Championing Dynamic State Regulation

An Interview with David A. Costello

By Robert H. Colson

In Brief

Invigorating a Proven System

David A. Costello is committed to making a century-old state licensing system effectively regulate a changing profession. Forging agreement to change among 54 boards of accountancy is no small task, but Costello, as president and CEO of the National Association of State Boards of Accountancy (NASBA), has assumed leadership in getting the boards to accept the third edition of the Uniform Accountancy Act (UAA). Striving to keep the system effective despite the challenges of electronic commerce, alternative practice structures, megamergers, and falling geographic constraints, Costello is faced with convincing state board members and legislatures that what is good for the public is also good for the profession.

Whereas critics have said that Costello works too closely with the AICPA, his promotion of substantial equivalency among states has held back the proponents of national licensure. If the current system can offer the ease of mobility licensees clamor for while continuing to protect the public interest, then the necessary alternative has been found.

Six years ago, the NASBA board of directors decided they wanted a CPA to head their organization. David A. Costello began his career in public accounting with Ernst & Ernst (now Ernst & Young) and then moved into industry, working his way through the ranks at Genesco before leaving the corporation as president of one of its subsidiaries. While maintaining a consulting practice, he served less than a year as executive director of the Tennessee State Board of Accountancy before being recruited by NASBA as its president and CEO (much as Barry Melancon, president and CEO of the AICPA, was recruited from the Louisiana Society of CPAs).

Under Costello’s leadership, NASBA has initiated new revenue streams that provide additional help to the state boards. He moved the organization’s headquarters to cut costs and add space, increased administrative services offered to state boards, and created a for-profit subsidiary to serve the examination administration needs of other professions. Today NASBA holds more conference and committee meetings for state board members and executive directors than ever before and underwrites the costs for many attendees. In the area of technology, it continues to enhance its website (for both public information and the boards’ exchange of information) and is developing CredentialNet and other databases to serve the boards’ licensees.

As the professional environment changes, however, will the state boards have a meaningful role to play? The CPA Journal asked Costello to describe his vision of professional regulation in the years ahead.

The UAA

The CPA Journal: When the third edition of the Uniform Accountancy Act was issued in February 1998, there was talk that 40 states would be substantially equivalent in two years. What’s holding up the process?

David A. Costello: Although our initial prediction now seems overly optimistic, we had good reason to believe the states could accomplish significant adoption quickly. Remember, the third edition of the Uniform Accountancy Act was based on the concepts developed by a joint team of the leadership of NASBA and the AICPA, which then passed their ideas on to the AICPA/NASBA UAA Committee to be written into the UAA. This was then sent as an exposure draft to the state boards of accountancy, state societies, and other interested parties. When the third edition was finally released, we were hopeful that everyone would see how well the sections worked as a whole, allowing for more mobility with enhanced enforcement mechanisms. Unlike previous editions of the UAA, we thought this one was so well integrated that states would opt to adopt it totally.

Maybe we were a bit naïve. While many states have adopted significant parts of the UAA—for example, permitting acceptance of commissions, allowing limited nonlicensee ownership, and requiring 150 hours of education—they have been slower to adopt the total concept of substantial equivalency. This key provision would allow licensees from substantially equivalent states the mobility to practice with minimum notification.

It’s a matter of trust. Although 41 states are substantially equivalent to the education, examination, and experience provisions of the UAA, only 14 states grant practice privileges to licensees of other states based on UAA’s requirements. That’s good, but falls short of predictions. We want more than the mere form of substantial equivalence; we need the substance that recognizes diversity but honors other states’ licensing and enforcement processes. Once we build up a record of states disciplining their licensees for actions taken in other states where they had exercised practice privileges under substantial equivalency, more states will adopt this key section. We expect that as more states gain confidence in the system, more will sign on. We’re going to be working on sharing disciplinary information and explaining how well the system can work.

CPAJ: What have been some common difficulties the UAA has encountered?

Costello: Some of the things that initially created problems have been resolved through discussions among the state societies, boards, and legislators. For example, in states that are two-tier—that is, those that have license holders as well as certificate holders that do not have a license—attaining substantial equivalence was initially seen as a problem. Once it became clear that only license holders would be able to attain practice privileges through substantial equivalency, however, passage became simpler.

In some states, nonlicensed accountants have felt threatened by the UAA. There was concern about the services reserved to licensees and the safe harbor language proposed in the UAA. We have met with members of the NSA [National Society of Accountants], NAEA [National Association of Enrolled Agents], and others and have been able to clear up the misunderstandings about what the UAA sets out to do, which basically does nothing to change nonlicensees’ business relationships.

Another difficulty has been nonlicensee ownership, which New York has debated heavily. The revised UAA recognizes that there are many facets to the practice of CPA firms and that some non-CPAs should be allowed to rise to partnership level—although not to control the CPA firm. A majority of the states have agreed with the new UAA, but this issue is still being debated in others.

