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The natural
consolidation of small firms into large is a major factor.



In Brief

The Burden Will Switch to the Individual

Ownership of the profession by nonprofessionals, coupled with consolidation of small entities into larger ones, are common trends in our economy. Professions such as pharmacy, medicine, and veterinary medicine, are already experiencing these trends in significant amounts. The CPA profession is not immune to these trends, and the early signs are already present.

Consolidation of thousands of small practice units into entities such as American Express Tax and Business Services may be an irreversible trend. The recent AICPA/NASBA report attempts to deal with the trends and forces at work. According to author Huefner, it succeeds, in large part, but misses the point that can reshape the issues in favor of the new CPA.

The extensive background of the issue of non-CPA ownership of CPA firms was fully discussed by Pustorino and Rabinowitz in the April 1997 issue of The CPA Journal, and will not be repeated here. The issue is complicated because the accounting profession both supports non-CPA ownership in certain circumstances and opposes it in other circumstances.

The profession's case for non-CPA ownership is based largely on personnel needs and may be summarized as follows: the scope of CPA practice has become very broad and therefore requires different types of personnel, not all of whom need be licensed CPAs. To aid in retaining these personnel who are essential to carry on some of the more lucrative elements of practice, granting equity interests is deemed necessary. Further, the increasing need for technology requires greater investment of capital; broadening the ownership of the firm expands the base of available capital. Within these constraints, the profession (though not all of its members) is supportive of the concept of non-CPA ownership. In this form of non-CPA ownership, the non-CPA owners are envisioned as professional persons actively engaged in the firm.

The American Express situation represents the type of non-CPA ownership that evokes highly negative reaction from CPAs. Here, an outside, non-CPA company is buying CPA firms, employing CPAs, and offering certain services of CPAs (although, for the present at least, not the attest service). An example of the type of service offered may be seen in the attached exhibit, drawn from a recent American Express newsletter to its cardholders enrolled in its "Membership Rewards" program.

In this form of non-CPA ownership, the non-CPA owners are a company rather than professional employees of the firm, thus representing not only non-CPA, but also nonprofessional ownership.

Were the American Express case not present, the whole matter of non-CPA ownership would attract relatively little attention; CPAs would find ways to accomplish their personnel needs, and little opposition would be found to clear the regulatory path. But American Express is representative of two important trends that go well beyond the accounting profession. Without an understanding and appreciation of these trends in a broad setting, the challenge of American Express cannot be fully understood. The two interrelated trends are--

* the increasing ownership of the professions by nonprofessionals, and

* the consolidation of small, local
operations into national ownership.

Ownership of Professions by

Concentration of business ownership dates from the Industrial Revolution, and began with crafts and trades rather than learned professions. Concentration first began in manufacturing, where significant economies of scale made the large integrated factory a necessity. Transportation and communication became national industries because of the necessity of operating over a large geographical base. Later, retailing nationalized to take advantage of economies in distribution and advertising. In all these areas, the individual tradesperson and craftsperson gradually gave way to larger organizations, and ownership became distinct from the individual practitioners of crafts and trades.

In more recent years, the trend of non-professional ownership has extended into the learned professions, most notably in pharmacy and the medical fields. At one time, pharmacy stores were typically one-unit businesses owned by a licensed pharmacist, akin to small CPA practices. Recent years have seen the growth of large pharmacy chains, as well as pharmacy units within other retailing locations, such as supermarkets. The individual pharmacy is bought out by a national chain and closed; often the pharmacist-owner then accepts a job with the chain.

Similarly, medical providers were once, like CPAs, the owners of their practices. The major changes in medicine in recent years have seen many "corporate" providers of medical services emerge (both profit and nonprofit), wherein medical providers are employees, not owners. A 1995 American Medical Association study found that over 45% of all doctors nationally now work as salaried employees of hospitals, large medical groups, and other health-care providers. Even where medical providers are still owners of their practices, the third-party payer system (especially the HMO) has shifted much control away from owners. There is much concern expressed about the impact on the doctor-patient relationship resulting from this situation: limitation of care (and advice) based primarily on cost grounds, referrals to affiliated providers, and the like. These are very much a parallel to the concerns about accountant independence and quality of service that might arise under non-CPA (and particularly nonprofessional) ownership.

