Preparing Students for the New CPA Examination

Authors:
Shirley Dennis-Escoffier, CPA
Associate Professor of Accounting
University of Miami
Coral Gables, FL

Tom Purcell III, J.D., Ph.D., CPA
Associate Professor of Accounting and Professor of Law
Creighton University
Omaha, NE

Jane Rubin, CPA
Program Consultant
Jane Rubin, CPA
St. Louis, MO

Jeffrey C. Totten, CPA
Senior Manager
National Tax Management & Administration
Deloitte & Touche LLP
New York, NY

Editor's note: If you would like further information about this column, please contact Shirley Dennis-Escoffier at sdennis@miami.edu.

The CPA examination is undergoing a revolution. In 2004, it will be computer-based, and the subjects and skills tested expanded. Unlike in the past, the examination will require candidates to use research tools and access authoritative literature, as they would in actual practice, rather than recounting memorized facts and details. A similar shift has been advocated by the AICPA in the Model Tax Curriculum (MTC) (see www.aicpa.org/members/div/career/edu/introduc.htm), first issued in 1996 and revised in 1999. This column discusses how the CPA examination has changed and how the MTCs approach can help educators prepare students for the revised examination.

MTC

In 1996, an AICPA task force developed the MTC, in which it recommended changing tax course content and delivery methods to better prepare students for tax and accounting careers in the real world. The task force developed content outlines for two undergraduate tax courses, an MBA tax elective, a Masters of Accounting program with a tax emphasis and a Masters of Science in Taxation degree. Although it concluded that most graduate-level programs adequately prepared students for the workplace, the task force recommended radically changing undergraduate courses.

Traditionally, first tax courses emphasized individual taxation; coverage of business transactions and entities was postponed until the second course. However, as a broader education was promulgated and accreditation standards changed accordingly, the emphasis on nontechnical skills caused many schools either to discontinue the second course or offer it only as  an elective. Thus, the first course became the only tax course to which many students were exposed, leaving them unprepared for the realities of contemporary accounting practice.

As a solution, the task force recommended that the first course present an overview of the business entities generally encountered in both public and private practice, along with a discussion of their unique characteristics. Unfortunately, this was occasionally misinterpreted as simply incorporating a discussion of business entities into the first course, which emphasized memorization of details, rather than integration of planning, research and financial-accounting concepts from a decision-making perspective.

The MTCs five objectives for the first undergraduate tax course are:

• To introduce students to a broad range of tax concepts and types of taxpayers.

• To emphasize the role of taxation in making business decisions.

• To enable students to conduct basic tax research and planning.

• To expose students to professional standards and ethics.

• To provide students with a knowledge of the interrelationship and difference between financial accounting and tax accounting.

These objectives are consistent with the recommendations of the Accounting Education Change Commission. However, they were not specifically designed to prepare students to pass the CPA examination, but rather to give them a sound base on which to build practical experience.

Similarly, the AICPA Vision advocates broadening a practitioners activities. For tax practice, this implies shifting from basic compliance-oriented tasks to high-value planning and consulting. The new CPA examination emphasizes this same focus on the high value of (1) research and planning and (2) integration of tax into business decisionmaking.

How Has the Examination Changed?

The new CPA examination shifts emphasis from memorizing technical details to understanding a wide range of business topics, which is expected of professionals. It has four separately scored sections:

1. Regulation (3 hours): Combines Federal taxation, professional responsibilities and law.

2. Financial Accounting and Reporting (4 hours): Covers business enterprises, governmental entities and not-for-profit organizations.

3. Auditing and Attestation (4 hours): Is similar to the prior examinations coverage.

4. Environment and Concepts (2 hours): Combines managerial accounting with business structures and contains approximately 40% of previously untested content.

Candidates can sit for each section individually, in any order, but have to pass all four sections within a rolling 18-month period.

Because the new examination is computer-based, it allows candidates to access authoritative literature in case-based simulations and to use computer technology to develop solutions (such as narratives or spreadsheets). Most simulations, which should take between 2040 minutes each to complete, require some electronic research.

Unlike previous examinations, content covered primarily in one section may overlap with another section to test a candidates ability to integrate knowledge. For example, issues may appear in the Financial Accounting and Reporting section and also in the new Business Environment and Concepts section under business structures. This intermingling closely follows MTC objectives.

New Examination vs. MTC Content

The MTC-recommended content of the first two undergraduate tax courses is essentially the same as the new examinations content. Although the MTC states ...at least six semester hours of tax should be included in programs preparing students to enter the accounting profession, realistically, not all students are required or able to take a second tax class. Thus, to adequately prepare students for the CPA examination, accounting programs with only one tax course will have to be broadened to include MTC-recommended content.

An AICPA Tax Education Committee survey found that over 80% of schools had only one required tax course in their undergraduate accounting program, even though approximately 75% offered more than one undergraduate tax course (see Rubin, Tax Education, Assessing the Impact of the AICPA Model Tax Curriculum on the First Tax Course Taught at AACSB-Accredited Institutions, TTA, August 1999, p. 596). The survey also revealed that, in general, the first tax course focused on individual taxpayer compliance, with only 37% of the schools covering business entities.

