Licensing and Disciplinary Systems
Introduction
The accounting profession operates under a layered regulatory framework designed to protect the public interest. State boards of accountancy grant CPA licenses and enforce state accountancy laws, while professional organizations like the AICPA set ethical standards and administer peer review programs. Federal regulators such as the SEC and PCAOB oversee practitioners who serve publicly traded companies. Understanding how these bodies interact is critical for both the REG exam and professional practice.
State Boards of Accountancy
Role and Authority
Each of the 50 states, the District of Columbia, and U.S. territories maintains a state board of accountancy (or equivalent agency). These boards:
- Grant and renew CPA licenses
- Establish education, examination, and experience requirements
- Set continuing professional education (CPE) requirements
- Investigate complaints against licensees
- Impose disciplinary sanctions
State boards are governmental agencies with legal authority to regulate the practice of public accounting within their jurisdictions. Their rules carry the force of law, unlike the AICPA's standards, which apply only to voluntary members.
CPA Licensing Requirements
Although specific requirements vary by state, most jurisdictions follow the "three Es" framework:
| Requirement | Typical Standard |
|---|---|
| Education | 150 semester hours (including a bachelor's degree), with specified accounting and business course hours |
| Examination | Pass all four sections of the Uniform CPA Examination within a 30-month rolling window |
| Experience | 1–2 years of supervised experience in public accounting, industry, government, or academia (varies by state) |
Example: A new staff accountant at Gies Co. has completed 150 semester hours and passed the CPA exam. Her state requires one year of supervised experience under a licensed CPA. After completing that year, she can apply for licensure through her state board.
:::tip Exam Tip
The 150-hour rule is a common exam topic. Remember that most states require 150 semester hours to be licensed, although some states allow candidates to sit for the exam with fewer hours (commonly 120 hours with a bachelor's degree).
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Continuing Professional Education (CPE)
Licensed CPAs must complete continuing professional education to maintain their licenses. Typical requirements include:
- 40 hours per year (or 80 hours over a two-year reporting period)
- A minimum number of hours in accounting and auditing subjects for CPAs performing attest services
- An ethics component (typically 2–4 hours per reporting period)
- Courses must be from approved providers (NASBA-registered sponsors)
Failure to meet CPE requirements can result in license suspension or nonrenewal.
State Board Disciplinary Process
Grounds for Discipline
State boards may discipline CPAs for conduct including:
- Fraud or deceit in obtaining a CPA license
- Dishonesty, fraud, or gross negligence in performing professional services
- Violation of state accountancy statutes or board rules
- Conviction of a felony or certain misdemeanors
- Failure to comply with professional standards (GAAS, GAAP, SSARS, etc.)
- Revocation, suspension, or refusal to renew by another state board
Disciplinary Sanctions
| Sanction | Description |
|---|---|
| Letter of reprimand | Formal warning placed in the licensee's record |
| Censure | Public reprimand with continued license |
| Probation | Continued license with conditions (additional CPE, supervision, etc.) |
| Suspension | Temporary loss of license for a specified period |
| Revocation | Permanent termination of CPA license |
| Monetary fine | Financial penalty imposed by the board |
Example: An auditor at MAS Inc. is found to have issued an unqualified opinion on financial statements without performing adequate audit procedures. The state board investigates and ultimately suspends her CPA license for two years and requires 80 additional hours of auditing CPE before reinstatement.
AICPA Membership and Discipline
AICPA Membership
The American Institute of Certified Public Accountants (AICPA) is a voluntary professional organization. Membership requires adherence to the AICPA Code of Professional Conduct, which in many areas sets higher standards than state law.
AICPA members must:
- Hold a valid CPA certificate (though a license is not always required)
- Comply with the Code of Professional Conduct
- Complete CPE requirements (generally 120 hours over a three-year period)
- Submit to peer review if practicing in areas requiring it
AICPA Disciplinary Mechanisms
The AICPA has two primary disciplinary paths:
-
Automatic discipline (without a hearing):
- Conviction of a crime punishable by more than one year in prison
- Willful failure to file a tax return
- Filing a fraudulent tax return
- Aiding in the preparation of a fraudulent tax return
-
Investigation-based discipline:
- Complaints are investigated by the Professional Ethics Division
- Matters may be referred to a Trial Board for a hearing
- Sanctions range from admonishment to expulsion from membership
AICPA membership expulsion does not revoke a CPA license — only the state board has that authority. However, loss of AICPA membership can trigger a state board investigation.
