Interstate Compact: Regulating the Profession as Practiced

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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













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