Nonprofessional Ownership

Ownership of a professional practice is profitable because of, in part, the monopoly power professions derive from their licensed status. There is a natural desire by nonprofessionals to find ways to partake of this profitable endeavor. Further, when nonprofessional ownership is coupled with consolidation of small units, profit opportunities increase. In pharmacy, economies of scale in buying, advertising, and the like have driven the acquisition of individual stores by corporate ownership. In medicine, additional profit opportunities arose from the insurer's profit--the middleman between the payer of medical costs (individuals or employers) and the recipient (medical providers). Further, the ability to exercise some control over the amounts paid to providers enables the owner to capture some of the provider's profit. This characteristic has been around a long time, as participating providers accepted what the insurer would pay. In the past, the difference effectively went from the doctor to the patient; now it goes from the doctor to the nonprofessional owner.

In accounting, the major attraction is not a middleman's profit, but rather the tie-in to the sale of other goods and services. In part, this is the result of the ever-broadening scope of accounting services, most of which are outside the CPA's
regulatory franchise. Initially at least,
nonprofessional owners, such as American Express, aim at marketing other services to clients of the CPA firm. Much of the initial focus is on segments of the clientele--individuals of more than modest means and small business owners--where the biggest CPA firms have generally been structurally unable to compete, thereby leaving this market to the small firms, who are often ill-equipped to handle this complex field.

Another reason for the trend toward nonprofessional ownership is that professions, by necessity, are becoming more businesslike. Historically, professional service firms in general and CPA firms in particular were highly professional and labor intensive. There was relatively little need for capital, technology, support services, marketing, and other business/management capabilities. In today's practice, these elements are essential. This need for increased business/management skills and characteristics opens a door to non-CPA owners, who may be very well suited to meet these needs.

Consolidation of
Small Business Units

A second economic trend relevant to the future of the profession is consolidation. Across the economy, companies that acquire small local operations have emerged. This trend extends across all types of businesses, not just the professions. It is less driven by corporations seeking to capture the profits of professional practice and more by economies of scale.

Initially, this trend has focused on such industries as funeral homes, real estate agencies, animal hospitals, and landfills. A recent Wall Street Journal article detailed a consolidation trend within the animal hospital business. Animal hospitals have historically been single-unit businesses, usually owned by a licensed veterinarian. A typical unit may have one or two veterinarians, a few staff, and its physical facilities--again, not unlike a small CPA firm. The consolidator buys the business and usually retains the personnel to run the unit. The attractions for the previous owners are--

* increased ability to focus on the work of animal care (which they presumably enjoy),

* the ability to get rid of some of the managerial and administrative tasks of running the business (tasks which they often do not enjoy),

* freeing up the capital invested in facilities, and not worrying about future capital needs, and

* gaining support services from the national organization.

The consolidator gains by providing more efficient management services, operating cost efficiencies, marketing power, and possibly by building a national brand name, especially in fields where one has not previously existed.

While the public perception may be that the accounting profession is
dominated by a small number of big
international firms, in truth the largest aggregate employment of CPAs is in thousands of small practice units. A 1996 AICPA study indicated that there were 46,641 practice units in the United States. Of these, 45,166 (96.8%) had fewer than 10 AICPA members, and 25,332 (54.3%) were sole practitioner units. The difficulty of functioning as a very small,
freestanding practice unit is well recognized. Growth in income is often dependent on being able to offer a greater line of services, such as may be provided by affiliation with a national provider. The CPA profession thus possesses characteristics similar to other industries in which a consolidation trend is evident.

