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August 1993

The case for non-CPA owners in CPA firms. (includes related article) (Two Sides of the Issue -- AICPA Council Will Be Voting Soon)

by Capelli, Andrew J.

    Abstract- Members of the American Institute of Certified Public Accountants (AICPA) should allow individuals who are not certified public accountants to gain ownership of CPA firms. Client demands for specialized services warrant the inclusion of highly qualified non-CPA professionals into accounting firms. However, these non-CPA professionals can only be lured into the world of accountancy if they are promised eventual ownership of the firm. Nevertheless, non-CPA owners have already gained inroads in accounting. They are usually concealed under the guise of principal or other similar titles. In some cases, they are disguised as partners. This only results to the gradual decimation of respect for rules and of certainty as to whether an ownership structure falls within the boundaries of law. The AICPA should simply allow non-CPAs to own both partnerships and non-partnerships to remove barriers that force some entities to break the rules.

Finally, in May 1991, the AICPA Council, having just concluded a rather lengthy and emotionally filled debate on the amendment to its form of practice Rule 505, resolved that the Board of Directors of the AICPA address and resolve the issue of non-CPA ownership. A task force was appointed to pursue that resolution, and it is its recommendations that will be debated prior to a vote at the fall AICPA Council Meeting.

Unfinished Business

Some have said that the Council theoretically dealt with the issue of ownership when it debated changing Rule 505. This is simply not correct. Rule 505 authorizes a CPA or a group of CPAs to practice in a form consistent with the alternatives available to it under state rules and consistent with the resolutions of Council. It is the resolution of Council aspect attendant to Rule 505 that was the subject of the Council demand for resolution. The supporting resolution of Council currently requires that those firms--other than partnerships--who wish to become members of the AICPA, even though they may be in compliance with state law as to form of practice, must be wholly-owned by CPAs.

Many state accountancy laws provide for similar restrictions in that a firm must contain only partners or shareholders who are CPAs in order to hold itself out as a CPA firm. The AICPA has no similar restrictions on the formation of a partnership for the practice of public accounting with non-CPAs. A CPA may now have a non-CPA partner and still enjoy the benefits of membership.

Since the most common form of practice for firms with multiple owners is a partnership, the simple answer is to conform the rules for other forms of practice to those of the partnership. To allow partnerships to have non-CPA partners and not also allow professional corporations or the very "hot" limited liability companies, which are now permissible in over 30 states, to have non-CPA owners makes no sense at all. Council has the ability to modify its existing resolutions under Rule 505 to permit non-CPA ownership of non-partnerships under whatever circumstances or restrictions it deems appropriate.

Why the Question?

Do firms want non-CPAs to be part of the ownership ranks, or is this strictly a rhetorical question? The answer is non-CPA owners are already a part of the profession, either disguised under the name of principal or some similar title, or wearing the label of partner. This latter situation, as noted earlier, is not prohibited by the AICPA Code of Conduct and exists even though no state licensing board presently officially recognizes non-CPA partners in CPA firms.

These non-CPAs ascended into ownership positions because the professional and business activities of CPA firms demanded that they be there. These non-CPAs are highly educated, motivated, and talented professionals that bring respect, knowledge of other disciplines, and answers to clients and, in some cases, the CPA firms themselves. We are talking about actuaries, engineers, lawyers, managers, and other specialists that are essential for the conduct of successful businesses, including professional firms.

Those opposing non-CPA ownership say that these skills are available in other places to assist clients and CPA firms and that they can be contracted for when needed. This is quite true. And for the smaller practice unit that may be the only practical way to approach it. But for many firms, including many local practitioners, one or more of professional specialties are being called for by clients almost daily. The answer for them is to bring the talent and the expertise into the firm. The result is improved responsiveness and better control. It also provides assurance to clients about the firm's future ability to meet their ongoing needs.

Clients want assurances that those from the firm attending to their attest needs are licensed, highly trained, and eminently qualified to deliver that all-important attest report in full compliance with professional standards. That will always be the case, and that can not be compromised. But clients seek delivery of specialized services from the CPA firms knowing that they will be provided within an existing framework of quality, professionalism, discipline, and control.

Ownership is Important

As the report of the AICPA Task Force states, many of these specialists are highly qualified professionals and successful in their own fields. They often have had an ownership interest in a professional firm before joining the CPA firm. Often a firm can only attract such persons by an offer of ownership or the promise of ownership at a later date after achieving some mutually agreed upon threshold. Many talented specialists that enter the firm without a proven track record will only do so with the opportunity of sharing in the benefits of ownership as they gain success in the CPA firms.

Owners Who Are Not Owners

An ownership interest is usually characterized by an ability to vote on governance matters, a paid-in capital account, and a pro rata sharing in profits and losses. Many firms which presently have non-CPA principals have a loan account from the principal as a substitute for a capital account. It is on this basis that they take the position that such non- CPAs are not owners. If non-CPA owners were to be recognized, this strained characterization could be avoided. The proposal, if accepted, will also eliminate inconsistencies within the AICPA rules, and accordingly owners whether CPAs or non-CPAs would be allowed to identify themselves as owners and be known to all user groups.

Some CPA firms that have non-CPA professionals in senior positions have attempted to overcome the restriction on ownership by what some consider to be fragmentation. Examples can be seen in firms of all sizes with subsidiaries or affiliates that perform special services, some of which may not be regulated by state accountancy laws. Other firms have purchased ownership interests in established commercial ventures that offer such services. The best known example of fragmentation is the large international firm that spun off its consulting practice with the purpose of having all owners non-CPAs.

