Regulation in Step with Reality

Few people realize that tax services rendered by a New York state–licensed CPA are not supervised by state regulators (the Board of Regents) as they are in other states—and that’s not all.

A New York state CPA is licensed only to perform the practice of public accountancy, which is narrowly defined as “including but is not limited to an audit, review, compilation, forecast or projection.”

CPAs regularly perform other services in the same firm or in related business units that are generally unregulated. Assemblies, write-ups, all tax planning and preparation work, valuation and other business consulting services would fall in this category.

The reason for the narrow band of regulated CPA services is historical. In 1896, when the law that regulates the accounting profession in New York was initially enacted, what we think of today as traditional audits and verifications were what CPAs were supposed to do. Income tax and computers did not yet exist. The law was substantially amended once, in 1947. Those changes did not significantly modify the scope of professional services to be regulated—and that was 60 years ago. The public relies on us for a lot more today. It’s time to narrow the legislative gap in our professional regulation here in New York.

Everyone—CPAs, the regulators, legislators—wants the law governing the profession to actually reflect what CPAs do now, although nonattest services can be offered by unlicensed providers, who compete with CPAs. The expectation is that offering these services through a properly licensed and appropriately regulated CPA provides the additional standards and reputation of a CPA to back up the services. Even so, it has been a challenge to figure out how to update the law.

On the positive side, most agree that the definition of the profession should be expanded to include all attest (audit and review of statements and processes), tax, compilation, and expert accounting and related professional services. This would apply to those working in a CPA firm or in other capacities, such as in industry or in government. If these services were included in the licensed profession, performing them would then qualify for work experience leading to licensure, as long as they were performed under a CPA’s supervision. The continuing professional education requirement would then apply to all CPAs, not just to those in public practice.

There is also an apparent consensus on several other legislative changes, including mandating CPA firm reviews, allowing New York CPAs to accept disclosed commissions and referral fees for nonattest clients when they are otherwise legal, and on many technical fixes that would modernize the law.

The debate over how to make these changes has continued for more than three decades. Updated laws to regulate the profession would help all of us maintain and monitor the highest appropriate professional behavior in connection with the core services the public trusts us to deliver. Furthermore, we can then use a broader range of professional services to meet CPA experience requirements, rather than forcing all CPAs to gain audit experience.

So what is stopping us from narrowing the gap? Not much; we are very close, but as always in matters involving finding a consensus among groups with varying perspectives, the devil is in a few details. The details are in what the profession calls “mobility.”

In its broadest sense, mobility encompasses all the issues that arise when a CPA who is licensed in another state wants to either become a New York state CPA or serve people or businesses in New York state.

Most agree that the first prong of mobility, licensing others to practice in New York, can be accomplished by simply codifying and broadening current regulations and regulatory authority. This way, the New York state regulator will be able to protect the public interest with ongoing flexibility to address ever-changing business practices and non–New York licensing changes.

The second prong, serving people or businesses in New York state with an out-of-state license, is the sticking point. This issue is one of many challenges we face as we shift from the bricks-and-mortar–dominated economy to the technology-driven service-business model. Meeting this challenge is critical in retaining the relevancy of our nation’s balance between federal free trade and state regulation of the professions.

To protect New York’s citizens and institutions, the new law should automatically subject out-of-state CPAs to New York accounting regulations and rules if they have any connection to New York state persons. The AICPA, through the Uniform Accountancy Act, has been successfully urging states to provide these same reciprocal jurisdictional responsibilities and privileges for years. Some say they exist in New York’s general laws now, but the proposed changes would make it clear that any CPA from another jurisdiction would be subject to the New York standards and jurisdiction when serving clients with any connection to New York state.

So when do you need a license, and when can you serve New Yorkers with your out-of-state CPA license?

On one hand, no one disputes maintaining the current law for auditors that requires a firm that opens an office in New York to be registered to practice by the New York State Education Department and requires each “partner” who has the responsibility for the New York office’s work product to be a New York CPA.

On the other hand, most people we have talked to also agree that out-of-state CPAs serving New Yorkers or some CPAs who visit New York when they or their firm does not have an office in the state, should be exempt from registration. The NFL calls it “incidental contact” when you bump into the intended receiver without significant impact in competing for the ball. For us, incidental contact would cover signing tax returns filed in New York, taking calls and answering mail from an out-of state office, and (hopefully) observing an inventory stored in New York for a business headquartered out of state. Although the law is unclear on this point, incidental contact should continue to allow, as is the practice today, out-of-state CPAs to work for a New York CPA firm in any capacity until they have the authority customarily given to partners to sign or approve for release the firm’s ultimate work product in any regulated area. Nonregular client meetings, attending seminars (with or without a client) and other incidental contact should also be exempt. The challenge is agreeing on the definition of incidental contact.

New York lawmakers are accustomed to more restrictive principles that would require registration and/or notice in many more instances. They want to monitor activity before enforcement becomes an issue, and they want many more out-of-state individual CPAs, rather than their firms, to register, either permanently or with “temporary practice” permits.

Temporary practice permits seem to be the key to bridging the gap. They would allow incoming CPAs the ability to start work promptly and the state regulators time to review qualifications and other background information prior to actual licensure. In a resource-starved profession, we must be able to hire qualified persons—CPAs and non-CPAs, at all levels—to support our professional services here in New York. The regulators want to be sure that the professional responsible for the New York–based work is always under their supervision. CPAs need to be mobile to be effective in today’s economy, yet all of us understand the need for strict regulatory authority over people responsible for issuing audit reports in New York.

We continue to search for legislation that will meet the demands of the 21st century. It is my hope that we can find a definition of incidental contact that we can all agree upon—a definition that will allow all interested parties to support a system that will update our accountancy laws. We need to give the profession the increased regulation it wants, and we have to provide the public the updated protection it deserves.