In accounting, the combined trends of consolidation and entry of nonprofessional owners have been accomplished by the willing sale of CPA practices. In pharmacy, pharmacist owners have often been forced to sell due to competitive pressures from big chains. In medicine, employers' desires to control health-care costs have led to the creation of powerful HMOs which, in turn, have led to financial pressure on medical practitioners. Neither of these types of hostile pressures have led owners of CPA firms to sell to firms such as American Express. Rather, the mutual benefits of consolidation, such as have been described above for veterinary practices, seem to be the driving force. At least to some owner CPAs, the nonprofessional owner/consolidator has not been an unwelcome entrant.

The Response

Faced with new challenges to a traditional structure, the response has been somewhat erratic. Unlike most professions, where practice remains largely within the regulatory franchise, the CPA profession has leveraged a relatively narrow franchise (the attest function) into a conglomeration of services. Perhaps in this regard the CPA profession is most similar to pharmacy, where the typical pharmacy shop has long depended on nonregulated products (i.e., products other than prescription pharmaceuticals) for a large portion of its revenue. This characteristic may have made the pharmacy profession more subject to encroachment by non-professional owners and consolidators.

The focus in the accounting profession has gradually shifted from the licensed professional person to the firm. This shift has not been true in medicine, where the primary focus of practice is still the individual doctor, no matter what the nature of the organization for which he or she works.

The profession's regulators first attempted to utilize the "holding-out" notion to challenge CPAs employed by non-CPA firms who identified themselves as CPAs. The ill-advised Ibanez case struck a major blow to this approach. The regulators lost the Ibanez case because it failed the test of common-sense fairness: the ability of a duly qualified and licensed CPA to identify herself as such.

In Texas and elsewhere, the profession's regulators' response to American Express Tax and Business Services (TBS) has been to claim that only CPA firms may use SSARS language for compilation and review reports (even though it is open to debate whether reviews and, in particular, compilations fall within the profession's regulatory franchise). This has placed CPAs employed by TBS in the proverbial Catch-22 position: TBS cannot use SSARS language in a compilation or review report because it is not a CPA firm, but the individual CPA-employees of TBS would be in violation of professional standards by not using SSARS language. In this author's opinion, it is likely this approach will ultimately fail the public test of common-sense fairness.

Where We Are and
Where We Are Going

There long has been de facto non-CPA (but professional) ownership. Often this has been achieved by other-than-partner titles (e.g., principal) coupled with a compensation scheme that incorporates profit-sharing. Sometimes it is achieved by creating one or more additional organizations under common ownership, where the new organizations are not themselves CPA firms. The most common example of the latter has been the establishment of a separate consulting organization. The only real issue that remains is adjusting the professional and regulatory framework to allow such ownership to occur directly, rather than via the indirect forms now in use. The AICPA/NASBA report, discussed later, addresses this issue.

To a lesser extent, nonprofessional
ownership is also already here. Companies such as American Express have acquired a number of CPA practices, some of reasonable size. Presumably, the constraints that currently exist--such as American Express's footnote shown in the exhibit stating that it is not a "licensed CPA firm"--are handled by organizational means. For example, the partners of the selling firm retain their CPA firm entity, with only CPAs as official owners, to handle attest work. The CPA partners are the only employees/principals of the CPA firm, the other staff being employed and provided by the corporate owner. For their other (nonattest) functions, the CPA/principals are employees of the corporation. A compensation system can be designed so that the final result approximates corporate ownership of both attest and nonattest functions.

As an example of this type of approach, consider the following description of the acquisition of physicians' practice entities given in EITF Issue No. 97-2:

Contractual arrangements between entities that are in business to practice and dispense medicine (physicians' practice entities, hereafter PPE) and entities that are in business to manage the operations of medical practices (management entities) are becoming increasingly common. . . . [H]owever, many of the arrangements arise when the management entity seeks to acquire the PPE. Legal or business reasons will preclude the management entity from acquiring the equity instruments of the PPE. Instead, the management entity will acquire the net assets and assume the contractual rights and responsibilities of the PPE and execute a long-term services agreement to operate the PPE. The owners of the PPE (that is, typically the doctors) will receive consideration in exchange. . . . [T]he management entity will [also] secure the future services of each individual doctor employed in the PPE through employment and noncompete agreements.