Without a definition of “public accountancy” in the UAA, it has been difficult explaining the “CPA = CPA” concept to regulators. We purposely omitted an explicit definition, not wanting to limit the authority of boards to regulate the CPA in our ever-evolving and expanding profession. However, some state boards interpreted the lack of a definition as limiting their authority rather than giving them more reach in disciplining CPAs. So this too is an area we continue to discuss.

CPAJ: The UAA was designed to facilitate CPA interstate mobility, but how does the third edition benefit the public?

Costello: The public benefits from having the most qualified professionals available to serve them. By facilitating mobility, the boards are enabling the pooling of talent. But from a regulatory perspective, under the substantial equivalency provisions of the UAA, the licensee consents to the authority of the jurisdictions in which he or she may practice and is formally bound by their regulations.

Simplifying notification encourages all licensees to promptly notify a state board when providing services to its citizens. Failure to notify would render the individual guilty of unlicensed practice. Thanks to the Internet and fax machines, a licensed professional should be able to easily comply with the required notification.

State Regulation, Global Credential

CPAJ: You mentioned pooling of talent; why should this be restricted to just the United States? In a global economy, how can state regulation be relevant?

Costello: I remember a Ziggy cartoon in which he visits his doctor for a check-up. The doctor looks in his ear and says, “I don’t like the look of that!” He looks down his throat and says, “I sure don’t like the look of that!” Then comes the X-ray and the doctor says, “I definitely don’t like the look of that!” To all of which Ziggy asks, “What do I have, doctor?… Is it serious?” The doctor replies: “Oh, you’re in perfect health … I just don’t like your looks.” Sometimes I get the feeling that there are people who just don’t like state boards of accountancy. As long as we have accountancy as a dynamic profession, state boards will exist and they will become increasingly relevant. It’s a market necessity!

Commerce and technology have evolved to the point where even the smallest company can operate in the world market. Through mergers, many accounting firms have become international: A major U.S. daily newspaper recently referred to KPMG as a “branch of the Amsterdam-based firm.” But, when a licensee of a state board of accountancy renders service to a citizen in any part of the United States, or an individual practices public accountancy in the United States, that becomes the concern of the state boards. The purpose of the state boards is to protect the states’ citizens. Substantial equivalency should make this easier domestically.

Any type of professional regulation upholds a set of entry standards, and the education, examination, and experience standards the state accountancy boards have set for their licensees have generally proved to be effective at ensuring high-quality service for the public. Professionals from other countries who meet U.S. standards are welcome if they meet with the boards’ requirements, which may mean passing the Uniform CPA Examination or, if a mutual recognition agreement (MRA) covers the foreign professional, the Uniform International CPA Qualification Examination (IQEX). The NASBA/AICPA International Qualifications Appraisal Board is charged with developing MRAs in response to requests received by state boards from foreign credentialing organizations.

CPAJ: Are there currently any plans for making the CPA an international credential?

Costello: You really hit a nerve with that question. Since the third edition of the UAA provided CPAs with extensive professional latitude, we in NASBA believed that tremendous opportunities lay ahead for global expansion of the CPA. It is a 100-year-old brand with professional stature and public trust and it doesn’t require a complete makeover. We formed a joint committee with the AICPA and the AAA [American Accounting Association] a couple of years ago to take a serious look at the CPA designation worldwide. After a couple of meetings, the AICPA lost interest in the project. Now that the AICPA has inaugurated the “Cognitor,” it is doubtful they would be willing to reconsider such a plan. However, one only has to look at the number of foreign candidates who take the Uniform CPA Examination to know that the credential is of sufficient international prestige to attract individuals that have no intention of practicing in the United States. We still believe the internationalization of the CPA has merit and would be willing to work on that project again.

CPAJ: Does NASBA support or endorse the AICPA’s “Cognitor” credential and cpa2biz portal?

NASBA has developed five core values that summarize our “lines in the sand”:

1) preserve the public trust and confidence in the CPA license and credential;
2) support the licensing of individuals who demonstrate and maintain competence through education, examination, and experience requirements;
3) ensure that the integrity, objectivity, and independence of licensees are not compromised;
4) foster compliance with ethical and all professional standards; and
5) promote the rights of the boards of accountancy to regulate licensees in all their professional activities.

Should any of these values be challenged, you can expect the state boards and NASBA to put up a fight.

CPAJ: Can state regulation be effective in an e-commerce environment?

Costello: I think so. We have to be careful to put in place requirements that lead to an individual’s location. Of course, part of this will be reduced to caveat emptor. Someone who does all their transactions via the Internet with a party who claims to be a CPA and who does not offer an office address, a state of licensure, or a license number may be beyond our help. We would encourage those clients who want an engagement through the Internet to at least get these basic bits of information. The states of North Carolina and Washington have already enacted rules that require licensees to notify the Internet public of their state of licensure and license number.

