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to Basics
In accountancy,
apart from quasi-regulatory bodies such as FASB and the PCAOB,
or government agencies such as the GAO and the SEC, by far
the most powerful institutions associated with the accountancy
profession are the businesses that employ individual professionals,
whether public accounting firms or large commercial businesses.
In such an environment, the emphasis of both governmental
and self-regulation invariably shifts from individual professionals
to their business employers, while laws, regulations, and
professional ethics tend to focus on personal professional
behavior. In addition, larger employing entities generally
“corporatize” more completely than smaller ones,
while sole practitioners treat themselves as rendering personal
professional services. Accountancy
is experiencing today the tensions created by these concurrent
and often contradictory concepts of practice. For example,
because quality-control standards in large firms are part
of standard operating business systems, their response to
peer review is quite different from that of sole practitioners,
for whom quality control is tightly associated with firms’
personal moral codes and professional ethics. Additionally,
disclosure to clients of third parties’ roles in tax
preparation is far more intuitive to those providing tax
services to their personal clients than to those assigned
by management to work on firm clients. Both approaches exist
simultaneously and to varying degrees.
Professions
Although
it became popular during the 1990s to talk about “market-based”
professions, societies formally recognize activities as
professions because market-only solutions generally do not
provide a sufficient long-term supply of qualified, competent
individuals to satisfy all demands for the activity. It’s
the rare business that can grow its professional workforce
for possible future demand when its current revenues are
slumping. Likewise, it’s a rare individual that will
pay for a professional education and absorb the opportunity
costs of gaining experience in the face of highly uncertain
future earnings in the practice of that profession. Moreover,
activities that societies formally organize as professions
have a fundamental core service (usually personal) that
could be compromised if left solely to market solutions.
Consider your own reaction if the lawyer you retained did
not advocate for you because your opponent outbid you, or
your doctor dropped you for another patient who paid more,
or the auditor of a company you invested in were paid contingent
on an opinion acceptable to the company.
Because
of these considerations, societies usually organize professions
to buffer them somewhat from the instabilities inherent
in market organizations and from the pressures that arise
from normal competitive market practices. Usually, there
is a transfer of some of the risks and costs associated
with professional education, from both aspiring professionals
and the businesses, to professional schools, with experience
opportunities organized through the schools or other profession-wide
institutions. In addition, payment for professional services
becomes part of public policy, determined in part by legislative
and regulatory bodies rather than purely by market forces.
The
Fundamental Regulatory Structure of Accountancy
Part
of why accountancy has never quite achieved its professional
promise is the basis of state regulation. For example, in
New York State, professions are regulated by title or by
practice. Medicine, pharmacy, and most other professions
are regulated by practice. CPAs are regulated by title.
For example, a pharmacist is regulated when selling a prescription,
but not when selling a candy bar; a doctor is regulated
when writing a prescription, admitting someone to a hospital,
or performing an operation, but not when writing a diet
book. A prescription cannot be legally obtained without
a doctor’s prescription that is filled by a pharmacist.
On the other hand, there are numerous examples of financial
statements for third-party use legally prepared without
the involvement of a CPA. Although both the federal and
state governments regulate in various ways the numerous
different types of entities that employ doctors, only a
doctor can practice medicine, even when employed by an industrial
corporation. On the other hand, neither the federal nor
the state government restricts the employment of individuals
practicing accounting to CPAs, except in CPA firms.
Although
there are historical reasons for this situation, a major
contributory factor has been the inability to reach a consensus
on what constitutes the practice of public accountancy.
The Uniform Accountancy Act has contributed to the confusion
by extending the regulation-by-title approach to virtually
everything a CPA does, without regard to whether the activity
itself is regulated. As with many issues, a consensus in
the private sector would likely precede any governmental
consensus.
Service
Types
Even
though a consensus about what it means to practice public
accountancy seems remote, SEC chief accountants in recent
years have suggested that public companies should have CPA
employees in charge of their financial reporting. In the
meantime, however, it would help to sort CPA services by
the ultimate beneficiary. Services with inherently unknown
third parties (currently, audits, review, compilations,
and certain attestations) should be differentiated from
services with no inherent third parties (the various consulting
services, including tax planning) and from tax preparation,
where the government is the known third party but tax preparers
are expected to take the client’s perspective.
Robert
H. Colson, PhD, CPA
Editor-in-Chief
rhcolson@nysscpa.org
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