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By Anthony R. Pustorino and Allan M. Rabinowitz


Where Do You Stand?

Non-CPA ownership of CPA firms has been an issue of concern for many years. Presently, many CPA firms circumvent rules against such ownership by making their non-CPA specialists partners in all but name only.

The AICPA has led the movement to legitimize this practice through its Council Resolution Concerning Form of Organization that would still require CPA ownership of 662Ž3% of the firm, both in terms of financial interests and voting rights (Now proposed to be reduced to 51%).

While expressing concern about possible impairment of independence, SEC spokespersons have not made any specific proposals. NASBA has a proposal on the table to permit such ownership under slightly different conditions to that of the AICPA.

Practitioners are all over the lot on the topic. Those that consider the alternatives--a lack of competetiveness and slow growth--seem to be leaning in the direction of favoring such ownership.

A survey of state societies indicates some movement on the part of state boards and state societies to permit non-licensee ownership. However, unless it is clearly in the public interest, it will have a "tortuous journey through the legislatures of 54 licensing jurisdictions."

The issue of non-CPA ownership of CPA firms has been the subject of widespread discussion and debate for many years. The focus here is not to continue that debate but rather to bring the issue up to date. For the sake of completeness, however, Exhibit A includes a reasonably comprehensive listing of the two sides of the issue.

Prominent non-CPA contributors to CPA firms include specialists in various fields ranging from management advisory services, operations research, marketing, engineering, law, computers, and tax law. Because firms have found it difficult to retain these talented, but mobile, non-CPAs without offering them more than employee status, innovative means have been devised to convey upon them all the risks and rewards of ownership. But by witholding the formal titles of "partner" or "shareholder," they are often able to circumvent the accountancy laws of many states that prohibit non-CPA owners of CPA firms. Implicit in these state laws is the fear that the presence and involvement of non-CPA owners in CPA firms might tarnish the integrity of the attest function reserved to CPAs only.

AICPA Position

At the core of the movement to legitimize this de facto situation is the AICPA. Its support for this issue is expressed in its new proposed revision to Appendix B to the Code of Professional Conduct, Council Resolution Concerning Form of Organization and Name (Exhibit B). The AICPA's strong view of the paramount importance of keeping attest services inviolate and under the control of CPA owners is underscored by the first provision in the resolution requiring that a super majority (662Ž3%) of the ownership of the firm, both in terms of financial interests and voting rights, belong to CPAs. The AICPA as part of its recent agreement with the National Association of State Boards of Accountancy is now considering a reduction in the ownership requirement to 51%.

The issue of control over the activities of non-CPA owners is seemingly addressed by the resolution's second requirement that a CPA bear full responsibility for all services rendered by the firm. Despite holding only a minority interest in the firm, however, if the non-CPA owner controls a large part of the firm's revenue, the issue of effective control does not go away. It is also important to remember that the ultimate sanction the Institute, under its Code of Professional Conduct, (or a state society under its own rules), could impose (and only on its members) would be loss of membership. They cannot take away a license. Only licensing jurisdictions, i.e., boards of accountancy or education departments, can do that. Increasingly, as courts view the CPA certificate as a credential rather than as a license to practice, states can only limit its use when advertising is untrue or when used improperly in connection with the attest function.

Addressing the question of how non-CPA owners can be controlled in the delivery of nonattest services so that attest services are unaffected, Robert Elliott, chair of the AICPA Special Committee on Assurance Services, points out "there has never been an identified case of an audit tainted by nonaudit services." Because "attest services are required to be controlled by CPAs, and audit quality is supported by peer review ... I don't believe that any further controls are needed." Nor does he agree that there is any necessary conflict of interest between CPA and non-CPA owners, because "the common interest of being in business together should override separate interests .... So long as we're talking of people who have more to lose by not cooperating than by cooperating, the differences (or conflicts) are likely to be resolved."

Elliott also disputes the notion of a nexus between the delivery of nonaudit services to audit clients and a loss of auditor independence. He believes it is an issue only because there exists a "confusion between the issue of the appearance of independence and the issue of independence in fact ... (But) not having independence in appearance is not in itself--that is, apart from independence in fact--meaningful in terms of the public interest and audit quality."

SEC Position

While there is not a necessary linkage between non-CPA owners and the compromise of attest services, some believe nonaudit services rendered by an audit firm can have a deleterious effect on auditor independence and that the integrity of the attest function can be preserved only by limiting the scope of services a firm can provide to a client on whose financial statements it is opining. In effect, build a fire wall around the attest function and render no firm services to that client other than the opinion audit. Other services can be rendered by any combinations of individuals, practicing with whomever they wish, in any form they wish. At this point, however, in the evolution of this issue, Steven M.H. Wallman, SEC Commissioner, comments: "Trying to prohibit accountants from providing nonaudit services is a little like trying to put the genie back in the bottle."

