Getting the right person to handle your finances is the key to financial success. Do you need an accountant? Do you need a CPA? What are the differences?
These are the questions one encounters when dealing with finances especially when preparing tax returns. The difference between an accountant and a Certified Public Accountant (CPA) can be puzzling. This guide walks you through the accounting maze and answers these puzzling questions.
What is an accountant?
An accountant is a person who systematically keeps a record of all financial transactions. The role of an accountant can include:
- Business incorporation
- Business financials analysis and reporting
- Cash flow management
- Business planning advice
- Tax planning advice
- Filing tax returns
An accountant usually has a bachelor’s degree in accounting.
Advantages of using an accountant
Anyone can do the tasks accountants do; however, that is easier said than done. The U.S. financial system is incredibly complex and difficult to navigate. Just to file taxes, you would need to read 70,000 pages – two full sets of the Encyclopedia Britannica – to get through the entire tax code. Using an accountant keeps this structured and makes it easier to deal with. Here’s our guide on tax preparation.
Disadvantages of using an accountant
The biggest disadvantage of using an accountant is that they are not qualified to represent you in front of the IRS. If you need help with tax relief or debt settlement, they will not be able to assist you.
Although an accountant can prepare and compile financial statements, they cannot review or audit business financial statements.
What is a Certified Public Accountant (CPA)?
The American Institute of Certified Public Accountants (AICPA) created the Certified Public Accountant title to establish a standard for accountants to help business owners (and the IRS) feel more confident about an accountant’s work and ethics. The CPA designation helps enforce professional standards in the accounting industry.
CPAs are accountants. While accountants do not have a governing body, CPAs have the AICPA that governs them. In addition to what a regular accountant’s abilities, a CPA:
- Can legally represent you and your business before the IRS
- Can create audit reports
- Can create review reports
- Has advanced tax knowledge and support
- Adheres to a strict code of ethics
While CPA qualifications vary slightly by state, all CPAs must have a bachelor’s degree and pass the CPA certification exam. CPAs must also meet yearly education requirements to maintain their licenses.
CPAs are known for their income tax preparation role but can specialize in many other areas such as auditing, bookkeeping, forensic accounting, managerial accounting, and information technology. The CPA designation became more important after the Sarbanes-Oxley (SOX) Act of 2002.
Certified Public Accountants are subject to a code of ethics. The Enron scandal is an example of CPAs not adhering to such a code.
The CPA designation isn’t required to work in corporate accounting or for private companies. However, public accountants, who are individuals working for firms such as Deloitte or Ernst & Young that provide accounting and tax-related services to businesses, must hold a CPA designation.
Advantages of using a CPA
Because of the rigorous licensing and continuing education requirements, CPAs tend to be more knowledgeable about tax laws. So, a CPA can usually help eliminate tax problems. They are qualified to represent clients in front of the IRS.
Public companies are required to produce audited financial statements. Only a CPA can do this; accountants cannot.
Disadvantages of using a CPA
CPAs must have:
- A formal education
- Pass rigorous national testing
- Be approved by a state licensing board to qualify
- Meet their yearly education requirements to maintain their licenses
- Be governed by the AICPA
All this simply makes working with a CPA much more expensive.
Comparing CPAs and Accountants
The table below offers a comparison for key factors when choosing between a CPA and an accountant.
What percentage of accountants are certified public accountants (CPAs)?
According to the National Association of the State Boards of Accountancy, there are over 664,000 CPAs in the United States. The Bureau of Labor Statistics says that there are 1.24 million accountants and auditors in the U.S. That means that more than half of America’s accountants are CPAs.
How much does an accountant with a CPA make?
Compensation research company PayScale found that the average annual salary for a CPA is $63,000, whereas the average annual salary for an accountant is about $50,000. If you include bonuses, profit sharing, and commission, the average CPA can earn up to $112,350 compared to the $70,894 that the average accountant earns.
How to become a CPA
For an accountant looking to move forward in their career, they need to have a certain level of education, pass an exam, and procure a license:
If the accountant hasn’t already, they must complete 150 semester hours of education. While earning a bachelor’s degree, they will receive 120 hours of education.
The remaining 30 hours is often achieved while earning a master’s degree.
American Institute of Certified Public Accountants (AICPA)
American Institute of Certified Public Accountants is the premier professional body for all CPAs. It recommends one of the following approaches to education:
- Combine an undergraduate accounting degree with a master’s degree at the same school or a different one
- Combine an undergraduate degree in some other discipline with a master’s degree in accounting or an MBA with an accounting concentration
- Enroll in an integrated five-year professional accounting school or program, leading to a master’s degree in accounting
The next step is to study for and pass the Uniform CPA Examination. The AICPA administers the exam. But a candidate’s eligibility to sit for the exam is determined by the person’s state board of accountancy.