Joint Ethics Enforcement Program (JEEP)
The Joint Ethics Enforcement Program is a cooperative arrangement between the AICPA and participating state CPA societies to:
- Share complaints and investigation information
- Avoid duplicative investigations
- Allocate cases to the body best positioned to handle them
- Ensure consistent enforcement of professional standards
Under JEEP, an ethics complaint filed with either the AICPA or a state society is evaluated, and the case is assigned to one entity for primary investigation. This prevents a practitioner from being subjected to parallel investigations for the same conduct.
Example: A complaint is filed against a CPA at Kingfisher Industries for violating independence standards while performing an audit. Under JEEP, the complaint is shared between the AICPA and the state CPA society, and the state society takes the lead in the investigation because the alleged conduct relates to a state-regulated engagement.
Peer Review Requirements
Purpose and Scope
Peer review is a periodic evaluation of a CPA firm's quality control system for its accounting and auditing practice. AICPA members who perform audit, review, compilation, or other attest services are required to be enrolled in an approved practice-monitoring program (peer review).
Types of Peer Reviews
| Type | Scope | When Required |
|---|---|---|
| System Review | Examination of the firm's quality control system and selected engagements | Firms that perform audits or examinations |
| Engagement Review | Review of selected financial statements and related documentation | Firms that perform reviews, compilations, or preparation services (but no audits) |
Reviews are conducted every three years by qualified peer reviewers. Results are reported as:
- Pass — no significant deficiencies
- Pass with deficiency(ies) — some deficiencies noted but not pervasive
- Fail — significant and pervasive deficiencies in the firm's system
A fail result on a peer review can lead to additional requirements, including accelerated follow-up reviews, corrective action plans, and potential referral to the AICPA's ethics division or the state board.
Regulatory Relationships
How the Regulators Interact
| Regulator | Jurisdiction | Primary Focus |
|---|---|---|
| State Boards of Accountancy | All CPAs licensed in the state | Licensing, discipline, CPE enforcement |
| AICPA | Voluntary members only | Professional standards, ethics, peer review |
| SEC | CPAs who audit SEC registrants (public companies) | Financial reporting, auditor independence |
| PCAOB | Firms registered to audit public companies | Audit quality inspections, standards, discipline |
The PCAOB was created by the Sarbanes-Oxley Act of 2002. It has authority to set auditing standards for public company audits, conduct inspections of registered firms, and impose sanctions — including significant monetary penalties and permanent bars from public company auditing.
SEC Oversight
The SEC has the power to:
- Suspend or bar practitioners from appearing or practicing before the SEC under Rule 102(e) of the SEC's Rules of Practice
- Bring enforcement actions against auditors for violations of securities laws
- Refer matters to the Department of Justice for criminal prosecution
Example: The SEC investigates a CPA firm that audited Illini Security, a publicly traded company, after discovering the firm failed to identify material misstatements in the financial statements. The SEC bars the engagement partner from practicing before the SEC for five years under Rule 102(e).
Mobility and Practice Privilege
Interstate Practice
Mobility (or "practice privilege") allows CPAs licensed in one state to practice in another state without obtaining a separate license, provided certain conditions are met:
- The CPA's home state has substantially equivalent licensing requirements (150 hours, passing the Uniform CPA Exam, one year of experience)
- The CPA is in good standing in all states where they hold licenses
- The CPA complies with the host state's authority to regulate and discipline
Most states have adopted mobility provisions consistent with the Uniform Accountancy Act (UAA), developed jointly by NASBA and the AICPA.
:::tip Exam Tip
Mobility provisions generally do not require the CPA to notify the other state or obtain a separate license. However, the CPA remains subject to the disciplinary authority of both the home state and any state in which they practice.
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Summary
| Topic | Key Point |
|---|---|
| CPA licensing | Requires education (150 hours), exam, and experience |
| CPE | Typically 40 hours/year; includes ethics |
| State board discipline | Ranges from reprimand to revocation |
| AICPA discipline | Automatic for certain criminal conduct; Trial Board for others |
| JEEP | Coordinates investigations between AICPA and state societies |
| Peer review | Required every 3 years for attest practices |
| PCAOB | Oversees auditors of public companies (created by SOX) |
| Mobility | Substantially equivalent states allow cross-border practice without a new license |