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August 1993

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

by Lipshie, Norman W.

    Abstract- Members of the American Institute of the Certified Public Accountants (AICPA) should not support initiatives endorsing non-CPA ownership of accounting firms. The recommendations made by the task force assigned to handle this issue appear to benefit only a few. Any revisions of existing regulations should be enacted only if they are seen to give advantages to the public. The general public may even perceive such a regulatory change as nothing but a profit-driven strategy, thus, further eroding the image of the accounting practice. Moreover, non-CPA ownership may only encourage other businesses to enter the markets that are traditionally the bulwark of accountancy firms. The AICPA should instead focus its efforts on promoting self-regulation to prevent any drive to strengthen government control of the industry from flourishing.

This position was stated in the literature that accompanied the ballot mailed to members. If anything, Council should now address the exception permitted to partnerships and bring all practice units under the same standard--all owners must be CPAs.

The following points made by the Task Force require comment:

* The task force said top-notch professionals in specialized areas cannot be attracted to a firm without an opportunity to participate in ownership. This is clearly not true. The fact that CPA firms have long had and continue to have highly competent non-CPA principals and other non-CPA staff demonstrates the fallacy of this argument.

* The task force argued that because some firms have non-CPA partners, all forms of practice should permit non-CPA ownership. Of the estimated 39,000 firms that practice public accounting, my guess would be that 38,800 have all CPA owners. That latter group is providing competent service to clients as special needs arise by using outside experts and professionals from other disciplines. They can not afford to keep a staff of specialists in-house to respond to their clients' special needs as they arise.

* The recommendations of the task force attempt to restrict and control the activities of the non-CPA owner even though it admits that the limitations and restrictions are not easily susceptible to policing and regulation. Effective regulation and control over the activities of non-CPA owners would be essential to assuring the professionalism of firms was maintained. Because non-CPA owners, are not subject to regulation by state boards of accountancy, there is no built in control from the state licensing systems. Presently, there are no states that allow non-CPA owners. Further, it is probable that many, if not most, of the licensing boards will not endorse a change in state law or regulation to recognize practice units that have non-CPA owners or partners. Therefore, the efforts of the Task Force, if successful at the Council level, will have been in vain.

Other Factors Against Non-CPA Ownership

The Task Force does not address the question of public interest. Unless we can demonstrate that the public will benefit, we should not change the rules. The Task Force makes it clear that the benefits, if any, will accrue to only a few and has not shown the necessity for the change.

With all the money, time, and effort that is being spent on improving the somewhat tarnished image of the CPA, non-CPA ownership would be counterproductive. The public is likely to perceive the non-CPA ownership of professionals from other disciplines as strictly profit motivated to increase market share. We would appear to be more interested in increasing firm size as opposed to maintaining our position as a learned profession.

And if we are not a learned profession, why are we pushing for the 150- hour entry requirement, or supporting the quality review program, or promoting strengthened self regulation? Non-CPA ownership without effective control and self regulation could lead to regulation by a government agency.

Independence is the cornerstone of the accounting profession. Non-CPA ownership could strain the perception and reality of independence in the attest function because of the pressures the non-CPA owner might place on the firm as a business unit to produce more profits.

A very significant and potentially damaging outcome of non-CPA ownership would be the invitation it implicitly gives to other businesses to enter markets and activities that are now typically performed by CPA firms. I can see law firms and consulting firms expanding into tax return preparation and advisory services, accounting and bookkeeping services, personal financial planning, and other services that while presently offered by others, take on an added stature when performed by a firm 100% owned by CPAs.

The public has the right to assume that every owner of a CPA firm is a CPA. If someone identifies him or herself as an owner of a CPA firm, the public automatically assumes that he or she is a CPA. This assumption could lead clients and others to place greater weight on the statements of the non-CPA owner than may be deserved. They would expect the same thoughtful and deliberative responses the CPA normally gives based upon the experience and training that comes with maintaining the CPA license.

Or would the reverse happen where the CPA becomes nothing more than a figurehead behind which the non-CPA owner conducts other business activities?

Firms will also want to be careful in the states where a CPA, or a firm of CPAs, enjoy special privileges or other special forms of confidentiality. Those privileges might be affected by non-CPA ownership.

As part of the recent changes to the structure and governance of the AICPA, non-CPAs were recently permitted to become associate members. The very limited response to the program by non-CPAs associated with CPA firms indicates their lack of interest, support, and identity with the profession and its ethical and practice standards. We don't need non-CPA owners who are not enthusiastic and supportive of the profession.

On a somewhat different note, CPAs in many states expressed the concern that the non-CPA ownership provisions might open the door for public accountants to obtain sanctioning legislation that would put them on par with CPAs. If this were to happen, it would be very difficult for the public to distinguish between the CPA and the public accountant. As a result, the public accountant might achieve de facto CPA status.

Keep the Faith

Council, in my opinion, should defeat the proposals of the task force on the basis of the issues discussed here. But regardless of the merits of my position and Council's authority to change the ownership requirements, this change is so drastic that it must be voted upon by the whole membership. To do otherwise, after assuring the membership that 100% ownership by CPAs would be a condition of the change of Rule 505, would be a complete breaking of the faith that the membership has with the AICPA.

The seven criteria which distinguish professions from other pursuits are: 1) a body of specialized knowledge, 2) a formal educational process, 3) standards governing admission, 4) a code of ethics, 5) a recognized status indicated by a license or special designation, 6) a public interest in the work that the practitioners perform, and 7) recognition by them of a social obligation (John L. Carey). Let's not forget these criteria.

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.

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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