Several NASBA committees are looking at this area, and I think more states will be establishing requirements in the coming months.

Independence and Experience

CPAJ: As firms become larger and more diversified, do the state boards have the resources to regulate and discipline them?

Costello: Fortunately, our profession has achieved its reputation by earning the public’s trust. Anything that damages a firm’s reputation can have serious financial consequences: That’s what the state boards have going for them. The boards are the only organizations that can rescind an individual’s license or a firm’s permit to practice. As long as the CPA has value—and its withdrawal or limitation has significance—the state boards have what they need to take action.

During the past year we have strengthened the state boards’ ties with the SEC, and we will continue to facilitate information sharing with other regulatory agencies.

The boards are acutely aware of their need to treat firms of all sizes fairly. Taking steps against a large firm with many legal advisers at its disposal is certainly not something that any board would take lightly. However, boards have done it in the past, and we must assume they will in the future should they think such measures are warranted. It’s not so much financial resources to discipline individuals and firms as it is the regulatory muscle to shine a spotlight on the inappropriate, improper, or incompetent acts and conduct of individuals and firms.

CPAJ: How will the state boards handle the new independence rules from the SEC?

Costello: It’s too early to tell how the new rules will play out. I was glad to see that a compromise between the profession and the SEC was worked out because I do not think the contentious atmosphere that existed during the debate helped anyone. During our discussions of the proposed new rules, our member boards voiced strong support for the importance of independence in appearance as well as in fact. Interpreting appearance, however, is complicated. I think the debate made state boards take a fresh look at their standards. By adding the objective “reasonable investor” standard, which is common in securities laws, the SEC clarified what is meant by “appearance.”

When SEC Chairman Arthur Levitt addressed our annual meeting in September, we did hear some state board representatives say they feared that the SEC’s rules might trickle down to the state level and ultimately impede the small firm from offering tax and other consulting services. Boards don’t want two sets of independence standards and they don’t want to negatively impact small firms with rules designed for Big Five machinery. The SEC’s work did make the boards realize how interrelated the rules of all regulatory agencies are. NASBA’s committees are working to coordinate the boards’ efforts with those of other groups charged with the public’s protection.

CPAJ: The 150-hour requirement has been adopted by 48 states, but Colorado rescinded it. Do you have any doubts about the need for this entry requirement?

Costello: The current clamor over the 150-hour requirement focuses on only one aspect of the decline in accounting majors. However, there are many dynamics at work that affect students’ decisions on career paths and opportunities. Shall we reduce educational requirements for attorneys and doctors when their professions experience similar declines? Is less education required for accounting professionals in the most complex, technological society in the history of the world?

The AAA’s 2000 study by Professors Steve Albrecht and Bob Sack [see article on page 16] certainly raised some questions about how the states are implementing that requirement. There’s no denying that what a CPA is expected to know has expanded tremendously from what was required when I entered the profession. As the menu of services offered by CPA firms expands, we can only expect that the scope of training will increase. More importantly, students will need to be trained with the skills required for meaningful lifelong learning. The 150-hour requirement was originally envisioned as a means of bringing students with diverse academic backgrounds into the profession through additional training beyond the baccalaureate.

NASBA has an education committee (which includes representatives from the AAA) that is studying the 150-hour requirement. Is it living up to our expectations and, if not, what can be done? The Albrecht and Sack study found it may not be. Not every state has implemented the requirement in the same way, and we think it’s time to learn from the successes and failures. Colorado rescinded the 150-hour requirement just about the same time as Minnesota adopted it. So we do have differences among the states.

We can’t hide our heads in the sand; rather, we must thoroughly and objectively assess our education criteria and avoid quick-fix, short-term solutions. Let’s look at education content; let’s assess the market and its requirements for skills and abilities; and let’s provide the world’s most esteemed financial professional with the appropriate educational support.

CPAJ: What about experience? Other countries place more emphasis on experience and less on formal education. Have there been any significant proposals for changing the experience requirement?

Costello: The UAA includes an experience requirement that was a considerable change for many states. Rather than requiring experience in public accounting, the UAA calls for a year of experience under the supervision of a licensee—experience that does not have to be in attest services. However, if someone is going to sign audit reports, then he or she will need to get the experience required to meet the professional standards for competently rendering attest services, and that kind of experience can take more than a year to acquire.

This country’s accounting education system has reached a level of development that few others can match. We have moved away from the need for extended apprenticeships, but our state board members continue to testify to the merit of work experience. The basic one-year requirement is a compromise: Some states don’t have any experience requirement, but most have some. As we increase our efforts to bring about substantial equivalency among the states, I don’t think you are going to see much change in the basic elements of the UAA. We can’t get states to sing together if we keep changing the tune.

