What do the designations "CPA" and "Certified Public Accountant" mean? Who may use the designations, and under what circumstances? The Supreme Court's decision in Ibanez may change conventional wisdom concerning both of these questions.

There are two major users of the CPA designation. First, there are those who hold themselves out to the public at large as providing accounting and/or tax services. Accounting practitioners also perform varying amounts of management advisory services. Second, there are those who have fulfilled (passed) all the requirements to become a CPA; who might or might not hold a current license to practice as a CPA, but who do not currently hold themselves out to the public at large as providing these types of services. These CPAs not in public practice might be in industry, government, education, or the military; might be out of the work force temporarily or permanently (homemaker, unemployed, in school, or retired); or might be working in other fields entirely. Thus, an individual selling securities and/or insurance might hold a CPA certificate, as might a lawyer specializing in tax law, estate planning, or other areas in which possession of a CPA certificate could convey a marketing advantage.

The Ibanez Court Case

Silvia Safille Ibanez was a member of the Florida Bar who practiced as a lawyer. She was also a certified public accountant, holding a license from the Florida Board of Accountancy. Additionally, she was entitled to use the designation "certified financial planner" (CFP), a trademarked designation authorized by a private organization, the Certified Financial Planner Board of Standards. In her law office Yellow Pages advertising and on her law office stationery, she used the designations CPA and CFP. Although not explicitly mentioned in the opinion, it appears Ibanez did not maintain any Yellow Pages listing for accounting services, nor did she perform any accounting services, instead confining her efforts to the practice of law.

In the case, the Florida Board of Accountancy reprimanded Ibanez for engaging in false, deceptive, and misleading advertising. They charged her with 1) practicing public accounting in an unlicensed firm, 2) using a specialty designation (CFP) that had not been approved by the board, and 3) using the CPA designation, thereby implying that she abided by the provisions of the Florida Public Accountancy Act, which has a rule banning fraudulent, false, deceptive, or misleading advertising. "At the ensuing disciplinary hearing, Ibanez argued that she was practicing law, not 'public accounting,' and was therefore not subject to the board's regulatory jurisdiction." Moreover, Ibanez argued she really was a CPA and a CFP, so that her use of those designations constituted "nonmisleading, truthful, commercial speech for which she could not be sanctioned."

Before the proceedings in front of a hearing officer concluded, "the board dropped the charge that Ibanez was practicing public accounting in an unlicensed firm." When the hearing officer found in Ibanez's favor on all counts and recommended that all charges against her be dismissed, the board rejected the hearing officer's recommendation and declared Ibanez guilty of "false, deceptive, and misleading" advertising.

The Florida Board reached an interesting conclusion. It withdrew some charges against Ibanez and, when it did not like the outcome, declared her guilty anyway of other charges.

The Florida Board's position rested on the fact Ibanez said she was a CPA, so the board said she was "practicing public accounting." The board's reasoning was circular: 1) since she was a CPA, she called herself a CPA, 2) since she called herself a CPA, she must be practicing public accounting, 3) her law firm was not licensed to practice public accounting, and so 4) it tried to take away her license. Once it took away her license, of course, she would no longer be a CPA, and therefore no longer entitled to call herself a CPA. Thus, because she really was a CPA and truthfully called herself a CPA, she would lose her license, thereby ceasing to be a CPA.

Got That?

The Florida Board also claimed "that any designation using the term certified to refer to a certifying organization other than the board itself (or an organization approved by the board) inherently misleads the public into believing that state approval and recognition exists." Within accountancy, there are a number of professional designations known in the United States: the CMA (certified management accountant), CIA (certified internal auditor), CISA (certified information systems auditor), CBA (chartered bank auditor), CA (chartered accountant), CPCA (certified public consulting actuary), and, of course, the CPA designation. Some of these designations are bestowed by private organizations, and at least one (chartered accountant) is bestowed by a foreign organization. It appears the Florida Board's position was that all these designations are inherently misleading. Moreover, under the Florida Board's assertion, any designation using the term "certified" to refer to a certifying organization other than the board itself (or an organization approved by the board) inherently misleads the public. A truthful statement by an individual that he or she is licensed by one or more other states to practice as a CPA but is not licensed by Florida would be actionable by the Florida Board, even if the other state has more stringent standards to become a CPA than does Florida.

