Accounting Across State Lines

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Greater client and workforce mobility has presented accountants with a number of unusual challenges. It's not just the challenge of figuring out who owes what to which taxing authority, complex as that can be. It's also making sure that the accountant, firm and client are operating legitimately.

An easily overlooked footnote in KPMG's tax shelter problems, demonstrates the challenges facing firms as they grow. The Houston Chronicle reports that the former KPMG auditor who played a central role in the investment partnership that triggered a number of lawsuits from wealthy Texas clients was never licensed as a public accountant in Texas. That revelation, delivered in a letter from the Texas State Board of Public Accountancy not long after the lawsuit trial began in February, raised questions about how the firm monitors compliance with regulations and licensing requirements in the states in which it performs audits.

“It's fairly easy to get a license,” Bala Dharan, professor of accounting at Rice University told the Houston Chronicle. “Most of the Big Four do it automatically. When you move to another state, even before you land there, they get you to fill out the forms and get you licensed.”

Although the auditor in the KPMG case appears to have relocated permanently to Texas and relocation requires the individual seek licensure in the new state, it has raised awareness about accountants serving clients in or from other states. The greater issue of accountants operating across state lines either in person or electronically, without relocating, is called “substantial equivalency”. It is one of the 20 or so key state legislative and regulatory issues that the staff of the American Institute of Certified Public Accountants (AICPA) State Societies & Regulatory Affairs Team monitors regularly to detect trends that may impact the accounting profession.

Substantial equivalency is a relatively new regulatory concept developed by the AICPA/NASBA (National Association of State Boards of Accountancy) Joint Committee on Regulation of the Profession. Under substantial equivalency, the license granted by the state of primary practice enables the Certified Public Accountant (CPA) to practice, either physically or by using electronic technology, across state lines without obtaining a reciprocal license in the state of secondary or supplemental practice as long as the original license is deemed “substantially equivalent”. Substantial equivalency does NOT apply if the CPA relocates to or establishes a principal practice/place of business in a state other than the one they are currently licensed in, although it would streamline the process of becoming licensed in the new state.

Section 23 of the current Uniform Accountancy Act (UAA) outlines the provisions for substantial equivalency. For a state to meet the criteria of substantial equivalency, the state must enact language providing for the concept of substantial equivalency in the statutes governing accountancy with in the state and the initial licensure requirements must meet or exceed

  • 150 hours of education
  • the Uniform CPA exam
  • one year of experience

The most recent activities involving substantial equivalency are occurring in Pennsylvania, where, according to the Pennsylvania CPA Journal, state senator Robert Thompson, with the support of the Pennsylvania Institute of Certified Public Accountants (PICPA), sponsored Senate Bill 251 to amend the Pennsylvania CPA Law. Under the bill, a new section will be added to the CPA Law enhancing the mobility of the CPA designation across state lines and providing for substantial equivalency. A critical step in implementing substantial equivalency in Pennsylvania, is bringing licensure requirements in line with the UAA. To do this, the new legislation requires that, beginning in 2010, individuals will need at least 150 hours of postsecondary education in order to be issued a CPA certificate. Once the 150-hour requirement goes into effect, all licensed CPAs in Pennsylvania will be granted substantial equivalent privileges, even if they, personally, did not meet the requirement.

The Texas Administrative Code has provisions that apply to both certification by reciprocity (substantial reciprocity) and temporary practice in Texas. Neither applied to the KPMG case cited earlier as the individual had been working in Texas since 1981 according to the Houston Chronicle. Clearly, this was not a temporary arrangement. How an individual could work in a state for so long without being licensed is something of a mystery given that proof of continuing professional education requirements and license renewal fees would be submitted each year to the state acco9untancy board.

Perhaps it is inevitable that the line between relocating and providing service from a primary location to clients in other states gets blurred from time to time. It is certainly unreasonable to rely on any single regulatory agency, firm or individual to prevent that blurring from happening. As mobility increases, it falls to all of us, to insure we are functioning within the letter of the law, even when we are crossing state lines.


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