Elliott Testimony

TESTIMONY of
Robert K. Elliott
Chairman American Institute of Certified Public Accountants
before the
Committee on Higher Education of the
New York State Assembly
concerning
Proposed Amendments to the State Accountancy Statute (A.8600)
November 16, 1999

Good morning. My name is Robert K. Elliott. I am Chairman of the American Institute of Certified Public Accountants (AICPA), a member of the New York State Society of Certified Public Accountants, and a partner in KPMG LLP, a fin-n of certified public accountants (CPAs) practicing in New York. The AICPA is the professional self-regulatory organization for CPAs in the United States, with more than 330,000 members.

The AICPA has produced, Jointly with the National Association of State Boards of Accountancy (*1) a Uniform Accountancy Act (*2) (UAA) that both organizations encourage all states to adopt in the interests of uniform, high quality regulation of CPAs to better serve the public interest. The proposed amendments to the New York State Accountancy Statute are substantially consistent with the UAA.

I appreciate the opportunity to testify this morning in support of Assembly bill 8600.

The current regulatory system, including the New York Accountancy Statute, whose 1896 predecessor was our nation's first accountancy statute, has served the public and the accountancy profession well for many years. However, aspects of the current business climate are challenging the ability of the system to serve the public and the profession in the next century. These factors include:

- Globalization. We live in a rapidly shrinking world. The move to a global economy is accelerating, thanks to international trade agreements, advances in technology, communication, and travel. National and state boundaries, standards, and regulations are fast becoming limitations in a global marketplace. Businesses are adapting to these changes, and the accounting profession and state boards must also respond to meet the future needs of clients, employers, and the public. Foreign reciprocity is already underway, as international trade agreements provide an opportunity to permit qualified accounting professionals to offer services in the U.S. and U.S. professionals to be recognized abroad. With a shift to global capital markets, efforts are also underway to harmonize the accounting and auditing standards of the various developed countries, which may well lead to one set of global standards in the near future.

- Information Technology. Information and communication technologies are changing how information is developed and distributed, who distributes it, how it is stored, and how it is used. Thus, even sole practitioners and small firms can enter the global marketplace through the World Wide Web and are doing so now. These technological advances challenge regulations that depend largely on the physical presence of an individual in the state of jurisdiction.

- Expansion of Services. CPAs have expanded their scope of practice well beyond the traditional accounting, auditing, and taxation services that existed when the state board regulatory system was established. Today, CPAs offer a wide and growing range of services to satisfy new and existing clients and the public.

- Challenges to the Current System. Aspects of the current regulatory structure for the profession are under attack from various parties. They include CPAs who do not agree with the current system and feel it impinges on their perceived right to use their CPA title. On this front, the outcome of recent lawsuits in several states could dramatically affect the current regulatory system for the profession.

- Demographic Shifts. The focus of regulation has been on CPAs in public practice. Yet there has been an ongoing shift in the composition of the accounting profession away from public practice. Today the majority of CPAs work outside public practice in industry, government, education, and other fields, and it is likely that this shift will continue into the foreseeable future.

As a result of these shifts, the practice of accountancy has already changed and will further change in the future. The accountancy statutes of the various states have as their primary purpose to protect members of the public who rely on a CPA's report on financial statements, but who do not have the opportunity to either select the CPA or observe directly the quality of his or her work. But every aspect of the traditional audit relationship is changing:

-- Annual financial statements on paper are likely to be replaced by on-line access to real-time financial and non-financial information. Information content, frequency, and distribution methods will all change.

-- Auditor's reports are likely to evolve into on-line "seals 399 providing real-time assurance on the information. Such seals must be valid anywhere in the world, not just the jurisdiction in which the CPA happens to physically practice.

-- Audit technology is likely to evolve from the historical model of after-the-fact-detect-ion-and-correction to a preventive, systems-based model that produces reliability by design.

