Embracing a Borderless, Technologically Advanced World
Time for a New Era of Accounting Regulation

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FEBRUARY 2008 - On December 3, 2007, I had the privilege of being one of 24 people asked to testify before the U.S. Treasury’s Advisory Committee on the Auditing Profession. The underlying theme of the session was the regulation of the accounting profession in light of the growing convergence of national, international, and multijurisdictional planes, particularly as it relates to publicly traded entities.

In my testimony I called for several things, the most important being the establishment of an interstate commission for the regulation of the accounting profession, as well as a clear definition of what New York needs to do with 30 additional credit hours as we inch closer to 2009, when the 150-hour requirement takes effect in this state.

Seeking Balance and Coordination

Notably lacking in accounting regulation is any mechanism that balances the needs of the public with the needs of the profession. Currently, licensing standards are set by each state, with almost no coordination among the various states and the federal government.

For example, the SEC and the Public Company Accounting Oversight Board (PCAOB) set standards for audits of public companies, while the AICPA and the Government Accountability Office (GAO) set standards for other entities. An interstate compact could provide a coordinating mechanism for this hodge-podge of audit regulation.

An interstate compact is a contract between states that allows them to solve multistate, regional, and national issues through voluntary agreement. Compacts carry the force of law, and compacting states are bound to observe their terms even if they are inconsistent with other state laws. The general purpose of an interstate compact includes: establishing a formal legal relationship among states to promote and manage a common agenda, creating independent, multistate governmental authorities that can address these issues, for example, by establishing uniform guidelines, standards, or procedures for agencies in the compact’s member states.

The federal government has joined with states in a number of compacts, such as that which set up the Advisory Commission on Intergovernmental Relations. One compact serves as a model for the accounting profession: the Multi-state Licensure Mutual Recognition Model. This compact, established in 1997, addresses multistate licensure and allows nurses to practice across state lines in states that have adopted the interstate compact. It addresses disciplinary issues and the use of electronic media for the delivery of multistate health services, among other issues. Half of the 50 states currently participate in this compact.

With licensing standards for the accounting profession being set by the individual states, what the profession does not need is more than 50 separate sets of regulation. What the profession does need, however, is one set of professionally developed standards that can be the basis for seamless regulation on a state, national, and international level.

An interstate compact can address several issues facing the accounting profession. They include: mobility, ethics requirements, CPE requirements, and educational requirements.

Where the integrity of financial reporting is concerned, the public and the federal government justifiably expect the profession to follow the highest standards. An interstate compact for accounting regulation would focus on states’ commonalities, and its statutory basis would help enhance credibility for the regulation of the profession. Professional standards would continue to be developed by the profession. The compact would ensure that state regulations are seamlessly intergrated with national and international standards.

The entity that would administer the compact should also establish two academies of accounting education. A financial academy, perhaps called the National Academy of Auditing for Publicly Traded Companies, would have parallels to the establishment of the United States Military Academy at West Point, which was created to fill the need for professionals trained in the military sciences who would be ready to protect the country in times of war. Today, with our nation’s financial security as important as the safety of its physical borders, a financial academy would stave off economic disaster, which could result if the public lost faith in the independence, integrity, and efficiency of our financial markets. A second institution, which might be called the National Academy for Public Interest Accounting, would focus on the auditing of privately owned companies, and nonprofit and governmental organizations and other entities supported by public funds.

Preparing for a More Complex World

Over the past couple of years, serious issues have been raised about the quality of audits of publicly funded entities across the country, including the state of New York. The public entities questioned include school districts, nursing homes, fire districts, waste disposal sites, and public authorities. To address such concerns, a rising tide of legislation has been deliberated in statehouses and capitols.

The profession needs to be better equipped to limit the risk of fraud in these entities and maintain the public trust when it comes to the use of taxpayers’ money. Taxpayers should not be taking risks when they pay their taxes.

As the financial world evolves in a borderless, technologically advanced era, effective regulation of the profession through an interstate compact and the implementation of accounting academies would better serve and protect the public. Our nation’s physical borders are no longer the only borders that require well-prepared and well-educated sentries.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA




















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