CPA Out-of-state licensing

Monday, July 11, 2005

Do Accountant's Need to Be Licensed in Every State?

One of the hottest issues in accounting today is the growing trend for state boards of accountancy to place new restrictions on accountants practicing in their state. These rules are being proposed and passed in order to “protect the public”. Since I strongly agree that the public should be protected from unscrupulous persons and fraudulent acts, let’s take a look at the benefits (and costs) to the public.

First, who is covered by these new rules?

· CPAs who are licensed in states other than the one placing the restrictions.

Does each of these states have requirements for CPAs to be licensed in their state, including education requirements, successfully passing the CPA examination, etc.?

· Yes; while the rules may be different, every state requires CPA candidates to pass the national examination and meet stringent ethical requirements.

Are unlicensed, unscrupulous persons covered by these new regulations?

· No; that is beyond the jurisdiction of state boards of accountancy and is not covered by these new restrictions on the practice of accounting in the states.

So what is really happening is that state boards of accountancy are saying that their requirements are better than another state’s.

How do these new state restrictions affect the public?

· The “Big Four” and other large accounting firms are already licensed in multiple states since they have offices throughout the country. However, local individual CPAs, as well as small and midsized accounting firms, are now forced to investigate the temporary licensing rules in every state where a client resides or must file a tax return. Clients with multiple state returns, long-time clients who have moved to another state, or even a client whose child is in college and earns money to help pay for school may now be forced to sever that relationship or use large international accounting firms.

· The economics for most sole practitioners and local firms to comply with each state’s temporary licensing requirements are simply not feasible. The cost and time involved in even researching the temporary licensing rules for each state, filling in the forms, and paying the fees for five, ten, fifteen or more states doesn’t make sense unless the CPA has large clients or many clients in the state. Thus states have effectively reduced the public’s choice of professionals through the passing of these restrictions.

But I thought the Uniform Accountancy Act (UAA) was supposed to reduce the differences between states and facilitate interstate practice.

· So did I. But after long discussions with the National Association of State Boards of Accountancy (NASBA) and more than a dozen state boards of accountancy, it appears that we are moving in the opposite direction.

States have apparently determined that in order to “protect the public”, they need to limit the public’s choice of accountants to big accounting firms and CPAs within their state.

Well, isn’t it important that the preparers of state tax returns be familiar with the rules in that state?

That is a valid point. However, most states piggyback their rules onto those of the Federal government. For those states that do have extensive differences between state and Federal tax laws, most practitioners today rely heavily on their tax software to make the appropriate adjustments and remind them of the different rules.

Isn’t this really just a big to do about nothing?

I recently tried researching the temporary licensing rules for a seminar I was doing in Colorado. Here are some the differences I found in the temporary licensing rules that affect CPAs in that class:

· One state had no provision for temporary licensing and required all accountants who performed any accounting work for a resident of the state to be fully licensed.

· One state had a 13-page form that included a requirement for copies of the applicant’s original college transcript.

· One state required out-of-state CPAs to be licensed only if they set foot into the state, but the requirements include all tax returns.

· One state had an exemption for sole practitioners; so if there were two CPAs in the firm, that state’s public would be protected from “bad” accountants, thus assuming that all sole practitioners must be “good” accountants.

· One state had a temporary licensing requirement by engagement with a $450 fee for each engagement.

In addition, states are not standing still. In response to the restrictions being placed on Colorado CPAs, the Colorado Board of Accountancy called an emergency meeting to effectively reciprocate what the other states were doing to their CPAs. So it may take a full-time employee just to keep up with the constantly changing rules.

One of the most frustrating parts of the issue is that there is no central place for CPAs to research each state’s rules. It sometimes took 30 minutes or more for me to locate the place on the State board’s website that related to temporary licensing. Some I never found.

So what is so different about accountants needing to be licensed in every state for which they want to practice? Don’t doctors, attorneys, and even contractors have to be licensed in a state before they can practice in the state?

This is a question that I labored with for quite a while. Was it really that we, as accountants, were just used to the freedom of being able to provide services to our clients around the country? After discussing this with numerous practitioners and gathering more of the facts, I realized that there is a big difference between representing a client in court with all the differences in state civil and criminal laws or building a home or office building and not knowing the local zoning laws or utility companies to contact. Many companies operate in multiple states. Individuals own property in different states. If they had to have a different CPA to prepare each state’s tax return or multiple CPAs to prepare a financial statement, it would be financially prohibitive.

Is the public really being protected by increasing the restrictions on the practice of accounting by duly licensed CPAs? Do accountants need to be licensed in every state? I believe this is an issue that needs to be reconsidered.