What Enrolled Agents Can do vs. CPAs

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I have never been a CPA, but I did major in accounting and I was taught Generally Accepted Accounting Principles (GAAP). In taking care of issues in the cannabis business, if you use GAAP, you can expense more items through cost of goods sold (COGS) than you can under any other method of preparing financial statements.

Obviously, I haven’t used GAAP since school, so not wanting to get sanctioned by the Florida State Board of Accountancy, I sent them a simple question.

I asked them, “As an EA can I prepare a financial statement under GAAP?” I’ve been in practice for 24 years, and I remember a time when I could call the statements that I prepared in Florida compilations. Somewhere along the way, CPAs hijacked the term compilation, and EAs were no longer allowed to use it in Florida. The answer I received from the State Board of Accountancy was that, as an EA, I wasn’t allowed to do financial statements, much less a GAAP statement.

Let’s hold up here for a second. First of all, I do tax planning for businesses. The only way to do tax planning, is to put the business’s records into the form of a financial statement. Meaning I have to produce a Balance Sheet and an Income Statement that clearly reflects taxable income. One could argue that a tax return itself for a business is a financial statement. Page one of the business return is the income statement, and Schedule L on Page 4 is the Balance Sheet. A GAAP statement is more or less a statement produced under the accrual method of accounting, with some adjustments.

So I called a CPA colleague of mine that I refer any client to that needs an audited, reviewed or compiled statement, and he told me that the term “financial statement” was what the State Board of Accountancy had a problem with. That’s because in reality the only people who can produce a financial statement in Florida was a CPA. So, we are basically back to splitting terms again.

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About Craig W. Smalley, EA

Craig Smalley

Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.

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Jan 26th 2018 13:56

Mr. Smalley,

I would like to address several incorrect and insulting statements and implications in your article. First of all let me say that I understand your confusion and frustration over the issues surrounding financial statement services and who is allowed to provide them, but we work in an industry that is mostly about regulations, so understanding them and knowing how to apply them is important.

To start, you don't seem to have a good grasp on what CPAs in public practice do and have knowledge and expertise in, or of attest services in general. You stated that compiled, reviewed, or audited financial statements are always “produced under GAAP.” However, as you would say, that is EXACTLY wrong. Financial statement preparation and attest engagements are often performed using other bases of accounting, including cash basis and tax basis (which you seem to imply CPAs don’t know anything about).

Since I am a CPA, let me address a few of the points you have made regarding CPAs.

First, you stated “only about 10 percent to 20 percent of CPAs specialize in tax.” Where are you getting your data? It has been my experience that most CPAs, at least those in public practice providing the types of services you are talking about, primarily provide tax services. For example, of the dozen or so CPA firms servicing the same area my firm does, only about three or four of us provide attest services (along with tax services) and the rest focus solely on tax preparation for the majority of their business. To provide some actual data, if you look at the MAP survey published by the AICPA, you will see that on average, firms with less than $5M of revenue get about 50-60% of their revenues from tax services. Consider that many of these firms have separate departments for tax and attest services, so a person who is doing an audit at these firms specializes in auditing, and a person who is preparing tax returns there, specializes in tax. Some of us in smaller firms have to specialize in both, but that does not take away from our level of expertise, nor does it make us in some way less of an expert in one area or the other, it just means we have to put in more hours and effort to do so.

You go on to say “They are mostly concerned with attest services, which they will use the results of to prepare a tax return.” Again, this is incorrect as stated above, but you also imply here and in other statements in the article that CPAs will not know to, or maybe you think we don’t know how to, convert our compiled, reviewed, or audited GAAP basis financial statements to tax basis accounting when preparing a tax return. Personally, I find this implication offensive to the entire CPA profession.

CPAs by definition must be experts in both taxation and attest services to become licensed, regardless of what services they will offer in practice. The process to achieve and maintain a CPA license is one of the most rigorous of any profession. In contrast, anyone can become an EA by simply passing a test. For comparison, CPAs must have the equivalent of 5 years of college education, including certain courses in business and accounting (including taxation). EAs have no college education requirement. CPAs must have professional experience before being licensed, EAs do not. After becoming a CPA, one must maintain 120 hours of continuing education every 3 years. EAs only have to have 72 hours in the same time period. CPA stands for Certified Public Accountant, meaning that we are certified by a state board to practice in all areas of accountancy. EA stands for Enrolled Agent, meaning that they are enrolled/licensed by the IRS to provide tax services only. EAs are prohibited from using the word “certified.” The IRS automatically grants CPAs the rights and privileges to provide tax services and practice before the IRS without taking the exam they require of enrolled agents, because CPAs are already tax experts by definition. For you to imply that most CPAs know little to nothing about tax accounting is, again, insulting and simply incorrect.

