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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.


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




















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