-- Audit firms are likely to need substantial capital to support the research and development of new audit paradigms as well as to attract, train, and retain the talent necessary to perform such "high-tech" assurance engagements. This capital can not be raised by traditional partnerships, necessitating development of new practice structures.

The magnitude of these changes suggests the urgent need to modernize the accountancy statutes to facilitate the evolution of the accountancy profession so it can continue to serve the public interest in reliable enterprise information and even improve its ability to do so.

The emergence of the new paradigm suggested above will result in the following benefits to investors, creditors, and others who rely on the work of CPAs:

-- Improved liquidity through reduced information asymmetry between buyers and sellers, permitting capital to find its highest and best use in our economy, thus promoting economic development.

-- Improved financial-markets trust, facilitating the further democratization of financial investments.

Given the directions that accountancy has already gone and is likely to go in the twenty-first century, the Assembly bill will be beneficial to both the relying public and the accountancy profession.

It will permit the profession to better serve those who rely on it and to prosper. It goes without saying that the public can be well served only by a robust and prosperous profession.

-- Standardize the regulation of CPAs throughout the United States (as all states come into line with the UAA). This will improve quality and reduce consumer confusion.

-- Permit mobility of CPAs across all states whose accountancy statutes are "substantially equivalent" (as they will all be when all states come into line with the UAA).

-- Facilitate international trade in accountancy services, as mandated by United States participation in the World Trade Organization under the General Agreement in Trade in Services.

-- Permit the emergence of new, better capitalized organizational forms, thus permitting the development of new and better services for consumers as well as attracting and retaining the talent necessary to serve their interests.

-- Focus regulation on those services involving public reliance on CPAs, better balancing the need for public protection with the benefits of free-market competition in other service areas.

Thus the proposed amendments to the Accountancy Statute are in the public interest and will facilitate the evolution of the profession as it responds to the twin pressures of globalization and information technology.

Again, I appreciate the opportunity to appear before you today, and I would be pleased to answer your questions.

(*1) The National Association of State Boards of Accountancy is the forum for the nation's state boards of accountancy, which administer the Uniform CPA Examination, license certified public accountants, and regulate the practice of public accountancy in the United States.

(*2) The Uniform Accountancy Act and Uniform Accountancy Act Rules, 3rd Edition, revised November 1999. A summary of the key provisions of the act is included in the Appendix, "The New AICPA/NASBA Uniform Accountancy Act: What Does It Mean?"

(*3) The CPA WebTrust seal that already appears on some websites is an example of this type of assurance.

Recently the AICPA and NASBA approved significant changes to their jointly published Uniform Accountancy Act (UAA) and Uniform Accountancy Act Rules. The UAA is a model bill and set of regulations that AlCPA and NASBA designed to provide a uniform approach to regulation of the accounting profession.

The recent changes made to the UAA flow from major recommendations of the AlCPA/ NASBA Joint Committee on Regulation of the Profession (Joint Committee). The Joint Committee studied the issue of regulation for more than a year before issuing its report in May 1997. The report included numerous suggestions for improving the current state-based regulatory system for the profession as it moves into the next century.

As the Joint Committee carried out its deliberations, it focused on a number of current environinental factors that are affecting the accounting profession and its regulation. These include:

The Joint Committee also identified several key goals that are of central importance to any modification of the current regulatory system for CPAs in today's global economy and marketplace. These include:

Equality-to ensure that all who wish to use the CPA title are licensed and subject to state board of accountancy regulation regardless of their field of employment. The Act also promotes rules for licensing, practice, and ethics that are more uniform across jurisdictions and removes barriers that limit CPAs from using the CPA title.

Ease of Movement-to permit ease of mobility for CPAs across state lines, in person or electronically, in order to serve clients and employers outside the state where CPAs are licensed.

Response to the Marketplace-to remove barriers that unnecessarily limit CPAs and CPA firms from competing effectively in the marketplace for a broad range of professional services. The new UAA provides a balance between public protection and free market competition.

