| Interstate
Compact: Regulating the Profession as Practiced
NOVEMBER
2005 - In 2003, I presented for discussion the concept of
an interstate compact to set consistent multistate or nationwide
accounting standards. An interstate compact is a contract
between states that allows them to solve multistate, regional,
and national problems through voluntary agreement. Congress
could also authorize joining the compact so that it covers
the PCAOB, SEC, and Government Accountability Office (GAO).
Compacts carry the force of law, and compacting states are
bound to observe the terms even if they are inconsistent
with other state laws.
The
concept remains the most effective alternative as we continue
to address who sets accounting standards for public companies,
the private sector, and nonprofit and government entities.
In addition to being the only mechanism that engages the
sovereign powers of the states and the federal government,
the compact concept can also address problems in areas such
as practicing across state lines, substantial equivalency
standards of professional conduct, and peer review.
Massive
changes to standards setting and regulation were triggered
in 2001, when the continuing series of corporate scandals
began. As often happens, addressing one crisis presents
an opportunity to make broader changes. For example, the
profession is now reexamining peer review, and is beginning
to look at professional discipline and standards of ethics.
Notably lacking is a mechanism that balances the needs of
the public with the needs of the profession, and that coordinates
the states and the federal government. Licensing standards
are set by the states. The PCAOB sets standards for audits
of public companies, while the AICPA and the GAO set standards
for the balance of entities. The profession’s standards-setting
authority is being challenged by some, including a number
of states.
Where
the integrity of financial reporting is concerned, the public
and the federal government justifiably expect the profession
to follow the highest standards. The investing public and
the courts may question the validity of lesser standards,
and will be unsympathetic toward squabbles over authority.
An interstate compact for accounting regulation would focus
on states’ commonalities, and its statutory basis
would help reestablish credibility for the profession’s
self-regulation.
Historically,
the objectives of compacts include implementing common laws
and exchanging information. Each state adopts the terms
of a compact by statute; other states can then adopt identical
language. Upon adoption by a specified number of states,
the compact is activated. For example, in 1997 the National
Council of State Boards of Nursing adopted a professional
licensing compact that addressed disciplinary issues and
multistate licensure.
Although
the Uniform Accountancy Act (UAA), a model bill and set
of rules that the AICPA and the National Association of
State Boards of Accountancy (NASBA) designed to provide
uniform regulation of the profession, was long discussed
as a mechanism to solve many problems, it has yet to be
widely adopted with uniform language. An interstate compact
would establish a formal, legal relationship among states
to address their common problems. We would be able to craft
uniform regulations and address multistate licensing, disciplinary,
and other issues. Within an interstate compact, for example,
CPA firm peer-review programs could possibly draw on a multistate
pool of reviewers, allowing a closer match between reviewers’
expertise and reviewed firms’ practices.
Because
fleshing out the interstate compact concept requires considerable
thought about its structure and implications, the discussion
should involve as many states as possible. The Society leadership
recognizes that the potential benefits are too important
not to pursue, and we welcome everyone’s input.
Louis
Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA
lgrumet@nysscpa.org
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