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Embracing
a Borderless, Technologically Advanced World
Time for a New Era of Accounting
Regulation
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
lgrumet@nysscpa.org
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