The Uniform CPA Examination

CPAJ: Plans are moving ahead for a computer-based Uniform CPA Examination. Other professionals, architects for example, have adopted computer-based examinations and seen costs rise sharply and the number of candidates drop. At a time when the number of examination candidates is dropping, why are the boards ready to accept a computer-based exam?

Costello: The plans for the computer-based examination are exciting. The levels of knowledge that can be tested are impressive. If you look at recent statistics gathered on the candidates who passed the Uniform CPA Examination, there has been a strong correlation between GPA and passing rate. That’s not going to change. The CPA examination will continue to identify those who are competent to do the job.

Representatives of the AICPA and NASBA have been working together to ensure the computer-based examination covers the knowledge and skills needed for practicing competently as a CPA in a changing environment. The AICPA has told us prices are going to increase for the examination, but whether or not someone becomes a CPA is not going to be determined by the cost of taking the test. An AICPA study found most people who become CPAs make this decision long before fees for the examination are considered. For the state boards, it is critical that their licensing examination be psychometrically valid and test what is needed for competent practice. The new examination will meet those requirements.

It seems completely incongruous to me that some believe we shouldn’t be accelerating toward a computer-based examination. Our profession is on the leading edge of technology applications; we advise our clients on the optimal use of technology. And yet, just as there are shoe-shiners who always have scuffed and dirty footwear, so there are some professionals and regulators who actually think that we should stay with paper-and-pencil exams.

CPAJ: What’s wrong with the present paper-and-pencil exam?

Costello: The Uniform CPA Examination has served the boards well, but we think it is incumbent upon the boards to take advantage of the best testing methods available. The profession is not stagnant and we cannot fool ourselves into believing the entrance examination can be stagnant. Our examination candidates are preparing to enter a world where systems, operations, and results are more efficient and effective than decades-old approaches. Paper-and-pencil examinations can still test competency, just as handwritten account journals, ledgers, and financial statements can still produce numbers for Dell Computer. It simply makes no sense to apply inefficient, ineffective, and inapplicable methods to current challenges.

Just look at what happened in the last presidential election. I was amazed at the lack of electronic voting machines in our country. One could argue that not enough attention was regularly paid to the system for casting our votes. It was not until the vote was close that the failures in the system became evident. We don’t want to wait for a close call to bring any possible inadequacies in the test to light.

CPAJ: The number of CPA candidates has been decreasing. Why should students opt to become CPAs when information technology, finance, and other business areas offer higher starting salaries and require less formal education?

Costello: Let’s not wear blinders and pretend there are no competing fields of study for those people who in previous years would have found accounting to be their logical choice. The market will set the starting salaries and we have to anticipate that if more is needed to attract—and keep—people, then firms will have to adjust their budgets and fees accordingly.

What the state boards can do is work to maintain high standards, so that nothing diminishes the trust the public places in the CPA and the prestige the CPA offers licensees. More than one hundred years as a licensed profession has achieved significant recognition for the CPA.

The boards need to continue to strive to be user-friendly, and the Internet is helping us with this. By placing applications, fees, and notices on their websites, the state boards can get out information to all those who are interested in becoming part of the profession. In the last couple of years, many states have done a great job of making their websites highly informative and very easy to use. We too are working to make our site more inviting and helpful for would-be candidates. I encourage the profession to continue to invest in students, high schools, and universities so that career opportunities based on accounting and financial education are clearly displayed.

Accounting has been very good to me, offering an excellent bridge into management, and I think it will continue to provide future students with what is needed in the business world. Just as the profession is changing, so is accounting education, and I am confident there are enough good minds at work on keeping the curricula current for the foreseeable future.

CPAJ: Speaking of keeping up with change, we understand that the state boards’ dues pay less than 1% of NASBA’s expenses. Examination services are an important part of NASBA’s revenues and, with the number of candidates dropping, how will NASBA ensure that it stays viable?

Costello: The 54 boards’ membership dues are indeed only a very small part of our total budget. NASBA’s mission is to enhance the effectiveness of state boards of accountancy. We provide the boards with a forum to exchange information through our conferences, committees, and communications efforts. This takes money. To earn the necessary amount, we do provide examination services to states, as well as other administrative services involved with initial and reciprocal licensing, renewals, and continuing professional education. Based on our examination administration expertise, we formed a subsidiary that provides the same types of services to other licensed or credentialed professions.

Just as the services performed by the boards’ licensees are changing as more is done via computer, our services are being revised to take advantage of the benefits of technology. The public expects to have more information available via the Internet, and we are working to give it to them. The computer-based Uniform CPA Examination will have an impact on the way our services are delivered and will provide the boards and NASBA opportunities to enhance the security of the exam through a comprehensive national database.

NASBA is like any other association or business: In order to stay relevant and meet our objective of helping state boards, we must be financially viable. And we will be.