RECENT DEVELOPMENTS IN
NON-CPA OWNERSHIP OF
CPA FIRMS

By Anthony Pustorino, CPA, and Allan Rabinowitz, CPA, Pace University

As CPAs' consulting services proliferate, and attest services become a lesser percentage of a firm's revenues, many question whether the boundaries of CPAs' independence have been breached. In order to allay such fears (and to forestall any regulatory sanctions), CPA firms have developed innovative means to enable them to continue to render consulting and other nonattest services to the public through non-CPA firms without running afoul of the independence provisions of state accountancy laws.

For example, the Ohio State Board of Accountancy recently approved the following: An Ohio CPA firm formed a business service firm and transferred to it all the nonattest assets it renders to the public. The business service firm was then sold to Century Business Systems, a publicly traded company. The partners and employees of the CPA firm became employees of the business service firm. The CPA firm hires support and professional staff from the business service firm on a fee basis, as needed, to conduct its attest services. The New York State Board for Public Accountancy recently determined that a similar transaction in which the CPA partners of a prominent New York State CPA firm (in the top 20 nationwide) sold all of their nonattest assets to, and became employees of, American Express Tax and Business Services, did not violate New York State law.

Because both transactions were so carefully crafted to fit so neatly within each state's accountancy laws, regulators were left with little choice but to opine only that the sales did not violate their own laws (somewhat akin to giving negative assurance). The SEC, however, seems less concerned with the "goodness of fit" of these transactions within state accountancy laws and more concerned that consulting fees will taint auditors' independence. At a recent address to the Independence Standards Board, Lynn Turner, the SEC's chief accountant, said that he wants auditors to meet annually with company directors to explain why they believe their consulting fees will not affect their independence. He also wants any accounting firm considering selling its practice to a corporation to consult with regulators before the sale takes place.

While both the Ohio and New York State Boards prohibit the business service firms from offering professional (attest) services to the public, they can render any variety of consulting, business, and investment advisory services. So what the CPA partners were constrained to do in their CPA firms under their state accountancy laws (accept commissions and contingent fees, for instance), they are now free to do as employees of its progeny, their business service firms.

An example of a new service was the subject of a July 1998 Wall Street Journal article, which discussed the rapidly growing regulatory consulting practices of the large CPA firms in the area of securities law compliance. In their thrust to offer one-stop shopping for professional services to their clients, the largest CPA firms have hired thousands of tax attorneys in the United States and abroad. Much of their time is spent on consulting and, except for tax litigation, they do not represent their clients in courts. Lawyers in private practice object to this consultation and advice because they contend that the lawyers in CPA firms are practicing law and violating fee-sharing rules. Additionally, state bar associations are concerned about legal talent being hired away from law firms by the largest CPA firms that use the lawyers in corporate finance deals, mergers and acquisitions, human resources, employee benefits, stock option plans, and retirement plans, among other areas.

As clients grow larger, their businesses become more complex and cover greater geographical areas. They require CPA firms able to provide them with an almost unlimited variety of services. To do so, CPA firms of all sizes now hire in-house professionals, expert in many disciplines besides nonattest services. In order to keep such professionals, who are not always CPAs, ownership interests in the firms are often offered.

Regulatory impetus to non-CPA ownership is being provided by the proposed Uniform Accountancy Act, which has been endorsed by both the AICPA and NASBA. It states: "For firms of certified public accountants, at least a simple majority of the ownership of the firm, in terms of financial interests and voting rights must belong to holders of certificates from some state." [UAA Section 7(c)(1)]

This trend toward non-CPA ownership has fostered competition from non-CPA firms such as American Express, Merrill Lynch, Century Business Systems, and H&R Block, which now offer services to the public that traditionally had been the exclusive province of CPA firms, and do so in aggressive, ongoing advertising campaigns. H&R Block, in May 1998, when it acquired its first CPA firm, indicated that it wished to acquire a firm a month for two years and spend about $300 million in the process. Its stated focus is on regional firms with large tax practices and annual fees of $3 to $15 million, but it is also interested in acquiring smaller practices.

It is increasingly evident that the issue of non-CPA ownership has proceeded past the debate of whether it is good or bad for the public or the profession. It seems obvious that it is the juggernaut of economics that is propelling this inexorable march toward acceptance by firms, boards of accountancy, and state CPA societies. A comparison of the survey results (1997 and 1998) taken of boards of accountancy (Exhibit 1) and state CPA societies (Exhibit 2) indicates a trend toward acceptance of non-CPA ownership by the profession.