The exam consists of four sections:
- Financial Accounting and Reporting
- Business Environment and Concepts
- Auditing and Attestation
AICPA offers the test during four testing windows that open in January, April, July, and October. The window lasts approximately ten weeks.
The total allotted time for these tests is 14 hours. About half of the candidates that take the CPA Exam do not pass.
Once they pass the CPA exam, individuals receive their CPA certificate. However, they cannot practice as a CPA until they meet their state’s additional licensing requirements. The requirements vary by state.
The state licensing requirements have multiple components, including:
- Social Security Number
How to select an accountant or CPA
Just as you would research a mechanic, dentist, or contractor, you should also do your research when choosing an accountant or CPA. Here’s a list we’ve compiled to help you in your analysis.
Referrals from friends and family
Start by asking friends and family who they use as their accountant or CPA. It is a logical first step, but be careful because what is right for one person may not be right for you.
Remember, Bernie Madoff received most of his clients through word-of-mouth referrals. This example is a worst-case scenario. But it reminds us to not blindly trust a friend’s recommendation.
Rather, add the recommendations from friends and family to a list of other professionals you’d like to interview.
Online review sites
Read the best and worst online reviews to look for trends. Also, compare the reviews from six months or a year ago against the more recent reviews. Is there a large change in their ratings over time?
If you decide to interview that accountant or CPA, prepare a list of questions to determine what has changed. For example, if their reviews have improved, ask what changes they’ve made to improve client relations.
For declining ratings, try to identify any problems that cause clients to become dissatisfied with their services. Or you may choose to skip them altogether.
Accountant and CPA organizations
Search for CPA organizations in your local area. They are often self-policing and ensure that their members maintain a certain level of ethics and continuing education.
These organizations will generally not refer you to a specific accounting professional. Instead, they will share the information for several accountants or CPAs that fit your criteria.
Accountants vs. CPAs: which questions to ask?
Now that you have a pool of candidates to choose from, it’s time to ask questions to figure out which accountant or CPA is right for you.
You’ll want to ask questions about their professional qualifications, how they are compensated, their areas of focus and expertise, and availability. And if they’re preparing your taxes, you’ll want to verify that they’ll sign your tax return.
Eric Nisall, a CPA in Coral Springs, Florida, reminds readers that “you are the boss in this scenario, and the professional is working for you.” He recommends interviewing any accountant or CPA as if you are hiring them for a company that you own.
At many accounting firms, you may meet with one person in the beginning. However, all of the work done on your account may be performed by a junior accountant. Ensure that the person you are working with or who is working on your account is the person you think it is.
To save money, you may choose to have a junior staffer do the work while a senior accountant or CPA reviews the finished product. Make sure it’s your choice and that you know what you’re paying for.
To get a better understanding of their background, ask them where they went to school and their major. Instead of having the required training and degree, the accountant may have only taken an in-house crash course on the subject at hand.
When interviewing accountant and CPA candidates, inquire about their experience and specialties.
If you need someone to help you with your tax returns, a CPA who has spent their entire career auditing large corporations may not be the right fit.
Similarly, a real estate investor with multiple rental properties would not want a CPA who focuses on preparing taxes for families with traditional W-2 paychecks.
How do they get paid?
Some professionals charge by the hour, while others charge a flat fee.
Don’t believe someone if they tell you that they cannot provide an estimate for their services. They either need additional information from you to provide an accurate quote, or they may be hiding something.
How the company and the person with whom you’re working get paid can be two different things. Nisall says, “There are a lot of companies that pay employees based on volume. You should never have to feel like your return is being rushed just to meet some quota or to reach a bonus level.”
Who will sign your return?
This question is critical. The person who signs your return takes responsibility for the information reported to the IRS and the state. If someone isn’t willing to sign your tax return, you have to question why.
Accountants vs. CPAs: which one is right for you?
For everyday accounting tasks, an accountant is likely all that you need. However, if your situation is a bit more complex, you may need a CPA. Again, this is especially true if you need help with tax relief or debt settlement.
But as with any profession, just because someone holds a license designation doesn’t mean they are the best qualified to handle every situation. You must interview any potential accountants or CPAs before working with one.
You’ll want to fully understand their experience and background and focus on confirming that they are the right fit for you. Remember, there are over 600,000 CPAs in the United States. You will find one that best suits your specific needs.