Safe Harbor Transmittal Language - Protection for Unlicensed Accountants

Article excerpt

"Safe harbor" transmittal language is language that aims to protect the unlicensed accountant against violation of the statute or regulation that reserves the financial statement reporting function to licensees (CPAs or PAs) of the Board.

State laws (or regulations) are framed to prohibit the unlicensed accountant from rendering a report on the performance of a compilation or review of a financial statement. This prohibition follows from court decisions holding that the states have the authority to regulate speech incidental to the services the accountant performs for the client. Under those judicial decisions the states, if they so wish, can prohibit an unlicensed individual from providing a compilation or review report in so-called standard form language, or in language conventionally used by licensees respecting a compilation or review statement. In the 26 states that continue to prohibit the use of the "A" word, unlicensed individuals may not sign a report or transmittal as an accountant.

While the states may clearly regulate the language in a report, it is highly questionable whether the states can prohibit the performance of a compilation or review by the unlicensed accountant. The prohibition on the performance of an accounting function may very well constitute an illegal restraint of trade or an infringement on the right of the individual to pursue a lawful occupation or profession. Accordingly, the states control the functions of the unlicensed individual by defining the term "report" and by regulation of the language, that is, the speech that may be used to describe the professional services performed.

However, the majority of the states are aware and recognize that complete and absolute prohibition on the speech of an unlicensed accountant in a report or transmittal, after the permissible accounting function has been performed, may not pass judicial tests on the freedom of commercial speech. For this reason, among others, the states have adopted so-called "safe harbor" language by law or by regulation. As stated earlier, such language aims to protect the unlicensed accountant against violation of the statute or regulation that reserves the reporting function to CPAs and PAs.

The use of safe-harbor transmittal language becomes particularly germane in those instances where the state boards exercise administrative penalty jurisdiction over non-licensees as well as licensees. Some state boards possess authority to fine unlicensed accountants as much as $5,000 for infractions of the board's rules, although a $1,000 maximum fine is the norm among boards that possess such authority.

It must be noted that a safe-harbor compilation transmittal does not constitute a report. Sophisticated users of financial statements may detect the omission of the key phrases contained in the SSARS language. Such phrases as "in accordance with standards established by the American Institute of Certified Public Accountants" may be noted as a significant omission from permissible safe-harbor language. Similarly, in almost all of the states (there are a half-dozen exceptions that readily come to mind) accountants who are not licensed may not say in a transmittal that they performed their accounting services using "generally accepted accounting principles" (GAAP).

According to AICPA legislative doctrine non-CPA (unlicensed) accountants are forbidden to refer to GAAP, presumably under the theory that only an individual who has passed the CPA examination knows what GAAP is. This is so regardless of the amount of formal collegiate education the non-CPA accountant has achieved.

Safe-harbor transmittal language is limited to compilation services. No state to our knowledge has permissive safe-harbor transmittal language especially designed for a review. …