statement to bring it in conformity with the tax accounting principles of the Internal Revenue Code."

If you have suggestions for "A" word modifiers or for report letters, or have comments or criticisms of this article, please send them to the CSEA office. We very much want to hear from you. In the meantime, CAIA, as you know, is preparing to petition the United States Supreme Court to review the Bonnie Moore case. CSEA is providing some financial assistance and will commission its attorney to prepare an amicus curiae brief.

Theodore M. Bernardi earned his bachelor's degree at the University of California, Berkeley. He has been in public practice in Hayward, California, for 25 years. He is a member of the National Society of Public Accountants, the California Association of Independent Accountants, the National Association of Enrolled Agents and the California Society of Enrolled Agents (CSEA). As legislative chairman for the CSEA, he has appeared frequently before the California legislature and other bodies to represent the interests of the non-licensed accounting practitioner.

The offices of the California Society of Enrolled Agents are located at 3200 Ramos Circle, Sacramento, CA 95827; phone: 916-366-6646. The president of CSEA is Frederick L. Stine; editor of the newsletter is Bill Sprague.
COPYRIGHT 1993 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:accountants
Author:Bernardi, Theodore M.
Publication:The National Public Accountant
Date:Mar 1, 1993
Previous Article:Not quite: just in time inventories.
Next Article:Tax talk.

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