In Ibanez, the U.S. Supreme Court turned first to Ibanez's use of the CPA designation in her commercial communications. On that matter, the board's position is entirely insubstantial. To reiterate, Ibanez holds a currently active CPA license which the board has never sought to revoke. The board asserts that her truthful communication is nonetheless misleading because it "[tells] the public that she is subject to the provisions of the Board of Accountancy when she believes and acts as though she is not."

While there had been some dispute between Ibanez and the Florida Board of Accountancy as to whether or not she was subject to their regulation, at the time of the Supreme Court case, "Ibanez no longer contests the board's assertion of jurisdiction." The court also found that Ibanez's beliefs concerning whether she believed herself to be subject to the board's jurisdiction was not actionable by the board, only her actions as to whether or not she actually submitted to the board's jurisdiction.

To survive constitutional review, the board must build its case on specific evidence of noncompliance. Ibanez has neither been charged with, nor found guilty of, any professional activity or practice out of compliance with the governing statutory or regulatory standards. And as long as Ibanez holds an active CPA license from the board we cannot imagine how consumers can be misled by her truthful representation to that effect.

Regulation of Accountants

The term "certified public accountant" is typically regulated within each jurisdiction, whether state or otherwise, by statute and by a regulatory agency. This regulatory agency may be a stand-alone authority, or may be part of a larger government agency that also regulates other professions and trades such as doctors, nurses, cosmeticians, morticians, and barbers. The accounting regulatory boards typically consist of people who serve only part-time, with few full-time staff. When necessary, investigations may be handled by the same full-time staff, a contract investigator, or the regulatory board itself. Board members typically include practitioners and may or may not include nonpractitioner members to represent the public at large.

These regulatory boards usually regulate all levels of licensed accountants, since some jurisdictions have more categories of licensing than just certified public accountants. Some jurisdictions may also have public accountants, accounting practitioners, and other categories of licensure. While individuals without accounting training may offer to perform tax services (tax matters not being limited solely to certified public accountants), the rendering of opinions on the fairness of financial statements is typically a service limited to performance by certified public accountants and public accountants.

The essence of the need for regulation in any professional field, not just accounting is that most individuals who are not already trained in the particular field have no particular skill at identifying competent practitioners from among all those who might claim to possess the particular training and skills necessary for work in that field. Therefore, the government undertakes to certify whether or not an individual possesses at least a certain minimum level of skill in the field. Only those who meet the minimum standards may call themselves by the designation, but they need not exceed the standards, so the designation itself serves merely as a line of demarcation between those who meet minimum standards and those who do not.

Given a demand for the performance of professional services and some supply of individuals available to perform those services, an unfettered market will establish a clearing price. If standards are set relatively high, there will be fewer licensees, resulting in a higher average price paid to those who possess the designation. Because licensees command higher average prices than those who do not hold the designation, there is an incentive for impostors to claim they hold the designation.

Merely making the claim of holding the designation, without obtaining any related payment, tends to yield little benefit to impostors. Impostors may attempt to obtain the higher prices paid to valid designees by attempting to mix in with valid designees so that unknowledgeable purchasers will select the impostor instead of a valid designee. The boards regulating accountants have learned this strategy by now, so most of the boards' proactive investigations consist of reviewing Yellow Pages listings and advertisements of accountants to assure that the people listed do hold licenses from the boards, and the ads are truthful and nonmisleading. Most other investigation is reactive, meaning the board does not investigate unless someone makes a complaint to the board. The Florida Board's investigation was reactive; someone anonymously mailed a copy of Ibanez's Yellow Pages advertisement to the board.