Protection of the Public Interest-to ensure an effective enforcement system. The new UAA enhances protection of the public interest where it is most critical-that is, in the area of attest services. But the Act also assures that anyone who uses the CPA title must adhere to an appropriate level of professionalism.

The following is a brief summary of the recent changes to the UAA. References to sections of the UAA or UAA Rules are provided for convenience.

Perhaps the most significant change in the new UAA relates to providing greater ease of mobility across state lines for CPAs both in person and electronically. The cornerstone of the approach recommended by the Joint Committee is the concept of "Substantial Equi-valency" originated by NASBA.

Under this concept, if a CPA has a license in good standing from a state that utilizes CPA certification criteria that are essentially those outlined in the UAA, then the CPA would be qualified to practice in another state that is not the CPA's principal place of business. To use the concept to obtain a reciprocal license, a CPA must personally have qualifications that are substantially equivalent to those in the UAA. A NASBA Qualification Appraisal Service will be available to make these determinations of equivalency at the request of state boards, on a state-by-state basis, as well as for individuals. (UAA Sections 6(c)(2), 23 and UAA Appendix C).

Individual CPAs who practice across state lines, or who service clients in another state via electronic technology, would not be required to obtain a reciprocal license if they hold a valid license from another state and if their state of licensure is deemed substantially equivalent, or if they are individually deemed substantially equivalent. In this case, the CPA must notify the state board in the state in which the service will be performed. (UAA Section 23(a)(1)(2)).

If a CPA relocates to another state and establishes his or her "principal place of business" in that state then he or she would be required to obtain a license in that state. Likewise, if a firm opens an office in a state, the firm would be required to obtain a license in that state.

To assure protection of the public, provisions have been added to the UAA to enable state boards to discipline licensees from other states who practice in their state under substantial equivalency. In addition, the state of the licensee's principal place of business, which has the power to revoke his or her license, will have the authority to discipline licensees if they violate the law in another state when performing services outside the state. Another provision assures that the state board in the state of the CPA's principal place of business will be required to give consideration to complaints made by state boards of other jurisdictions. (UAA Section 23(a)(3), (b).

CPA = CPA
The Joint Committee recommended that all CPAs, regardless of their particular field or place of employment, be subject to licensure and regulation by a state board of accountancy. The new UAA accomplishes this by requiring all individuals who wish to use the CPA title to hold a valid license. (UAA Section 3(c),(f), Section 14(c)). Individuals may obtain a CPA license once they demonstrate they have met appropriate education, examination and experience requirements. (UAA Section 5). This license must be renewed periodically by demonstrating compliance with a CPE requirement. (UAA Section 6).

As long as individuals hold a CPA license they are subject to the authority of the state board of accountancy, regardless of what they do for a living and regardless of whether they use their CPA title. All licensees must comply with the accountancy law and regulations. (UAA Section 10).

The definitions of "holding out" and "practice of public accountancy" have been removed from this latest version of the UAA. Now, regardless of where they work or what they do, all licensees are subject to regulation by the state board. These changes are also consistent with recent court decisions ruling that duly licensed CPAs may use their title or "hold out" as CPAs regardless of where they work.

The historical regulatory framework for CPAs-that is one requiring CPAs to offer all public accounting services only through a CPA firm-has been called into question in light of current business practices and litigation. The new UAA recognizes these phenomena but also makes it clear that in all cases, individual CPAs will be licensed and subject to state board regulation.

Under the new UAA, CPAs are not required to offer services to the public, other than traditional attest services, through a CPA firm. CPAs may offer other services through any type of entity they choose. These entities are not licensed by the state board, and there are no CPA ownership requirements for them as long as they do not call themselves CPA firms or use the term "CPAs" in association with the entity name. However, all individual CPAs working in such entities must hold a valid license and are subject to regulation and discipline by the state board. (UAA Section 7(a)).

The Joint Committee recommended changes in the regulation of CPA firms to respond to changes in the marketplace for CPA services, the expanded use of non-CPAs within CPA firms, the need by firms to raise capital, and recent court decisions on who can call themselves CPAs.

