Regulation of Professions by Interstate Compact

CPA Journal, The, May 2004 by Zimmerman, Joseph

The regulation of various professions by the individual states has resulted in nonharmonious licensing standards, impeding individuals licensed by one state from practicing in sister states. This problem has become more serious in the practice of public accountancy because of the increased need for accountants to travel to many states to serve clients with multistate locations. More recently, however, federal legislation has raised issues regarding professional standards rather than licensing issues. When Congress enacted the Sarbanes-Oxley Act of 2002, it created the Public Company Accounting Oversight Board, granting it federal authority to establish auditing standards for public companies. Questions subsequently have arisen about commensurate authority for auditing standards for private entities.

Harmonious state regulatory standards for the accounting profession may be established on a regional or national basis by five nonjudicial methods. Each state legislature may enact (1) a reciprocity statute providing that a professional licensed by a sister state with identical standards automatically will be licensed; (2) the Uniform Accountancy Act drafted by the National Conference of Commissioners on Uniform State Laws; (3) a statute authorizing the head of a concerned state regulatory body to sign an interstate administrative reciprocity agreement with counterparts in other states; (4) an interstate compact; or (5) a federal-state compact. Congress, of course, may enact a complete or partial preemption statute based upon its constitutional power to regulate commerce among the several states. These same methods could also achieve uniform auditing standards, but the first two would be at a disadvantage because they would require such standards to be separately legislated, whereas the other methods could create a nonlegislative mechanism (in the form of a commission with the authority to promulgate regulations) to make them. This article focuses on interstate compacts and federal-state compacts because they offer advantages in dealing with both the licensing and the standards problem.

Interstate Compacts

Article I, section 10 of the United States Constitution grants states the authority to enter into an "agreement or compact with another state" with the consent of Congress. The constitution contains no restrictions on the subject matter of a compact and is silent about the process by which states may enter into compacts, with the exception of the required consent of Congress. The United States Supreme Court (359 U.S. 275 at 285) opined in 1959 that an interstate compact is a "contract" protected by the Constitution's contract clause forbidding a state legislature to enact a "law impairing the obligation of contracts." A compact may involve parts or all of two states or all 50 states, as well as the Commonwealth of Puerto Rico, the District of Columbia, United States territories, and Canadian provinces. As examples, the Interstate Compact on juveniles has been enacted by all 50 state legislatures, and the Interstate Compact on Education has been enacted by 48 state legislatures, the District of Columbia City Council, and the legislatures in three territories. Many other compacts have been enacted by a smaller number of states, and a significant number of compacts have been enacted by only a single state legislature.

The Negotiation and Ratification Process

The process of enacting a compact involves three steps: negotiators reaching an agreement on a tentative compact; enactment of the compact by concerned state legislatures; and congressional grant of consent if the compact is political in nature (see below). Political obstacles typically arise during each step, even for relatively simple compacts established or proposed in the past, and may become an insurmountable obstacle.

Compact negotiations. Gubernatorially appointed members representing their state on joint commissions negotiated and drafted all interstate compacts until 1930. The advantages of this method include the prestige of the commission, staff assistance, and the ability to continue negotiations over a substantial period of time. This method has been supplemented with other approaches, as illustrated by the proposed Interstate Insurance Product Regulation Compact, which was drafted by the National Association of Insurance Commissioners (NAIC), and the Nurse Licensure Compact, which was drafted by the National Council of State Boards of Nursing.

Commissioners critically examine each draft compact provision and seek to include only provisions perceived to be acceptable to their respective state legislatures. Individual negotiators may raise major administrative, financial, substantive, and technical issues that must be resolved. Unanimity must be reached on each issue, often an extremely difficult task, before the compact can be submitted to each concerned state legislature.

A negotiated compact proposing creation of only a study commission charged with developing recommendations to solve a specific problem or of a commission financed entirely by user fees generally involves a limited financial commitment by each compacting state and may not encounter serious legislative opposition. One or more legislative leaders in each state, however, may inform negotiators that the compact will not be enacted unless it is amended to authorize specified forms of gubernatorial or legislative oversight. Fears that political checks on the activities of the proposed compact commission could impair its functioning provide additional impetus for prolonged negotiations. In addition, governors may instruct negotiators to ensure that their states' political interests are safeguarded.