August 1998 Issue

Creating a new environment for the profession

The New Uniform Accountancy Act

By Ronald J. Huefner

In Brief

Responding to Reality

Revisions to the Uniform Accounting Act (UAA) are the result of a 1997 agreement between the AICPA and NASBA. The next phase is to seek adoption of the new UAA by the 54 licensing jurisdictions in the U.S.

Virtually all the provisions of the UAA are responses to the realities of today's marketplace for services of the type that may be rendered by CPAs (and perhaps others). These provisions involve:

    * Facilitating practice across jurisdictional borders. The UAA plan is widely accepted as the best available alternative to national licensure.

    * Establishing areas of permissibility for commissions and contingent fees. This point is controversial, but at least a specific position is taken.

    * Protecting the role of the CPA and the CPA firm in providing attest services. The definition of attest services has been broadened, but only a bare majority of CPA ownership of the CPA firm is required.

    * Holding all CPAs to minimum standards of licensure, regulatory compliance, and oversight, no matter where they work.

    * Enabling all CPAs to use their title no matter who their employers are. This provision is consistent with legal outcomes, fair to the individual, and consistent with practice in other professions, such as medicine.

    * Leveling the playing field in the provision of nonattest services, by eliminating the requirement that CPAs offer these services through regulated CPA firms.

    * Establishing an experience requirement of one year in virtually any professional experience in accounting. In the author's view, this is quite controversial.

ne of the major initiatives affecting professional practice to emerge in recent years is the proposed Uniform Accountancy Act (UAA). The UAA grew out of an agreement between the American Institute of CPAs (AICPA) and the National Association of State Boards of Accountancy (NASBA) that was finalized in 1997. Subsequently, it was ratified by the governing bodies of both organizations. The next phase is to seek adoption of the UAA by the 54 licensing jurisdictions in the U.S. The AICPA has stated a target of 40 adoptions by the year 2000.

The AICPA-NASBA initiative began with the serious problem of cross-jurisdictional practice. In an age of global commerce, having to confront 54 jurisdictions for a CPA to practice across the United States was no longer acceptable. The thought of national licensing was fairly quickly dismissed, and attention turned to finding ways to facilitate growing cross-jurisdictional practice, including practice by electronic means, while retaining the role of the states in the licensure process.

Along the way, a number of other professional practice issues increased in intensity, and several of these were incorporated into the discussions. Many of these issues have been highlighted by high-profile legal cases, including the "holding-out" issue (Ibanez), the status of CPAs working for non-CPA firms (Miller), and the non-CPA ownership issues raised by acquisitions of CPA firms by American Express, Century Business Services, and others. These issues have all been discussed in recent CPA Journal articles, and will not be elaborated here.

Overview of the UAA

The UAA is motivated by changes taking place in the business environment generally and the public accounting profession specifically. Among these changes are increasing globalization of business activity, rapid spread of information technology, expansion of services by CPAs, and growing legal challenges to the current regulatory environment. For many years, the profession has used a "model act" approach to try to increase the uniformity among state accountancy laws, with some degree of success. Recent trends in the profession have increased the need for greater uniformity. By first reaching agreement with NASBA, as a representative of the regulatory world, the AICPA leadership hopes to accelerate the process of change.

The UAA has four major goals, designed to be responsive to current problems and challenges while maintaining the unique public role of the CPA. These goals are to--

    * facilitate the movement of CPAs and the conduct of practice across jurisdictional borders;

    * establish consistency in the credentials of all those using the CPA title;

    * respond to a changing marketplace that demands a broad range of services from CPAs, well beyond what is reflected in the current regulatory environment; and

    * continue to protect the public interest, especially with respect to the CPA's attest function.

It is important for all CPAs to understand the major provisions of the UAA and its accompanying rules and their implications for the profession and for the practice of public accountancy.

Substantial Equivalency

Because CPAs are licensed and regulated at the state, rather than national, level, there are 54 separate licensing jurisdictions in the U.S. (the 50 states, the District of Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands). While all use the Uniform CPA Exam, each has its own rules with respect to initial education, continuing education, experience, and other qualifications. A CPA who moves from one state to another must endure an often-difficult process of obtaining a license in the new state by reciprocity. CPAs who don't relocate, but whose practice occasionally takes them across state lines, also face regulatory issues. Many states require a permit for licensees of another state who temporarily practice in their state. This is a largely unenforceable provision that is far more often ignored than followed. Further, the question of how extensive the cross-border practice must be to require a permit is often difficult to determine, and crossing borders electronically rather than in person is not addressed at all. In an age where clients have global needs, these interstate barriers to practice are intolerable.