Under the new UAA, those CPAs who wish to offer or render "attest services" for the public must do so in a CPA firm that is duly licensed by the state board of accountancy. (UAA Section 7). These firms must undergo peer review every three years (UAA Section 7(h)) and assure that those CPAs in the firm who supervise traditional attest engagements and sign or authorize someone to sign reports on financial statements meet an appropriate experience requirement that will be spelled out in professional standards. (UAA Section 7(c)(3), (4)). CPAs who do not perform traditional attest services may also organize as a CPA firm, as long as they follow all the applicable regulations for CPA firms.

A simple majority of the ownership of the CPA firm, in terms of financial interests and voting rights of all partners, officers, shareholders, etc. must belong to individuals licensed as CPAs in some state and the partners, officers, shareholders, etc., eligible for licensure as CPAs must be licensed in the state in which they have their principal place of business and perform professional services. (UAA Section 7(c)(1)).

All non-CPA owners of the firm must be active participants in the firm or its affiliated entities. The firm must designate and identify to the state board a licensee in the state who is responsible for the proper registration of the firm. (UAA Section 7(c)(2)).

The CPA firm name may not include the name of a non-CPA if "CPAs" is also included in the firm name, as this would be misleading to the public. (UAA Rule 14- 1).

The Joint Committee believes these changes to the basic regulation of CPA Firms will assure continued protection of the public in the most critical service area-traditional attest services. The new attest experience requirement will actually provide additional public protection by assuring competency of those individuals responsible for this function within CPA firms. At the same time, these changes also recognize that the structure of CPA firms, and the non-CPA firms they compete with, has changed in recent years and that the courts have defined much broader rights of practice for CPAs in these areas.

In the past, the UAA and its predecessor Model Public Accountancy Bill restricted the performance of audits, reviews, and compilations, performed in accordance with professional standards (SASs and SSARS), to licensees. The new version of the UAA expands on that concept slightly, by including other engagements performed in accordance with the Statements on Auditing Standards (SASs) and examinations of prospective financial information performed in accordance with the Statements of Standards for Attestation Engagements (SSAE) in this category of restricted services for licensees, which are defined as "attest services." (UAA Section 3(a), Section 14(a)).

These "attest services" are the most publicly sensitive because of their third-party reliance characteristics. They are the only professional accounting services that are restricted to licensees.

A definition of these "attest services" has been added to the new UAA, because it now plays a critical role in defining requirements for licensees and firms that perform these services. (UAA Section 3(a)).

-- Attest services may only be performed by a licensee operating in a licensed firm. (UAA Section 7(a), Section 14(a)).

-- Firms that perform attest services must undergo peer review every three years. (UAA Section 7(h)).

-- Licensees who supervise attest engagements for their firms and sign or authorize someone to sign reports on financial statements must have met certain experience requirements that will be defined in the professional standards. These professional standards will be developed with input from state boards. (UAA Section 7(c)(3), (4)).

-- Licensed firms must show that attest services are under the charge of a licensee. (UAA Section 7 (d)).

-- Licensees or firms cannot accept commissions or contingent fees for products or services provided to clients for whom they also perform attest services. (UAA Section 14(m)(n)).

The new UAA also includes "safe harbor" language for use by unlicensed individuals. This concept ties directly to the definition of attest services and the restriction of these services to licensees.

Under the UAA, only licensees may express an opinion or assurance on financial statements or use report language that implies the financial statements have been prepared in accordance with professional standards (SSARS). (UAA Section 14(a)(b)). However, unlicensed individuals may perform basic accounting services and issue financial statements on which they do not opine and which they do not purport to be prepared in accordance with professional standards (SSARS).

The "safe harbor" language added to the UAA (UAA Rule 14-3) is acceptable language that unlicensed individuals may use in association with financial statements that would not be in violation of the law and rules. While use of the language is voluntary, this safe harbor language gives guidance to the unlicensed to assist them in complying with the law. Currently, about twenty (20) states have some type of safe harbor language for use by unlicensed individuals.