Because regulatory boards prevent unlicensed individuals from passing themselves off as possessing the restricted designation, and therefore, by implication, possessing the qualifications of licensees, licensees receive some degree of protection against competition from those who are not licensed. Therefore, if the regulatory board is perceived to be reasonable in its dealings with existing licensees, those licensees have an incentive to support the regulatory process and agency. Regulatory boards must be aware that if they are excessively harsh with existing licensees, their actions may have the effect of taking away an individual's ability to earn a living. To a governmental agency, such action is perilous from a legal standpoint. Consequently, a typical preference among boards is to prescribe additional education and/or supervision for licensees who have exhibited a deficiency, with the intent of improving the skills of the licensee, thereby remedying the deficiency. This approach is most feasible when the licensee is agreeable to compliance with it.

When deficiencies are too serious, too numerous, or exhibited over too long a time frame, the regulatory board must consider other remedies, which may extend to revocation of the license or to civil or criminal action against the licensee. Licensees subjected to this level of action have the most incentive to fight the board, giving the board an additional reason to prefer an educational approach rather than a punitive one. The approach in the Ibanez case was a punitive one.

The Mass Marketing of CPA Services

How will Ibanez affect marketing of CPA services?

Some jurisdictions are "one-tier" jurisdictions. Anyone possessing a valid CPA certificate is automatically licensed to practice public accounting, and may "hold out" to the public as being licensed to practice those accounting services reserved to licensees. Other jurisdictions are "two-tier" jurisdictions, in which possession of a CPA certificate is not sufficient to practice public accounting; the individual must also hold a permit or license to engage in public practice.

The CPA designation, while not required for tax practice, may nevertheless be advantageous to individuals in public practice because of a public perception that CPAs have tax expertise not possessed by others. Thus, in a competitive environment where mass-market chains offering tax preparation services engage in television and other media advertising, and storefront operations offer low-priced tax preparation, the CPA designation helps individuals market their expertise, not merely their availability.

Ibanez's use of the CPA and CFP designations in her law office Yellow Pages advertising was obviously intended to help her attract clients. To the extent an impostor is successful in attracting fee-paying clients, or would be successful in the absence of regulatory action, the regulatory boards perform a service whereby they reduce the search costs of the public in ascertaining what service providers are available and whether those providers possess at least minimum levels of expertise in the field. The regulatory boards also reduce the deadweight losses to the economy that would occur from people using incompetent service providers.

The Project

In 1996, questionnaires were sent to the various state boards regulating accountants to learn their level of regulation concerning the use of the CPA designation and their reactions to the Ibanez decision. There were few current reactions to the 1994 Ibanez decision. Our comments are therefore confined to the responses concerning the use of the CPA designation.

The boards of thirty-five states, Guam, and Puerto Rico provided usable responses. Most jurisdictions do not permit unrestricted use of the CPA designation by those holding a CPA certificate. While some jurisdictions are one-tier jurisdictions, in which possession of a certificate also confers the right to practice, many jurisdictions are two-tier jurisdictions in which the certificate holder must also obtain a permit or license to practice. The permit to practice may also be tied to registration of practice offices.

CPAs value their CPA designation, having voluntarily studied and apprenticed to enter a profession in which they must adhere to very high ethical standards. When CPAs retire, can they still claim to be CPAs even though no longer practicing? Some boards allow a special status so that inactive or retired CPAs may continue to use the CPA designation.

Future Directions for
Regulatory Activity

The AICPA and NASBA are promoting a concept of substantial equivalency that will allow out-of-state CPAs to practice within their borders. However, there are issues to be resolved before such reciprocal recognition occurs. One issue is the one-tier versus two-tier status of the various jurisdictions. Another issue is the requirements for initial licensing; experience requirements range from no experience in Maryland to New York's requirement of two years of experience, including 18 months of auditing services and financial statement preparation, nine months of which must be in auditing alone.

