COMMENT DUE SOON ON AICPA ETHICS EXPOSURE DRAFT

Proposals Accommodate American Express, Non-CPA Owners, Among Other Changes

Comments are due by July 15th for AICPA's exposure draft, "Omnibus Proposal of Professional Ethics Division Interpretations and Rulings," dated April 15, 1998. The AICPA's Professional Ethics Executive Committee is proposing the ethics pronouncements to clarify the application of the Code of Professional Conduct to members who choose to practice public accounting in various alternative forms.

Figure 1 is an illustration from the exposure draft outlining the "alternative practice form" the ethics committee has in mind. While the committee never mentions American Express Tax and Business Services (TBS) by name, it is clear from this diagram that this model accommodates the American Express corporate structure. A number of changes to independence interpretations also address situations such as those encountered by CPAs working at TBS.

The pronouncements include interpretations of Rule 101, Independence, and Rule 505, Form of Organization and Name, and revisions of Interpretation 505-2 and ET section 91, Applicability. The revision to Interpretation 505-2 is proposed to ensure that members who practice in an alternative practice structure are not permitted to act in a manner in which members who practice in a traditional structure cannot.

The AICPA seems to have accepted the inevitability of TBS and similar alternative firm structures. The ethics committee believes that adoption of the proposed pronouncements, together with existing quality control and practice monitoring requirements, will provide adequate safeguards to protect the public interest and the reputation of the profession and ensure the equitable application and enforcement of the Code of Professional Conduct among members. The interpretation redefines the term "member or member's firm" for the purpose of an alternative practice structure, and identifies additional persons and entities to which some of the independence rules apply in a such an alternative structure.

Other proposals in the exposure draft address non-CPA owners. Of particular note, for example, is a change from the word "operate" to "own" in several places. For example, the proposal states that CPAs "may 'own an interest' in a separate business that performs for clients any of the professional services of accounting, tax, personal financial planning, litigation support services, and those services for which standards are promulgated by bodies designated by council."

Another important proposed change would apply when CPAs are responsible for work of other staff. Previously, AICPA members were responsible for work of those "who are either under the member's supervision or are the member's partners or shareholders in the practice." The proposed change states that an AICPA member is responsible for "all persons associated with him or her in the practice of public accounting whom the member has the authority or capacity to control." This clearly states that members are no longer liable for the work of their partners.

Other proposals in the exposure draft include the following:

* Proposed Revision of the Definition of Client. The Professional Ethics Executive Committee is proposing to revise the current definition of the practice of public accounting to include, under certain circumstances, AICPA members who are employed by Federal, state, and local governments. To accomplish this, the term "client," an element of the public practice definition, requires revision. Should this proposal be adopted, government auditors who are within a proposed criteria would be permitted to issue audit reports under generally accepted auditing standards provided they comply with Rule 101, Independence, and other code rules that apply to members in public practice.

* Proposed Revision of Interpretation 101-2 Under Rule 101. This proposal relates to the conditions to be met for a former owner of a firm to no longer be subject to the independence rules. The revision deals with the circumstances in which amounts are due to the former owner for his or her interest in the firm and when unfunded, vested retirement benefits are paid by the firm.

* Proposed Revision of Ruling No. 191 Under Rule 501 and Ruling No. 22 Under Rule 301. The former ruling dealt with members terminating their relationships with their firms and retaining client records. The revised ruling specifically defines members as those who are not owners of the firm because the application of the ruling to owners is a legal issue.

CPAs should carefully review the exposure draft, as these interpretations are far-reaching. For a copy of the exposure draft, follow the link on the home page at www.aicpa.org or call the AICPA's Ethics Division at (201) 938-3000. Address comments to Herbert A. Finkston, Director, Professional Ethics Division, AICPA, Harborside Financial Center, 201 Plaza Three, Jersey City NJ 07311-3881. *