Under the broad regulatory approach of CPA equality in the new UAA, all CPAs will be regulated in everything they do. As a result, the Joint Committee decided that a "public accounting" experience requirement prior to licensure (as was the case in the prior UAA) was too restrictive in light of today's environment for CPA services. Over half of today's accounting graduates pursue initial employment outside of public accounting.

Therefore, the new UAA contains a broad experience requirement for initial licensure of one year providing any type of professional service or advice involving the use of accounting, attest, management advisory, financial advisory, tax, or consulting skills, all of which must be verified by a licensee. This experience can be gained through employment in government, industry, academia, or public practice. (UAA Section 5(1), UAA Rule 6-2).

While the new UAA moves to a broader experience requirement for initial licensure as described above, it also adds a new feature requiring additional specific experience for appropriate individuals in firms that perform traditional attest services. (UAA Section 7(c)(3), (4)).

This requirement is designed to provide protection to the public with respect to the most sensitive services provided by licensees. Any licensee who is responsible for supervising traditional attest services and signs or authorizes someone to sign the accountant's report on the financial statements on behalf of the firm must comply with the appropriate experience requirement for such services as dictated by professional standards.

AICPA and NASBA will work cooperatively to develop a requirement that provides adequate protection to the public in this sensitive area. The development of this attest experience requirement will go through the normal development and exposure process for any new or revised professional standard. Licensees, state boards, and the public will all have an opportunity to provide input on the requirement as it is developed.

Compliance with this requirement will be monitored through the mandatory peer review process for firms (UAA Section 7(h), UAA Rule 7-3) and through complaints received by state boards.

The new UAA maintains the previous CPE requirement for license renewal of 120 hours of CPE during a three-year period preceding renewal, with a minimum of 20 hours in each year. However, a new feature is the introduction of language referencing the Statement on Standards for Continuing Professional Education (CPE) Programs jointly issued by NASBA and AICPA. (UAA Rule 6-4 (a)).

The CPE committees of NASBA and AICPA are currently studying the whole concept of CPE based on developing a CPA's competency. As new approaches to CPE are developed they will be incorporated into the CPE Standards. By referencing the Standards in accountancy regulations, state boards can more easily implement changes and it will provide greater uniformity to the approach to CPE that will be provided in the states.

The new UAA also allows for an exemption from CPE for CPAs who are retired or inactive and do not offer or render services to the public. Those individuals must include the word "inactive" adjacent to their CPA designation on business cards, letterhead, etc. (UAA Rule 6-7).

Finally, the CPE records requirements in the new UAA have changed. No longer will CPAs be required to submit documentation of every CPE course they have attended along with their renewal application. Rather, they will be required to sign a statement indicating they have complied with the state's requirements for CPE programs, and they must retain documentation on the CPE programs they attend for a period of five years. (UAA Rules 6-6(a)).

The previous UAA was silent on the issue of licensees accepting commissions and contingent fees and therefore could be construed as not prohibiting their acceptance in any way. The Joint Committee decided it was important to clarify this issue. Currently, states are split-slightly more than half permit licensees to accept these types of fees on some basis, while the rest continue to prohibit acceptance of such fees. The trend in recent years has been a move by states to permit such fee arrangements.

Provisions (UAA Section 14(m) and (n)) in the new UAA provide for the acceptance of commissions and contingent fees in certain situations mirroring the AICPA Code of Professional Conduct rules. Basically, they enable licensees to accept commissions that are disclosed to clients, except in situations where licensees perform traditional attest services for the client. In addition, licensees can accept contingent fees for services, except from clients for whom they perform attest services and except for preparing an original tax return. Contingent fees for preparation of amended tax returns or refund claims would be permitted, as long as the licensee had a reasonable expectation the claim would be the subject of a substantive review by the taxing authority.