You also imply that CPAs don’t know to, or how to, calculate depreciation using MACRS, which is just absurd.

One last difference between EAs and CPAs are the standards under which we perform our services. Both must follow IRS regulations, both must adhere to their respective professional organization’s codes of ethics and professional conduct, but CPAs also have to perform tax services according to the AICPA’s Statements on Standards for Tax Services, which is an even higher level of standards and practices for the tax services being performed than EAs are required to follow.

In conclusion, and to repeat your question “Who is better: an EA or a CPA?,” you are correct that it does depend; it depends not on the type of service the client needs (except when it comes to attest services, which as you mentioned should be performed by a CPA), but on the individual CPA or EA they are considering for the work. There are many EAs and CPAs out there who are excellent tax preparers with vast knowledge and experience. However, if you are simply comparing the two credentials and what they imply about the holder, CPA by far implies more education, knowledge, and professionalism than does EA, based on the requirements of each.

On a personal note, I find this article to be an incredible misstatement of what are presented as facts and misleading to the general public who may be reading it. It should be edited or taken down.

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to CPA Geek 5
Jan 26th 2018 19:35

Every state is different, as I pointed out. I have nothing against CPAs, and didn’t mean to upset you.

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to CPA Geek 5
Mar 4th 2018 18:31

One more thing, the percentages of CPAs that specialize in tax come from the AICPA. Secondly, you have to take a BASIC tax class in college, and one part of the CPA exam is tax. It is unknown to me, why CPAs are allowed to represent clients before the IRS.

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Jan 26th 2018 14:19

I would also like to add that in my state, in addition to compilations, reviews, and audits, financial statement preparation must be performed by a CPA firm, though there are some exceptions. This is in the state code. Just because you aren't providing an opinion doesn't mean you're allowed to perform the engagement. In fact, only audits have opinions anyway, which again shows the author's lack of understanding and knowledge of attest services. So, you really SHOULD check with your state board of accountancy and make sure you aren't breaking the law. I would encourage everyone reading this to disregard the author's nonchalant attitude towards this matter and to know their state's laws and regulations before providing services to the public.

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Jan 26th 2018 16:36

To my knowledge, the only way you can get an answer from the State Board of Accountancy is to submit a request for a Declaratory Statement. I am aware of no such request made to the Florida Board of Accountancy which I currently chair. Perhaps a question was asked of staff, but if a question were asked precisely as you stated, I believe that staff would not have answered it the way you describe.

As defined in professional literature AR60.o5 a compilation is an attest service. The report in a properly prepared Compilation Report states that the "My (our) responsibility is to conduct the compilation in accordance with Statements on Standards for Accounting and Review Services issued by the American
Institute of Certified Public Accountants." Those standards include AR60.05. So to properly issue a Compilation Report, it must be assumed that the issuer knew they were conducting an attest service.

It is my interpretation of Florida law that Compilation services may only be performed by licensees of this State. State law for many years has permitted non licensees to prepare financial statements under FAC61-H1-34. This provision was recently deemed not necessary because new standards under SAARS permitt a level of association with financial statements below a compilation by licensees and non licensees and thus the Florida Rule was repealed as a part of our effort to reduce unnecessary regulation.

I am not sure who you spoke to and not sure the precise question you asked, so I cannot comment on your assertion on what you were told by staff, but I am not aware of any such question directed to the Board of Accountancy.

You mentioned that your Friend said the term “financial statement” was what the State Board of Accountancy had a problem with. Again I suggest that if you want to know what the Board of Accountancy has a problem with, you should ask the Board, not a "friend". The Board follows Florida Statues (made by the Florida Legislature and signed by governor) and the Florida Administrative Code (Rule). I have no knowledge of any statute or any rule where a financial statement is limited to a licensee of the state. There are services that licensees and/or non licensees may provide but your article does not accurately portray those requirements.