SEC Chairman Arthur Levitt's view of the primacy of the attest function was expressed in his address to the December 1996 AICPA Annual Conference on Current SEC Developments in Washington, D.C., as reported in the Wall Street Journal. He said the "accounting industry should view auditing as the very soul of the public accounting profession--not a loss leader retained as a foot in the door for higher fee consulting services." At that same conference, SEC enforcement director William McLucas said "The complex entanglement of services with clients pose, in my view, a subtle but very real threat to independence."

Position in the States

In spite of the fact there is a general awareness that non-CPA ownership exists, in fact, most state CPA societies and boards of accountancy, with some exceptions, and the National Association of State Boards of Accountancy (NASBA), have either not supported the AICPA position in its entirety, or appear reluctant to move at all on the issue of nonlicensee ownership.

The administrators of all of the 54 licensing jurisdictions (i.e., boards of accountancy) were surveyed for this
article to ascertain the current status of the nonlicensee ownership issue in their jurisdictions. While three states (Arizona, Nebraska, and Ohio) said they allow nonlicensee owners, only two, Nebraska and Pennsylvania, have actually enacted such a law. Of the 48 jurisdictions that do not, at present, permit such ownership, seven (California, Florida, Michigan, North Carolina, Oregon, South Carolina, and South Dakota) have the matter under review and are seriously considering enacting similar legislation. Two other jurisdictions, Hawaii and Virginia, have "no prohibition" against such ownership. Many jurisdictions whose rules prohibit nonlicensee owners seem to give the issue tacit approval by routinely not enforcing their rules.

NASBA has no current official position on the issue. There is only a proposal by its Uniform Accountancy Act Committee to revise Article 7 of the act regarding non-CPA ownership (Exhibit C). If passed by each jurisdiction's legislature, it would allow nonlicensee owners of firms under similar limiting conditions as in the AICPA resolution. It differs somewhat from the resolution by requiring that only a majority of the ownership of the firm in terms of financial interests and voting rights belong to licensees. Another difference is that the NASBA proposal requires only a baccalaureate degree for nonlicensee owners while the resolution requires 150 hours of college education beginning in 2010. Both, however, are clear in the emphasis on regulation over individual licensees rather than firms, i.e., that a single licensee owner be responsible for all services provided by the firm, including compilation and review services.

Gerald Burns, chairman of NASBA's Uniform Accountancy Act Committee, comments on this requirement:

The use of nonlicensee professionals, including nonlicensee owners, is a resource that should be available to all CPA firms, regardless of size. The use of this resource is not risk free, and CPA firms should be aware that their CPAs can pay the ultimate price for non-CPA owners because their own licenses are at risk, regardless of the form of organization their firm takes.

He also expresses some concern that in both the resolution and NASBA proposal, regulation over individual CPA licensees is strengthened at the expense of deregulation of firms "... it is hard to see how our profession continues to strengthen when the very structure (the firm) that has led to the development of professional standards no longer is a regulated participant in the profession."

At NASBA's October 1996 annual meeting, Ronnie Rudd, NASBA's chairman, speaking on a number of issues affecting the profession, expressed the following comments and warning:

One of those issues is ownership. There is nonlicensee ownership in a number of other professions and we have to determine if we want to change--or what we are going to do when the state legislature or the court tells us we have to change. Just look at the medical profession, where non-licensee ownership is permitted. All the legislators will see is that with the advent of nonlicensee ownership, the cost of medical services went down.

The general view expressed at that same meeting by many boards of accountancy members on the proposed UAA rule revision might best be characterized by apathy, noninterest, or "not in my tenure on the board," for it received a lukewarm reception from board members present.

Burns states the issue starkly and, perhaps, prophetically:

Non-CPA ownership is the crossroads issue of our profession. At this crossroads we sense a paradigm change. To stay on the traditional CPA road, may lead to obsolescence of our professional services. To take the new road, which begins with non-CPA owners and possibly ends with Smith Barney, Merrill-Lynch, and American Express becoming the dominant CPA service firms of the future, is a challenge for CPAs.

The American Express Issue

The recent commercial by American Express that invites potential clients to "schedule an appointment with one of our CPAs" appears to violate the accountancy laws of many jurisdictions that prohibit the practice of the profession of public accountancy by an unlicensed entity. Such activities are indicative of the reservations many CPAs have on this issue and must strike a chilling note for even the most ardent supporters of non-CPA ownership. It also raises the specter of how many other public companies are waiting in the wings readying to take over CPA firms and enter the field of public accounting.

Where Are We Headed?