The characteristic described here--where legal reasons prohibit the management firm from ownership of the physicians' practice--has a direct parallel to the acquisition of CPA practices by nonprofessional owners.

Non-CPA (but professional) ownership has been with us for a long time, and nonprofessional ownership is present and growing. Professional and regulatory constraints do not prevent these forms of ownership, but merely require creative, cumbersome, and indirect means to achieve them. There is little value to considering whether or not to allow non-CPA ownership; it exists. There is a need, however, to consider how to position and prepare the CPA for working in this new practice environment.

Preparing the CPA for the
New Environment

In the author's view, the new practice environment requires the profession to focus on strengthening the credentials of the CPA person.

The growth of the trends toward
nonprofessional ownership and consolidation of small practice units into public accounting will mean that future CPAs will work in less professionally supportive environments. The current CPA firm structure, populated top to bottom by CPAs, is highly professionally supportive. Medical practices and hospitals also had this characteristic in the past, as medical personnel dominated the entire structure. As nonprofessional ownership has increased in the medical profession, the medical practitioner faces a more difficult environment for rendering professional service. Professional decisions are more likely to be challenged on cost/profit grounds, and the medical practitioner needs the ability to respond to these pressures.

The CPA of the future is likely to work in similar environments and face similar pressures, with less support from a full network of CPAs within the organization. More highly-qualified professionals are needed to function in this less-professional work environment. Thus the need appears to be a strengthening of the credentials of the individual CPA. The public protection now provided by the structure of today's CPA firm--extensive review, quality control, and the like--can be maintained in a less professional work environment only if we have better qualified professionals. Such increased public protection would likely take the form of both increased education (already well on its way) and increased experience. The question is whether the profession's current initiative, as reflected in the recent AICPA/NASBA report, properly positions the CPA for the new work environment.

In addition, some observers believe it will be necessary to build internal "walls" to provide some protection to the CPAs performing attest services. These barriers would block out economic pressures from other sectors of the business entity that might otherwise influence the CPA's judgment or subvert his or her independence and objectivity.

In the CPA profession, unlike most professions, over half the individuals who presently hold the CPA do not practice the profession for which they are licensed, namely, rendering attest services to the public. Some states separate certification from licensure, creating a class of unlicensed CPAs. Many states enable CPAs to allow their license to become inactive by opting out of meeting continuing education requirements. The result is a large number of people called CPAs, some of whom are licensed to supervise audits and who do practice public accountancy, are licensed but do not practice public accountancy, have inactive licenses, and have no licenses. This situation does not enhance the stature and prestige of the profession and does not position the CPA for the new work environment.


The recent Final Report from the AICPA/NASBA Joint Committee on Regulation of the Profession (April 1997) is designed to set the tone for the future regulation of the profession. The report sets forth eight objectives:

1. Assuring that all CPAs are licensed and subject to state board jurisdiction.

2. Providing for the portability of the CPA designation across state lines-- enabling all licensed CPAs, whether in public practice, industry, government, or academia, to call themselves CPAs in all U.S. jurisdictions.

3. Providing for the mobility of CPAs in public practice to readily operate across state lines, in person or electronically, to service clients outside their state of
licensure--making it easier for CPAs to relocate from one state to another and obtain reciprocity.

4. Providing for an effective disciplinary/enforcement system to protect the public that utilizes CPA services across state lines.

5. Providing greater uniformity in the rules for licensure, practice, and ethics for CPAs in all jurisdictions.

6. Eliminating rules or barriers that inhibit CPAs from using their CPA title-- developing a regulatory system that does not discourage CPAs, regardless of their line of work or place of employment, to tell the world they are CPAs.

7. Strengthening the focus of regulation to sustain the protection of the public where it is most critical and adapting regulation to the future needs of the public with an awareness of the impact on the profession.

