What is a Certified Public Accountant (CPA)?

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Definition:

A certified public accountant is a licensed professional that can audit financial statements of public companies and prepare taxes, among other things.

🤔 Understanding CPAs

A certified public accountant (CPA) is a designation accountants can earn after making it through a rigorous exam process and meeting other criteria. Individuals within a CPA license often work as tax professionals, auditors, or chief financial officers (CFOs) for large companies. Only CPAs can audit the financial statements of public companies. To earn a license, CPAs have to fulfill education and work experience requirements that states set, pass a four-part exam, and pay required fees. While all CPAs are accountants, not all accountants are CPAs.

Example

Suppose that fictional retailer Clothes Co. is seeking a new in-house accountant. The board of directors decides to limit its search to certified public accountants. By focusing on candidates with CPA licenses, board members know the person they hire will have the required skills and expertise.

Takeaway

A certified public accountant is like a licensed engineer…

Engineers don’t need a license to work in the profession. However, there are some things that only a licensed engineer can do, such as signing and sealing engineering plans. Similarly, accountants can be successful without becoming licensed CPAs. But ultimately, having a CPA designation opens more job opportunities.

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What is a certified public accountant (CPA)?

A certified public accountant (CPA) is an accountant that has met specific education, testing, and work experience requirements. Each state government is independently responsible for setting requirements for CPAs and issuing licenses — No national agency handles this.

There aren’t that many requirements to become an accountant. In general, you have to get a bachelor’s degree and meet qualifications for the jobs to which you’re applying. A CPA is an accountant who has met stringent requirements for a license, such as passing a four-part exam and fulfilling necessary work requirements. CPAs often have more knowledge than a non-CPA accountant and can carry out more duties.

What does a CPA do?

Certified public accountants (CPAs) can work in many roles. One of the primary responsibilities of CPAs (and one that only CPAs can do) is to audit the financial statements of public companies. They act as a third party to ensure companies are following requirements set forth by the Securities and Exchange Commission (SEC).

Many CPAs work as tax preparers. Anyone can prepare your taxes. But CPAs can represent clients in front of the Internal Revenue Service (IRS) in the case of an audit, while many other tax preparers cannot.

CPAs can also be invaluable as business professionals. Their education and testing requirements include extensive knowledge of business strategy and management, meaning they can be an asset for any type of business. Many hold roles in financial accounting and reporting, management accounting, financial analysis, and treasury management. Some become chief financial officers (CFOs).

What are the types of CPAs?

Certified public accountants can hold many roles. Some examples include:

  • Forensic accountants who work as investigators to ensure companies and individuals are following the law. They seek out everything from accounting errors to criminal fraud. A forensic accountant might work for an accounting firm or a government agency, such as the Federal Bureau of Investigation, the Internal Revenue Service, or the military.
  • Tax or financial planning professionals who help individuals and companies file taxes and manage their financial affairs
  • Consultants to government agencies, businesses, nonprofit organizations, and financial institutions
  • International accountants that specialize in international regulations and trade
  • Environmental experts who specialize in the compliance with environmental regulations as they relate to accounting
  • Information technology CPAs who specialize in data security

What is the difference between a CPA and an accountant?

While all certified public accountants (CPAs) are accountants, not all accountants are CPAs. In practice, the two are eligible for many of the same career opportunities. But there are some important distinctions between the two in terms of background and the opportunities they qualify for.

CPAs earn a special license after meeting education requirements, going through a challenging testing process, gaining the necessary work experience, and meeting any other conditions that states set. After getting their license, CPAs also must take continuing education courses.

Another key difference between the two professionals is that CPAs are generally considered fiduciaries, which means they have a legal and ethical obligation to act in the best interest of their clients. They also have to follow a code of ethics set by the American Institute of Certified Public Accountants (AICPA). Accountants without a CPA license are not fiduciaries.

CPAs and accountants also differ in terms of some of the responsibilities they can take on. Although CPAs and accountants can both prepare your taxes, CPAs can represent clients in an Internal Revenue Service audit, while not all non-CPA accountants can do so.

CPAs are also allowed to audit the financial statements that public companies file with the Securities and Exchange Commission (SEC).

While accountants and CPAs are similar in many respects, employers might prefer to hire CPAs for certain roles because of the rigorous testing and continuing education they’ve completed.

How do you become a CPA in the US?

Becoming a certified public accountant (CPA) in the US is a rigorous process that starts with education. Requirements vary slightly, but almost every state mandates that you earn 150 credit hours in relevant education, such as auditing, taxation, accounting, finance, and business.

The next step is to pass the CPA exam. The test has four parts and is challenging, so you may want to sign up for a CPA prep course and give yourself at least six weeks to study for each portion of the exam.

If you successfully pass all four exams, you’ll also have to pass a take-home ethics exam. The ethics exam covers legal and regulatory questions and the code of conduct.

Before becoming a CPA, you’ll also have to fulfill work experience requirements, which vary by state. You’ll have to work for anywhere from six months to two years under the supervision of a CPA.

Once you’ve met the education, testing, and work requirements, all that’s left to do is pay your state’s license fees.

What is the difference between a CPA license and a CPA certificate?

Your certified public accountant (CPA) license is what requires the years of education, testing, and work experience. It’s also what gives you the ability to practice as a CPA or own a CPA firm. You’ll have to renew this every year, though the cost will vary from one state to the next.

The CPA certificate is more ceremonial than anything else. Once you pass your CPA exam, you’ll receive an official certificate. This piece of paper doesn’t come with any special abilities — It’s not what actually allows you to practice as a CPA. You might have to pay a small fee for a new certificate each year.

The CPA designation is the actual title of “certified public accountant” that individuals can use after meeting the requirements to receive a license. Licensed CPAs can use the designation on business cards, letterhead, and correspondence.

What is the history of the CPA?

The first organization for public accountants in the US was formed in 1887 as the American Association of Public Accountants. After a few name changes over the years, it exists today as the American Institute of Certified Public Accountants (AICPA).

In 1917, AICPA decided it was essential to have a uniform CPA examination for accountants and offered to create and grade the exam. Before then, some states offered CPA licenses, but the exam from one state to the next. In 1917, three states became the first to use the standard AICPA exam. By 1952, every state used the test.

The exam has undergone some changes over the years to account for changes in laws and industry best practices.

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