State CPA societies are often catalysts for change in the profession, so their views on non-CPA ownership might portend the future. To that end, letters were sent to each of the 54 state and territorial CPA societies inquiring about their activity regarding the non-CPA ownership issue. The questions asked, the responses received from several of the larger states, and a summary of the activities of all of the CPA societies on this issue are included in Exhibit D. The responses indicate that in five states either the state society or board of accountancy has already examined, or will soon examine, the non-CPA ownership issue. Three other states plan to introduce legislation recommending a change to non-CPA ownership in 1997.

So while there seems to be some movement on the part of state boards and state societies to sanction nonlicensee ownership, however glacial that movement might be at present, the ultimate resolution to the proposal will likely turn on the fulcrum of "whose interest does it serve?" If it is not clearly perceived to be primarily in the public interest, it will have a tortuous journey through the legislatures of 54 licensing jurisdictions. *

Anthony R. Pustorino, CPA, and Allan M. Rabinowitz, CPA, are both professors at the Lubin School of Business, Pace University. Pustorino is past chairman of the New York State Board for Public Accountancy and retired president/shareholder of Pustorino, Puglisi & Co., LLP, CPAs. Rabinowitz was formerly vice-president­finance of Macmillan Publishing Company and president of The Scribner Book Companies. The authors wish to acknowledge the contribution of Louis Dooner, CPA, in the preparation of this article.




* Nonaudit services have a long precedent in the profession and have become integral to its economics and traditions.

* Various kinds of nonaudit services provided by non-CPA owners enable firms to better understand the clients' businesses, thereby resulting in better audits.

* The variety of needs and demands of clients are better met when they deal with CPA firms whose knowledge base has been enlarged. CPA firms perform many services other than the attest function that often necessitate the ongoing employment of specialized, talented non-CPAs. Some of them are qualified to hold, or have held, ownership interests in professional firms other than CPA firms. Often CPA firms can attract or retain such persons in a highly competitive marketplace only by making ownership available to them, thus promoting firm stability and continuity of service.

* Non-CPA ownership can add different dimensions to smaller firms and make them more competitive. Large firms have already taken advantage of the different professional expertise that non-CPAs can bring to a firm.

* Non-CPA partners are subject to the CPA profession's ethical standards because their CPA partners are responsible for actions of non-CPA partners and those persons under the latters' supervision. All CPA firm partners and employees are bound by the code of ethics whether or not they are CPAs, so it is no longer appropriate to restrict ownership to CPAs when much of a firm's work is outside the attest function. CPA firms can impart their values of quality, integrity, and service to non-CPA owners.

* The general public is not aware of CPA firm ownership structure nor is it expected to react negatively to non-CPA owners who are active in other than the attest function. Ultimate responsibility for, and oversight of, the attest function will still remain with the CPA ownership of the firm.

* Without non-CPA ownership, a CPA firm with a successful non-CPA practice could be split apart from the attest practice.

* Practice has become more capital intensive and accounting firms must raise additional capital to keep abreast of the advances in information technology employed by clients to assure the quality of future services.

* Professional rules should focus on the substance of a firm's practice rather than its form. Restrictions on ownership are unacceptable constraints on a firm's business decisions.

* Other countries and some other professions already allow, or are considering allowing, such ownership.

* Non-CPA ownership of CPA firms already exists in varying equivalent fashions, and although most states and accounting boards reserve CPA firm ownership to CPAs, few boards actually police these restrictions.


* Non-CPA ownership might strain the perception and reality of professional independence because of pressures the non-CPA owner might place on the firm to tie basic services to those generating higher profits.

* The public may perceive non-CPA owners as not acting in the public interest but being strictly profit motivated and not concerned with maintaining professional standards including independence and objectivity.

* The CPA license may become less prestigious if non-CPAs can own part of a CPA firm. This may also reduce the desire of people to become CPAs.

* CPA owners may become figureheads behind whom non-CPA owners conduct other business activities.

* CPA firms have long employed highly competent non-CPA principals and staff without the need to make them

* CPA firms are able to provide competent service to clients by using outside experts and professionals from other disciplines as special needs arise.

* Permitting ownership by non-CPAs grants them all the benefits of a government protected monopoly without requiring all the professional obligations.

* If a non-CPA owner leaves a CPA firm, there may be no practical way to enforce confidentiality rules unless supported by statute.

* Until every licensing jurisdiction permits nonlicensee ownership, significant reciprocity problems will arise.

* There may be practical difficulties involved and a natural reluctance on the part of licensing jurisdictions in pursuing single CPA owners for covert, unprofessional acts of nonlicensee owners.