8. Assuring that state boards have the necessary resources to carry out their licensing and enforcement functions for the protection of the public.

The major focus of this report is the simplification of licensure and mobility across the 54 U.S. jurisdictions. Objectives 2 through 5 address this compelling problem of having 54 licensing jurisdictions in a world where practice routinely overlaps jurisdictions. This issue was one of the main drivers of the AICPA/NASBA initiative, and the report makes reasonable proposals to address the issue.

Objective 1 is responsive to the diversity of the licensure status of CPAs described above. It would require all CPAs be licensed. All would be subject to a CPE requirement, although the details might vary to fit the needs of different categories of employment. This
is also a positive development for the profession.

Objective 6, and to some extent objectives 5 and 7, bear on the issues of ownership, scope of practice, and licensure criteria. These objectives are implemented by the following proposals in the report:

* The regulatory franchise should be clarified to include compilations and reviews as attest services.

* Attest services must be performed by CPA firms.

* A majority of the ownership of CPA firms must be with licensed CPAs.

* A major expansion in the number of individuals holding the CPA license would be allowed, by accepting a broad range of experience toward a one-year experience requirement. This experience
may be gained in public accounting,
industry, government, or education. However, those who supervise attest
work would face a more stringent experience requirement.

* CPAs would not be required to offer their services to the public through a CPA firm, except for attest services. Thus, non-attest services could be offered through any entity desired; such entities would have no CPA ownership requirements, so long as they did not call themselves "CPA firms" or use the term "CPAs" in the entity's name. Such entities would not be licensed by state boards.

Evaluation of the

The report properly addresses the status of compilations and reviews. These comprise a gray area, as most state regulations were written prior to the advent of these services. Since they serve the same broad purpose as audits, that is, a form of public reporting on financial statements, it is reasonable and appropriate they should be included in the CPA's regulatory franchise.

The above proposals also recognize the reality of non-CPA ownership, by permitting 1) up to 50% ownership of CPA firms by non-CPA professionals, and 2) all non-attest services can be offered by CPAs in entities without ownership restrictions. As noted earlier, such non-CPA and non-professional ownership already exists, but currently has to be accomplished by indirect means. Further, according to objective 6, CPAs working for such entities would not face problems in identifying themselves as CPAs. Thus, the issues of Ibanez and "holding out" probably disappear.

However, as the delivery of professional accounting services changes--just as it has in other professions--better qualified individuals are needed to offset the diminished network of professional support within the organizations that employ the CPAs. The AICPA/NASBA report is not responsive to this important need. A system where anyone can become a CPA if they (1) hold an accounting degree, (2) have worked a year in a position supervised by a CPA, and (3) pass an exam, does not convey the qualifications and prestige needed in the future environment. If the "P" in CPA is to have real meaning, all licensees must be highly qualified to serve the public in its traditional and expanding areas of practice. It would appear that, given that more CPAs will deliver service to the public in entities that are
not structured as CPA firms, more,
rather than less, public experience
is needed.

Even apart from the needs of the new practice environment, the AICPA/NASBA proposal for expansion of licensure seems contrary to the interests of the profession. It also does not address the need to "wall off" the CPA who may provide attest
services to the public in a corporate
environment. CPA is still a valued brand name, having a highly positive public perception. It reflects a set of core values of integrity, independence, objectivity, and fairness. It is incumbent upon the
profession to protect and strengthen the value and perception of the CPA designation, rather than diminish it by reduced entry requirements.

In the context of non-CPA ownership, the report appears to be a case of being willing to sacrifice the prestige and distinctiveness of CPA licensure of the individual in a last-ditch effort to hold onto a bare majority of ownership of a broadened attest function. Much debate is likely to ensue on (a) whether this strategy will succeed and (b) if it does, whether it is worth the price. *

Ronald J. Huefner, PhD, CPA, is
Distinguished Teaching Professor of Accounting at the State University of New York at Buffalo and past president of the Buffalo Chapter of the New York State Society of CPAs.

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

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