Practice privilege: California's implementation troubled.

• Author: Allen, Bruce C.
• Position: Government relations

California's longtime statute that allowed for incidental practice by foreign accountants and out-of-state CPAs was repealed Jan. 1, 2006.

It was replaced by a requirement that out-of-state CPAs obtain a practice privilege from the California Board of Accountancy for any service, other than preparation of individual tax returns and estate tax returns, when the individuals were clients at the time of death.

The first months of operation have revealed many problems for taxpayers and their out-of-state CPAs related to implementation and interpretation of practice privilege in California.

Good, in Concept

For years, CalCPA has supported the practice privilege concepts contained in the Uniform Accountancy Act, which would allow CPAs from outside California to provide accounting services to clients located in California by simply notifying the CBA that they were entering the state for that purpose.

The concept, when adopted by all states, would allow CPAs to provide services to out-of-state clients without obtaining a full license from every state in which they provide those services.

Such provisions would accommodate the need to expedite movement of partners to comply with SOX requirements for audit partner rotation as well as to respond to a Government Accountability Office study, which found that complying with different licensing requirements in different states makes it more difficult for smaller firms to compete with the very largest firms. The goals of practice privilege were ease of entry and consumer protection.

In Reality ...

So, when CalCPA participated in the practice privilege deliberations and supported legislation, we hoped that through the regulatory process, reasonable accommodations could be made to protect the public interest while facilitating cross-border accounting practices.

However, we now believe that implementation issues, misunderstandings and the impact of unintended consequences require immediate action to rectify what has become an untenable situation for California taxpayers, the entire CPA profession and its foreign counterparts. To this end, CalCPA is sponsoring legislation, AB 1868 (Bermudez).

Under a CBA interpretation, if services are provided by a firm (and most engagements are with a firm), the CBA is requiring the firm to register with the CBA. Firm registration requires that at least one partner be fully licensed in California. Further, if the firm is a corporation or an LLP, the firm must also register...