RESOLVED: That the characteristics of an organization permitted by state law or regulation under Rule 505
are as follows: 1. A super majority (662Ž3%)* of the ownership of the firm in terms of financial interests and voting rights must belong to CPAs. The non-CPA owner would have to be actively engaged as a firm member in providing services to the firm's clients as his or her principal occupation. Ownership by investors or commercial enterprises not actively engaged as firm members in providing services to the firm's clients as their principal occupation is against the public interest and continues to be prohibited.1

2. There must be a CPA who has ultimate responsibility for all the services provided by the firm and by each business unit2 performing financial statement attest and compilation services and other engagements governed by Statements on Auditing Standards or Statements on Standards for Accounting and Review Services.

3. Non-CPA owners could not assume ultimate responsibility for any financial statement attest or compilation

4. Non-CPAs becoming owners after adoption of Council's resolution would have to possess a baccalaureate degree and, beginning in the year 2010, have obtained 150 semester hours of education at an accredited college or university.

5. Non-CPA owners would be permitted to use the title "principal," "owner," "officer," "member" or "shareholder," or any other title permitted by state law, but not hold themselves out to be CPAs.

6. Non-CPA owners would have to abide by the AICPA Code of Professional Conduct. AICPA members may be held responsible under the code for acts of co-owners.

7. Non-CPA owners would have to complete the same work-related CPE requirements as set forth under AICPA bylaw section 2.3 [BL section 230] for AICPA members.

8. Owners shall, at all times, own their equity in their own right and be the beneficial owners of the equity capital ascribed to them. Provision would have to be made for the ownership to be transferred to the firm or to other qualified owners if the non-CPA ceases to be actively engaged in the firm.

9. Non-CPA owners would not be eligible for membership in the AICPA.

1 Existing firms not in compliance when these standards are adopted would have three years in which to bring themselves into compliance.

2 "Business unit" is meant to indicate geographic (such as offices) and functional arrangements (such as tax and management consulting services). AICPA Professional Standards ET Appendix B

*Proposed revision. In February 1997, the AICPA/
NASBA Joint Committee on Regulation recommended a change to a simple majority ownership by CPAs of CPA firms. The AICPA Board of Directors has approved the recommendation and will seek Council's endorsement.





(a) A majority of the firm's ownership, in terms of financial interests and voting rights, must belong to licensees. Any nonlicensee owners in whatever business form that is allowed by this act must be engaged in providing services to the firm's clients as the nonlicensee's principal occupation.

(b) The firm must designate a licensee who has ultimate responsibility for all the services provided by the firm, and designate a licensee responsible for each branch office and business unit performing financial statement attest and compilation services and other engagements governed by Statements on Auditing Standards or Statements on Accounting and Review Services.

(c) Nonlicensee owners cannot assume ultimate responsibility for any financial statement attest or compilation engagement.

(d) Nonlicensee owners must have completed a baccalaureate degree conferred by a college or university acceptable to the board.

(e) Nonlicensee owners may use the titles principal, owner, officer, member or shareholder, or any other title permitted by state law, but may not hold themselves out as licensees.

(f) Conduct by nonlicensee owners must conform to this board's rules of professional conduct. The registered firm and licensees of the firm shall be responsible under the rules for acts of nonlicensee owners.

(g) Nonlicensee owners must comply with all standards of their own profession, including those set for continuing professional education.

(h) Owners of the firm shall, at all times, own their equity in their own right and shall be the beneficial owners of the equity capital ascribed to them. If a nonlicensee owner ceases to be actively engaged in the firm, that nonlicensee owner's ownership interest may only be transferred to the firm or another qualified owner.

(i) Nonlicensee owners must meet the same good character standards that are set for licensees in this act [see Sections 5(a)-(b)].

*This rule has not been endorsed by either the NASBA Board of Directors or the Joint AICPA/NASBA UAA

Rule 7-1--Firm Characteristics

The characteristics of a firm permitted under Section 7(c) of the act are as follows:



Questions asked:

1. Is your society or state board examining this issue?

2. If not, will it be examined in the near future?

3. Do you think a change will be recommended?

4. Have you conducted any studies that analyze the pros and cons of this issue?

Selected States Questions Comments

1 2 3 4

California Yes Yes Yes

Florida Yes No

Illinois Yes Q-3 Not sure (8/96)

Q-4 Chapters reviewing literature and discussing

New Jersey Yes No No Q-1 Society leadership beginning to examine; State Board engaged in high level consideration

New York Yes Yes Q-1 Society special task force and Board

Texas No No No No Not being pursued. Committee on new accountancy bill may pursue.

Summary of all states and jurisdictions

Yes 24 6 9 9

No 28 17 19 35

Uncertain 4

No response 1 1

Legislation passed 1

Totals 54 28

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