While national licensure would solve these problems, the states are understandably reluctant to give up their role. The solution achieved by the UAA is the creation of the concept of substantial equivalency. Under this concept, a CPA wishing to practice in a UAA-adopting state would be automatically qualified if the CPA's home state has licensing criteria that are substantially equivalent to the provisions of the UAA. In such a case, the board in the visited state must be notified, but no reciprocal or temporary license is needed, unless the CPA is actually moving to, or opening an office in, the new state. In this case, a reciprocal license would be required, but the process between substantially-equivalent states should be considerably simplified.

If the CPA's home state does not have substantially equivalent licensing criteria, but the CPA personally meets the UAA criteria on a substantially equivalent basis, the same outcome results. The CPA may legally practice in the new state without a reciprocal or temporary license, unless relocation is involved. The present system is left in place for situations where the licensure criteria of the home state are not substantially equivalent to the UAA and the individual in question also does not personally meet the standard.

While this may be a less than perfect solution to the problems of cross-jurisdictional practice, it is a major improvement over the present situation of a complex system fostering substantial noncompliance.


At present, the fact that a person may be identified as a CPA in a nonpublic practice context does not indicate whether that person has a current license, an inactive license, or, indeed, has ever been licensed. Some CPAs not in public practice fail to meet continuing education requirements, causing their licenses to become inactive. Some jurisdictions separate certification from licensure, the former being granted upon passing the CPA exam and the latter upon meeting the experience standard (which some certified individuals never do).

While the present situation does not seem to cause major problems, it does have its faults. Because CPA designates a state license, it is difficult for states to regulate and discipline those CPAs with inactive licenses or those who were never licensed. Further, the public perception of the CPA may be somewhat diminished by the variations in official status that exist.

The UAA would standardize the meaning of the CPA designation. Anyone who uses the CPA title, even in nonpublic practice environments such as industry or academia, would be required to--

    * possess a valid, current license and

    * meet the requirements of his or her state's board of accountancy, particularly with respect to the experience for licensure and continuing education requirements.

A CPA who is not in current compliance with CPE requirements would be required to identify himself/herself as "CPA (Inactive)," for example, on business cards.

A second dimension of the proviso that "a CPA is a CPA" addresses past disputes over who may use the CPA title. The Ibanez and Miller cases, discussed at length in the February issue of The CPA Journal, are examples of the controversies that have arisen when validly-licensed CPAs use their title in nonpublic-practice employment contexts. The UAA provides that all CPAs may use their CPA title no matter where they work. Thus, the somewhat arcane concept of holding out will disappear. Similarly, definitions of what constitutes the practice of public accountancy will become generally unnecessary. Any CPA who has earned and maintained a license can use the title in any employment context.

This provision seems to be a reasonable one. Attempts to prevent validly licensed CPAs from identifying themselves as such and employers from stating that an employee is a licensed CPA, have generally failed legal tests as well as the test of common-sense fairness.

Delivery of CPA Services by Firms

At present, CPAs in public practice are expected to render all their services through the vehicle of a CPA firm. This is based on the theory that, while only audit/attest services require licensure, all public services rendered by a CPA are subject to state regulatory jurisdiction. Reality does not always conform to this model, as some firms set up separate entities to offer consulting or other specialized services.

Some CPAs are unhappy with this situation, arguing that their competitors in nonattest fields are not subject to the same regulatory environment as they are. Other CPAs feel that by being held to a higher standard than competitors, CPAs are given greater status.

The debate about whether CPAs should offer all these other services is an old one, but one that has largely been resolved by market reality. CPAs offer a wide range of services, and the scope continues to widen. The AICPA itself is busy creating a variety of new services for its members to offer, the recently announced WebTrust™ being one example.

Definition and Delivery of Attest Services. In recognition of the market reality of the broad scope of practice by CPAs, the UAA makes a major change in the way a CPA offers services to the public. It provides that only attest services need to be offered through a CPA firm. All other services may be offered through a CPA firm or through any other entity. Such an "other entity" may not call itself a CPA firm and may not have "CPA" or "CPAs" as part of its name. But, given the provisions described in the preceding section, any CPAs working for these other entities may use their title in identifying themselves.

Attest services, defined by the UAA as audits, reviews, compilations, and examinations of prospective financial information, must be performed by CPA firms licensed by state boards of accountancy. A number of requirements would apply to such firms, including the following:

    * Licensed CPAs must constitute a majority of the firm's ownership.