Until nationwide reciprocal recognition of the CPA certificate is achieved, which is probably many years away from reality, individuals who hold a CPA certificate must continue to look at the rules and regulations promulgated by their state of licensure to determine what is considered proper and improper use of the title Certified Public Accountant.

Because of the Ibanez decision, state regulatory boards will be less likely to attempt to limit truthful, nonmisleading advertising. Further, the Supreme Court's support for allowing nonpracticing CPAs to disclose their CPA designation makes it reasonable to expect that more companies in other fields will attempt to take advantage of the reputation of the CPA profession by promotional campaigns utilizing their employees who are CPAs.

However, CPAs who engage in "incompatible activities" will more than likely be prevented from engaging in those activities. An example from The CPA Journal's Briefing Book on Issues Facing the CPA Profession in Ross A. Johnson v. State of California Board of Accountancy stated:

The Ninth Circuit Court concluded that California's statute did not ban Johnson from holding out to the public as a CPA. It prohibited him from taking commissions while doing so. The statute did not restrict commercial speech but rather the conduct of taking commissions. The court said: "Johnson can identify himself in advertising and letterhead as a CPA ... What Johnson is not permitted to do under the combination of sections 5051 and 5061, is to use his various professional licenses to engage in commission-yielding transactions that create a conflict between his interests and those of his client."

Johnson was a California CPA who sold products for H.D. Vest, Inc. and simultaneously practiced as a CPA.

In another case, Kenneth Don Earles represented some of the same clients as both a CPA and a commission-based securities broker. This violated a California State Board of CPA's rule that states, "A licensee shall not concurrently engage in the practice of public accountancy and in any other business or occupation which impairs his independence or objectivity in rendering professional services."

The decision of the Court of Appeals stated:

The board's very detailed written opinion makes it clear that the board was concerned that Mr. Earles' serving a client as a commission-based securities broker creates a conflict of interest as to Mr. Earles' serving the same client as a CPA. A CPA must exercise professional judgment as to the financial affairs of a client. That professional judgment must not be affected, not even subconsciously, by the prospect of financial gain to the CPA. If the CPA is receiving commissions on the financial transactions of the client (in this case, securities transactions) then there is the potential, or at least the appearance, that the CPA's judgment as to the client's financial affairs could be affected by the CPA's self-interest... the issue is whether the board, whose decision is entitled to the presumption of validity because of its accounting expertise and because it is applying its own rule, acted in excess of its statutory authority or was arbitrary and capricious and abused its discretion in deciding Mr. Earles' objectivity as a CPA could be impaired...Because the board's analysis is rational and its conclusion reasonable, its decision should not be vacated on judicial review.

While Ibanez loosened some restrictions on advertising by nonpracticing CPAs, it should not be construed to authorize all situations in which a practicing CPA is engaged in other activities. This is especially true if those activities create conflicts of interest and are incompatible with "holding out" as a CPA. *

Benny R. Zachry, DBA, CPA, is an
associate professor at Nicholls State
University. Clyde L. Posey, PhD, CPA, is a professor at Louisiana Tech
University. Michael M. Grayson, CPA, is in the doctoral program at Louisiana Tech University and is an assistant
professor at Hampton University.

In Brief

Holding Out and the Regulation of CPAs

In Ibanez, the Florida Board of Accountancy attempted to take away the license of a CPA who used that designation in advertisements for her law practice. The Supreme Court ruled otherwise in finding that consumers would not be misled by her truthful representation that she held an actual CPA license.

The authors discuss the regulation of accountants and performed a survey to determine if there was a regulatory reaction to the Supreme Court's decision. There has been little in the way of specific response.

In terms of regulation in general, the AICPA and NASBA are promoting a concept of substantial equivalency. While the Ibanez decision loosened some restrictions on advertising by nonpracticing CPAs, there appears to be little change in the regulation of those activities that create conflicts of interest and are incompatible with holding out
as a CPA.