Students taking only one MTC-recommended first tax course are not exposed to all of the topics in the CPA examination. For example, some of the topics in the Regulation section of the examination that are not mentioned include:

• Consolidated returns.

• Liquidating and nonliquidating distributions for S corporations.

• Built-in gains tax.

• Distribution of partnership assets.

• Ownership changes and liquidation and termination of partnerships.

• Estate and gift taxation (including transfers subject to the gift tax, the annual exclusion and items includible in and deductible from a gross estate).

• Taxation of trusts (including types of trusts, income and deductions and determination of a beneficiarys share of taxable income).

The extent to which these and other second-course topics can be integrated into a single course, without diminishing the first course, depends on the number of classes offered in a term and their length. A brief introduction to some topics, however, would at least put students on notice that they need additional CPA examination preparation.

Computer research skills need to be emphasized to adequately prepare students for the new examination and todays workplace. The MTC advocates introducing students to tax research in the first tax course. The 1999 survey found that only 55% of schools used tax research databases in the first course. Practitioners (who provided comments on the survey) stressed the importance of electronic research and also recommended a mix of nontechnical general business skills and technical accounting and tax skills that focus on both business entities and individuals.

Making the Transition

What can educators do to prepare their students for modern tax practice, as well as for the new CPA examination? Unfortunately, they face some obstacles, including limited appropriate teaching materials and their own reluctance to accept and embrace the changes recommended by the MTC and required by the CPA examination. To be successful, educators will have to address these issues and change how they teach the first tax course. For example, business students do not need to memorize technical rules and exceptions, required to prepare returns. Instead, they must learn how to recognize major tax issues and to make good business and financial decisions.

Guidance and Materials

A key element of change is the availability and use of appropriate pedagogical materials. Although more tools will need to be developed, several resources are available to help educators shift from an approach that emphasizes individual/technical rules to one that identifies business-entity issues and emphasizes tax planning. Textbooks are the primary teaching resource. Currently, at least four meet MTC recommendations:

• Dennis-Escoffier and Fortin, Taxation for Decision Makers (Prentice Hall, Inc., forthcoming, March 2003).

• Jones, Principles of Taxation for Business and Investment Planning (McGraw-Hill/Irwin, 6th ed., 2003).

• Murphy and Higgins, Concepts in Federal Taxation, 2003 Edition (Thomson South-Western Publishing, 2003).

• Smith, Raabe and Maloney, West Federal Taxation, An Introduction to Business Entities, 2003 Edition (Thomson South-Western Publishing, 2003).

In addition to these texts, several other resources are available, such as case studies, samples of course syllabi and articles discussing current experiences with the MTC. The Deloitte Foundation will be publishing cases from its annual Tax Challenge program, following regional and national competitions (for more information, contact Kathy Shoztic (kshoztic@deloitte.com )). PricewaterhouseCoopers LLP publishes a series of tax cases known as the PwC Case Study Program in Tax (see www.pwcglobal.com/taxcasestudies; for information on how to access the case studies, contact Anna DeMarco (anna.demarco@us.pwcglobal.com)). The case studies illustrate examples of real issues facing tax consultants and are consistent with the MTC approach (e.g., identifying issues, evaluating solutions and assessing their tax, business and financial implications). The firms materials are available to university faculty for classroom use.

Faculty-developed tools are another good source of material. The American Taxation Association (ATA) maintains a website that contains over 300 syllabi from over 200 tax educators; see ATA Syllabi Exchange (www.atasection.org). It updates the database on an annual basis.

Articles are also a good information source; see, for example, Dennis-Escoffier, et al., Tax Education, Experiences with the Model Tax Curriculum, TTA, May 2001, which summarized the experiences of four institutions that adopted and implemented the MTC.

Meetings offer additional opportunities. For example, the upcoming ATA Mid-year Meeting (St. Petersburg, Florida, February 28March 1, 2003) is presenting a session, titled The Changing CPA Exam: Are Your Students Prepared?, in which panel members will present in-depth information on how tax will be covered in the new CPA examination and will share exercises and techniques developed to prepare students for the new format.

CPE courses may also be suitable for classroom use.

Regardless of their teaching materials, tax instructors will have to invest significant time in preparing coursework and in teaching classes that correspond to the MTC and the new CPA examination. Because the new approach emphasizes different tax skills, they will have to polish their own skills and modify and develop new teaching tools that emphasize research, planning and tax concepts, rather than rules and memorization. Their overall investment in the new approach will be crucial to students success.

Conclusion

Because the CPA examinations tax section is shifting from knowledge of  specific tax rules to an emphasis on concepts and critical problem solving, the MTC should aid faculty in preparing students to achieve greater success on the examination than under the traditional teaching approach. Implementation challenges may arise during the transition period, but, as the examinations content becomes more clearly defined, enhanced integration of the MTC and the examination should result. The AICPA Pre-Certification Education Executive Committee is committed to support of the MTC. Within the coming year, a joint AICPA-ATA subcommittee of practitioners and educators will revisit and likely revise the MTC to ensure consistency and harmonization with the new CPA examination specifications.