Also, to clarify, the Florida Board of Accountancy does not regulate non licensees, so your implication that the Board has any jurisdiction over EA's is incorrect. Unlicensed activity is handled by the Department of Business and Professional Regulation and not the Board of Accountancy.

While there are numerous professional inaccuracies in your article, which others have pointed out, I would merely add one comment that you you can expense more items through COGS under GAAP than any other method. This is simply not true. Often times a cash basis of accounting will result in higher expenses, especially in any period where the value of inventory increased during the current period.

Thank you for opportunity to correct the record for what the Florida Board of Accountancy does and what it does not do. I hope the editors of this blog will consider the inaccuracies of this article and act appropriately.

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to DavidDennis
Mar 4th 2018 18:27

I have been censored by the FL State Board of Accountancy 15 years ago, for disclosing in my report, that the statements were not audited. I was told I couldn't use the terms Balance Sheet or Income Statement. That came from the Board of Accountancy, NOT the DBPR. Today my report indicates that I am not a CPA, the reports are on the income tax basis, and that was all because of the State Board.

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to DavidDennis
Mar 4th 2018 18:27

I have been censored by the FL State Board of Accountancy 15 years ago, for disclosing in my report, that the statements were not audited. I was told I couldn't use the terms Balance Sheet or Income Statement. That came from the Board of Accountancy, NOT the DBPR. Today my report indicates that I am not a CPA, the reports are on the income tax basis, and that was all because of the State Board.

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to DavidDennis
Mar 10th 2018 23:24

Just a note here, you can't have inventory on the cash method of accounting, which is COGS. You either have to use accrual or hybrid, but you are the expert. What do I know?

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Jan 26th 2018 19:10

While not wanting to get into the meat of this discussion and I am NOT either a CPA or an EA, it does seem to me that the CPA profession is a bit over-zealous about a couple of things.

For example, I will be starting a bookkeeping and tax business in the near future but I cannot refer to myself as an "Accountant", even though that's exactly what I am and how I've been employed for over 40 years. CPA's already have a special designation, to wit: Certified Public. Why shouldn't I be allowed to refer to myself as an Accountant???

And, re: financial statement preparation: Unless the financials are a proper "review" or "audit", what's the big deal?? After all, ALL financial statements begin as a compiled/organized arrangement of accounts prepared from the books/records of the entity. If they don't need to be attested, what's the problem?

I think the problem really is billing rate. The CPAs - understandably so - want to protect their professionalism and consequently a higher billing rate. But the fact is, most small companies don't need the expertise of a CPA for general bookkeeping/financial statement preparation. Better to have a general accountant or full charge bookkeeper prepare the records and then leave the heavy lifting to the CPAs and EAs. I think this is in the client's best interest as well: The CPA/EA can double-check/oversee/audit the bookkeeper's work to keep them honest.

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to Michael Abrams
Jan 27th 2018 13:04

Again to your assertion that you cannot use the term accountant in Florida is simply not correct. I refer you to FS 473.322(1)(b) - "A person may not knowingly assume or use the titles or designations "Certified Public Accountant" or "Public Accountant" or the abbreviation C.P.A. ... unless than person holds an active license under this chapter or has the practice privileges pursuant to FS 473.3141". The Statute does not prohibit the term or title "Accountant", unless it is used in misleading manner.

The issue is not billing rates, the issue is protecting the public from confusing titles.

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Jan 26th 2018 19:38

All I know is what the State Board of Accountancy in FL has sanctioned me for. At the end of the day, the point I am making is that 15% of CPAs specialize in tax. I’ve seen it in the 24 years I’ve been in practice. Of that 15%, 1% specialize to the level that I do

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Jan 29th 2018 12:49

Actually, I'm not in the State of Flordia, but in my state and many others, one cannot use the title "Accountant" unless one is a CPA...