While statistics as to the entire 15,700 multi-owner firms who are members of the AICPA are not available, a recent study of approximately 6,800 firms in the SEC and Private Companies practice sections shows that about 225 of these firms have non-CPA owners. Of the 11,492 partners in those firms, 9,421 (85%) are CPAs and 1,671 (15%) are non- CPAs. Non-CPA owners cannot be ignored.

Controlling Service Quality

The AICPA Task Force believes that it is preferable for a firm to gain the necessary additional competence internally since that arrangement offers the best opportunity to control overall service quality. In addition, non-CPAs in the firm come under the reach of the ethical standards of the AICPA and the accountancy boards on the basis that members and licensees are responsible for the acts of their partners and those under their supervision. Further, CPA firms that place a high priority on quality service have successfully transferred traditional values to non-CPA specialists employed by the firm.

The Task Force also stated that it believes that pride of ownership enhances dedication to quality and that non-CPA professional employees with an opportunity for ownership would be motivated to do better work. Finally, non-CPA owners would be more responsive to the maintenance of the overall professional status of the firm because of the ownership stake.

The Reality of the Situation

As noted earlier, most state laws and accountancy board regulations restrict ownership of public accounting firms to licensed CPAs irrespective of whether the firm is a proprietorship, partnership, or professional corporation or limited liability company. However, few state boards actively enforce their regulations. At least one state is addressing this issue, however, which raises the possibility that others may follow.

Firms of all sizes have established owner equivalents with titles such as principal for non-CPAs who share all the benefits and burdens of owners. Others have made non-CPAs quasi-owners by allocating all the benefits of ownership but not all the risks.

The resulting expediences promote erosion of traditional respect for the rules and create uncertainty whether a particular ownership arrangement falls within or outside the rules. This leads to the perception that some are not following the rules and a consequent breakdown in professional unity and respect for others. Either a greater guidance must be given by the state boards as to what are the permissible interests non-CPA employees may have in firms, or the present prohibition against their having ownership interest in non-partnerships should be eliminated. In any event, state regulations must be standardized and the profession rules must be consistent with those regulations.

The AICPA Task Force appointed pursuant to the 1991 resolution of Council has reported its unanimous conclusion to recommend that non-CPA ownership in CPA firms be permitted under certain circumstances. The circumstances are presented in the shaded area on page 42.

The Task Force report went on to indicate that was clear from Council's discussion as well as surveys conducted by various state CPA societies that there is little sentiment for permitting ownership by the public at large or by financial institutions such as banks or other business entities.

The Task Force report also indicated "it was the unanimous belief of the members that the accountancy laws and professional regulations and the structure of accounting firms must be brought into synchronization." The profession's scope of services has broadened to meet client needs, thereby creating a demand within firms for non-CPAs with specialized skills. This development has created pressures on outdated prohibitions against ownership interest in firms by non-CPAs and has resulted in evasion of rules that are of such long standing that they cannot realistically be eliminated by enforcement. As a first step, the time has come to eliminate the inconsistency in the AICPA rule which now permits non-CPA ownership of partnerships but prohibits such ownership in other practice forms.

Support of CPAs Requested

The AICPA Task Force proposal would recognize the reality of the structure of current practice and legitimize it. This proposal demands the support of CPAs nationally. Further, this proposal cannot be criticized by clients of CPA firms or the public at large since it assures that expertise required for the services demanded by those clients is available in their CPA firm. It also attempts to protect the CPA franchise by assuring the highest quality expertise is available in the delivery of attest services as well as all other services demanded of firms in today's practice of public accountancy.

In September, the AICPA Council will vote on the recommendations of a task force to allow non-CPA ownership of firms with AICPA members under the following conditions:

* There must be a CPA who is responsible for the acts of the firm and each business unit providing financial statements attest services.

* A majority of the firm's owners, in terms of numbers, financial interest, and voting rights must be CPAs.

* The non-CPA owner must be actively engaged in providing services included in the definition of the practice of public accounting in the AICPA code of professional conduct.

* Non-CPA owners cannot assume direct responsibility for any financial statement attest engagements.

* Non-CPA owners would have to possess a baccalaureate degree. Beginning in the year 2010, non-CPA owners becoming owners, would have to complete 150 semester hours at an accredited college or university.

* Non-CPA owners have to complete the same work-related CPE requirements set forth under the AICPA by-laws Section 2.3 for AICPA members.

* Non-CPA owners would be permitted to use the title partner or shareholder but not hold themselves out to be CPAs.

* Non-CPA owners would have to abide by the AICPA Code of Conduct.

* The ownership interest of the non-CPA must be surrendered back to the firm or to other qualified owners if the non-CPA ceased to be an active professional participant in the firm.

There are persuasive arguments on both sides of the discussion. Proponents on both sides are adamant that their views make the most sense. Both sides agree the issue should not be dismissed as unimportant. The CPA Journal is pleased to present the two sides by having two AICPA Council members discuss the issues.

Andrew J. Capelli, CPA, is a partner of KPMG Peat Marwick and a member of the task force making the recommendations. Norman W. Lipshie, is a partner of Weber Lipshie & Co. Both are former presidents of the NYSSCPA. After studying the issues, readers and AICPA members may wish to let their representatives to Council know their thinking.

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