    * These CPAs must be licensed in the state of the principal place of business and where the majority of services are performed.

    * Non-CPA owners must be active participants in the firm.

    * The firm's name may not include the name of a non-CPA.

    * The firm must undergo peer review every three years.

In addition, individual CPAs who supervise attest engagements, or who sign or authorize the signing of attest reports on behalf of the firm, will be required to meet special (though as yet undefined) experience requirements.

The inclusion of compilation services in the definition of the attest function will be somewhat controversial. Compilations have been a gray area, where a number of unlicensed practitioners--non-CPAs who provide accounting and tax services--have long staked a claim to practice. Non-CPAs may be expected to fight vigorously for their right to practice in this area. Even some CPAs feel that compilations, which give no assurance on the financial statements, are not properly part of the attest function.

Another controversial area also included in the above list of requirements for CPA firms is that of ownership. The UAA would require only that a majority of the ownership (over 50%) of CPA firms be held by CPAs.

Commissions and Contingent Fees. Still another very controversial topic is the longstanding issue of commissions and contingent fees. The UAA would permit commissions, so long as they are disclosed and the CPA does not perform attest services for that client. Commissions would be acceptable in financial planning engagements, for example. Similarly, contingent fees would be acceptable except for services to attest clients and preparation of original tax returns. Though many states already provide some room for commissions and contingent fees, the topic continues to be strongly debated, with many CPAs feeling their valuable trait of independence is compromised by the acceptance of commissions.

Implications for Practice. The various UAA provisions with respect to the conduct of practice are likely to lead to a number of changes in the delivery of services. Just as we have seen public utilities shift their nonregulated activities into separate entities, we are likely to see public practices divided into entities doing regulated work (CPA firms) and entities doing nonregulated work (other firms). Nothing would seem to preclude an individual CPA from participating simultaneously in two firms, conducting attest services in the firm of Smith and Brown, CPAs, and offering all other services in the non-CPA firm of Smith and Brown. Firms of all sizes are likely to split into two firms, a CPA firm that performs attest work and a non-CPA firm that performs other services. Depending on firm size, there may or may not be overlapping personnel, but some common ownership by CPAs would be common. However, the individual CPAs working in non-CPA-firm entities are still governed by state board regulations and, for AICPA members, by its code of conduct. Used for many years by such large firms as Arthur Andersen/Andersen Consulting, this arrangement is not new.

Whether such a structure is in any way harmful to the public interest is unclear. To some extent, the UAA is formalizing what already exists. Some may argue that public protection is strengthened by provisions requiring all persons using the CPA title, in any area of employment, to be licensed and to meet state board requirements. Clarifying that reviews and compilations are attest services also is in the public interest. Taking nonattest services outside the realm of the CPA firm may have little effect, as individual CPAs continue to be subject to state regulation and discipline.

The Experience Requirement

One provision remains to be discussed, one likely to be quite controversial. Experience required for licensure would be reduced to one year, and it could consist of virtually any professional experience in accounting. Specifically, any type of professional service or advice involving the use of accounting, attest, financial advisory, management advisory, tax, or consulting skills, whether earned in public practice, industry, government, or academia would be acceptable, provided only that it be verified by a licensee (supervision by a licensee is not required). There is a further provision that additional experience would be required for anyone in public practice who supervises an attest engagement or who signs attest reports on behalf of the CPA firm. This additional experience will directly relate to the delivery of attest services and will be set forth in quality control professional standards established by the AICPA.

The experience requirement has long been a subject of controversy, as it has been difficult to demonstrate a proven link between pre-licensure experience and competency to practice. States have traditionally traded experience for education; several have required two years experience for the candidate with a bachelors degree and one year for the candidate with a masters degree. An earlier article in The CPA Journal (December 1994) advanced several arguments for the reduction or elimination of the experience requirement.

The promoters of the UAA advance several arguments for the significant change to the experience requirement. First, it is said that this change logically follows from the equality provision, that a CPA is a CPA no matter where employed. Second, the point is made that over half of today's accounting graduates accept initial employment outside public accounting, and that fewer than half of today's CPAs actually practice public accounting. It has long been a source of frustration to many well-qualified accounting professionals that the lack of a particular form of experience has barred them from achieving the CPA designation. Finally, it is argued that the scope of practice has become so broad that a variety of competencies are needed and hence a variety of qualifying experiences are appropriate. Since a majority of CPAs (or at least accountants) will never perform attest services, why should everyone have to demonstrate this competence? The relevance of requiring attest experience for someone who will work primarily in taxation or consulting is certainly questionable.