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Jan 31st 2018 18:05

I think one of the issue that Mr. Smalley is bringing up is that some State CPA societies may be a bit overzealous in their attempt to regulate the definition of the accounting and tax industry. We EAs know our primary focus is tax. I personally do very little bookkeeping/financial statement preparation. I primarily do tax prep and representation. However, if I did do so, in my state, I can not in any shape or form, state what I do is accounting. In other states, they are much more lenient, and a non-CPA can call themselves an accountant - just not a CPA. Up until recently, some state CPA societies even prohibited EAs from calling themselves EAs! We actually had to have a federal law passed in order for our designation to be acceptable in all states.

I think if AICPA made a more national effort in standardizing their rules and regulations in this matter, it would benefit all of us.

By the way, there are not too many EAs who do not have some formal education beyond just "taking a test". I personally know of many EAs who have accounting degrees, and other financial training. I personally have a Master's in Accountancy, but just am not interested in becoming a CPA, as that is not the type of work I am interested in doing.

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to TJTaylor
Jan 31st 2018 20:31

TJ, while I see the point you are trying to make here, you seem to have a misunderstanding of who has regulatory authority in the accounting industry. State CPA societies and the AICPA are professional organizations. It is the state boards of accountancy that are authorized by state laws to issue professional licenses and regulate license holders. The AICPA does have "nationally standardized rules" for its members to follow, but it does not have any legal authority to overrule state laws and regulatory bodies, nor does it have any bearing on non-members.

Also, I agree with your assessment of EAs in general when it comes to their level of education, but you don't know that based on the credential. My point was that for a consumer who is simply evaluating whether they should call an EA or a CPA for whatever tax services they may need, the only thing they can infer about an individual based on their EA credential alone is that they have passed the EA exam, while the CPA carries much more weight, as detailed in my previous post. Again, this is why I said, it all depends on the individual who will be doing the work. I have absolutely nothing against EAs. Many are highly educated and are excellent tax preparers with the highest level of expertise, but lacking any knowledge of the individual professional, the credentials speak for themselves. It is important for the public to be educated about what each one factually represents and for us not to mislead them with articles like this one.

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to CPA Geek 5
Mar 4th 2018 18:47

exactly how do you carry more weight? You took one basic tax class, and one part of your exam is tax. How is that better?

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to Craig Smalley
Mar 4th 2018 20:30

So you're asking how having a requirement to have a college education that includes taxation (CPA) is better than having no education requirement (EA)? Is that a rhetorical question? I believe it answers itself. Last time I checked, even one is more than zero.

Your mistake is assuming that because you supposedly have a higher education as a basis for your tax expertise, that for some reason applies to all EAs as a class of professionals, which is both illogical and incorrect. Again, my assessment is based on the requirements of each credential as a minimum standard on which to evaluate the holder, and is not reflective of any individual that may have significantly more education or other qualifications than is required of them.

Also (in response to your other reply post above), being able to properly and effectively conduct research, (including proper citation of your source materials), having some educational background for your understanding of business law, and having the education and training to effectively communicate in a business and regulatory context, are all important parts of being able to effectively and successfully represent clients before the IRS, in addition to extensive knowledge of the tax code, and are all generally a part of a CPA's education. Such is not necessarily the case for an EA. So, I would say that's better too.

Additionally, CPAs have extensive accounting knowledge and skills that EAs are not required to have, which means they are better equipped to aid clients in making sure transactions are properly recorded on their books and that their account balances are fairly stated, etc. Since the books are what you must prepare an accurate tax return from, I would say that adds significant value to hiring a CPA over an EA, again just based on the credential.

I don't know you or how good of a tax preparer, consultant, or representative you might be. Likewise, you don't know me, what my background is, how many tax courses I've taken, etc. and THAT is exactly the point. Often from the public view, the only thing one can judge a tax professional on is the credential attached to their name and the minimum qualifications that are implied by it.

I do understand what you are saying about EAs having 100% of their expertise focused on taxation, while CPAs not only have expertise in taxation, but also in many other areas that are relevant to providing the best and most comprehensive service to a client. Your argument is that only focusing on one thing is better that having a more expansive knowledge and skill base, but that is not usually the case in my experience.

Since it is tax season, this will have to be my last reply, but I wish the best to all of you for the rest of the season. May you all have a successful one!

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Feb 5th 2018 17:28

Craig, excellent article! I enjoyed how you didn't criticize CPAs, but provided a balanced view of both designations. Hopefully, your insight allows our (EA) designation to come out of the shadows of the CPA designation.

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