Implications for the Profession. The provision in the UAA relating to the experience requirement has substantial implications for the profession. First, a major increase in the number of CPAs can be expected. The CPA is viewed as a valuable credential, one that nearly all accountants aspire to possess. Historically, public accounting employment has been the means for all but a small percentage of candidates to achieve the qualifying experience. As the percentage of accounting graduates achieving initial employment in public practice continues to fall (it is probably now under 50%), the current experience requirement will be a barrier for many. Under the new rules, any holder of an accounting degree with virtually any sort of professional experience would be able to become a licensed CPA. While there is some cost and inconvenience to passing the CPA exam and maintaining licensure, most accountants are likely to conclude that the benefits of being designated a CPA outweigh the costs. It would not be unreasonable to expect that the rate at which new CPAs are licensed will significantly increase once the new experience requirement is in place.

A second implication is a major change in the meaning of "CPA" that is likely to eventually lead to a diminution of its status. Historically, CPA has meant that a person has some breadth of experience in examining and reporting on the financial affairs of companies. Under the UAA provisions, this tradition of the CPA may be diminished. Many accountants will be designated as CPAs, but many of these will not be entitled to conduct an audit; attest work will become an invisible specialty. Only those CPAs with the appropriate additional experience will be able to supervise audits or other attest engagements, but the public will have no way of knowing which CPAs are so qualified and which are not. As is well known in a commercial context, when a brand name is overly diluted, it loses value. The CPA is currently a valuable brand name, but may be diminished if overextended to persons who don't fit its traditional standards.

A third implication is likely to be increased hiring costs for CPA firms, especially smaller firms. Employment by a CPA firm has offered an important additional benefit not offered by most other employers, namely the opportunity to gain the qualifying experience toward the CPA. This factor has led many graduates to opt for initial employment in public accounting. With CPA firms losing the near-exclusive right to provide qualifying experience under the UAA, many graduates may find public practice employment less appealing. The results will be a smaller talent pool and thus increased employment costs for CPA firms, higher fees to the public, and fewer people in a position to build a career in public practice.

On a more positive note, a final implication may be an increase in the coherence of the profession. It has long been difficult to clarify what is meant by the "accounting profession"; is it all professional accountants, or just CPAs? In other professions, nearly all law school graduates become admitted to the bar, and nearly all medical school graduates become MDs; in accounting, probably fewer then half the accounting grads become CPAs. By making it possible for nearly all professional accountants to become CPAs, accounting profession and CPA may become synonymous, and the proliferation of specialized certifications for nonpublic experience may become much less necessary. This may create a clearer (though different) public image of the profession.

A Different Profession

The new UAA will make major changes to the world of public accountancy. Development of the UAA began because the regulatory environment was in need of both updating and a higher degree of standardization. As is often the case, many different provisions find their way into the final document, not all of them to everyone's liking. Sometimes this is due to the need to find common ground among participants with diverse interests.

A much improved approach to cross-jurisdictional practice, consistent with maintaining licensure at the state level, was created. Several concessions to marketplace and legal realities were made, not all of them likely to be popular with CPAs. However, current practices with respect to the use of the CPA title and the nature of practice by CPAs probably could not be sustained much longer, given successful legal challenges and significant new entrants into the marketplace for services. These provisions represent reasonable tradeoffs: CPAs can use their title in any employment context, but all CPAs must be licensed and subject to state board regulation. CPAs can perform nonattest services in any entity, but only CPA firms can perform attest services, and the definition of attest services is broadened. Non-CPAs can be owners of CPA firms, but they must be active in the firm, and CPAs must hold the majority ownership. All of these represent trade-offs that, while arguable, are probably fair compromises given today's market and legal environments. Reasonable trade-offs are less evident in the broadening of the experience requirement. Further, some of the reasonable trade-offs in other areas are weakened by this component. For example, the requirement of majority ownership of CPA firms by CPAs becomes much less meaningful when licensure is open to virtually any accounting graduate who has held a professional position for a year and passes the CPA exam.

Much debate is likely to surround the adoption of the UAA proposals by the 54 licensing jurisdictions. Some elements will survive this debate, while others will not. Whatever the final outcome, the accounting profession of the 21st century will be quite different from that of the 20th century. *

Ronald J. Huefner, PhD, CPA, is Distinguished Teaching Professor of Accounting at the State University of New York at Buffalo and past president of the Buffalo Chapter of the New York State Society of CPAs.

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