Non-CPAs Be Allowed to Co-Own CPA Firms?
MAY 2007 - Pop
quiz: What percent of a CPA firm must be owned by CPAs? As with
many CPA-practice issues, the answer depends on where you live.
In New York State, 100% of a CPA firm must be owned by CPAs, but
New York is an exception to the general rule. Most states have enacted
a version of the Uniform Accountancy Act (UAA), which requires that
a simple majority interest in a CPA firm be held by CPAs. In those
states, non-CPAs can own up to 49% of a CPA firm.
New York’s stringent CPA firm-ownership requirement is different
from other states’, it is similar to the firm-ownership
requirements that New York imposes on many other professions.
With limited exceptions, New York requires that professional firms
be comprised only of individuals licensed or authorized to render
their firms’ services. There is, however, legislation pending
in the New York State Legislature (Senate bill S.930, sponsored
by Senator Ken LaValle, and Assembly bill A.2060, sponsored by
Assemblyman Ron Canestrari) that would allow professional design
corporations (including engineering, architecture, landscape architecture,
and land surveying firms) to offer nonlicensees an ownership interest
of up to 25%.
believe the accounting profession should also seek to relax New
York’s CPA firm–ownership requirement to conform to
CPA firm–ownership requirements in most other states. Indeed,
New York responded to a legal challenge to its CPA firm–ownership
requirements in 1987, when the New York State Board of Regents
promulgated Rule 29.10(b), which permits a CPA firm to compensate
its non-CPA employees by giving them up to a 35% share in the
firm’s annual net income. But should New York State allow
non-CPAs to have an ownership stake in CPA firms? And if so, what
percentage of a CPA firm should non-CPAs be allowed to own? Below
is a list of some pros and cons of allowing non-CPAs to have an
ownership stake in New York CPA firms.
CPA firm mobility. New York is currently one of
only five U.S. states that require 100% ownership of CPA firms
by CPAs. As a result, multistate, national, and international
firms must negotiate a bureaucratic morass whenever they move
personnel to an office in another state. Varying practice requirements
among the states make this movement of personnel exceedingly complicated.
retention. Competition for talented employees is
more intense than ever, especially in the accounting profession.
But non-CPA professionals working in New York CPA firms (lawyers,
computer information specialists, or consultants, for example)
know they can never make partner. As a result, New York CPA firms
have a tougher time hiring and retaining these non-CPAs, who often
have little incentive to make a long-term commitment to CPA firms.
services. The composition of today’s typical
CPA firm is very different than it was 50 years ago, and New York
needs to keep up with the times. Whether the practice involves
audit, consulting, tax, or a new and emerging field, businesses
and individuals are looking to CPA firms for more services than
ever before. The fact is, today’s CPA firm needs to hire
and retain a wide variety of non-CPA personnel—not only
to thrive, but to survive.
audits. Modern audits require input from and participation
by many different types of professionals in addition to CPA auditors.
To maintain an experienced multidisciplinary audit force, firms
need to be able to offer ownership to different types of professionals.
a CPA firm in the family. Is it really fair for
the New York State Legislature to tell the owners of CPA firms
in New York that they cannot legally pass a minority interest
in their business on to members of their family who are not CPAs?
conflicts of interest. Conflicts of interest may
be inevitable when non-CPAs co-own CPA firms. For example, assume
that a marketing expert with an MBA co-owns a CPA firm with a
CPA auditor. The marketer’s main objective is to improve
the firm’s market share, but the auditor’s main objective
is to protect the public interest. Can these competing objectives
regulation. Many non-CPA owners of CPA firms are
regulated only by the marketplace. The CPA profession and the
financial environment it protects are integrally intertwined with
government regulation. New York and the United States have effectively
made the policy decision that investors and the financial markets
they rely on must be protected through governmental oversight.
Permitting unregulated owners of CPA firms erodes this policy
decision and perhaps the public trust that undergirds the CPA
work by a non-CPA at a CPA firm will give the entire CPA profession
a black eye. Should the accounting profession be
held accountable for the work of a non-CPA owner who has not passed
the CPA exam, is not subject to CPE requirements, and is working
outside the CPA’s Code of Professional Conduct? Perhaps
more important, should the public be exposed to this work?
is in control? CPAs may not be in control of their
own firms in a state that permits up to 50% of a CPA firm to be
owned by non-CPAs. What if, for example, a CPA-owner—working
in a CPA firm with 49 non-CPA and 50 CPA equal owners—decides
to vote with the non-CPAs on important business decisions? Few
would suggest that non-CPAs should ever have effective control
of a CPA firm.
owners create a public “expectation gap.”
The public is generally unaware that most states allow non-CPAs
to co-own CPA firms. As a result, most people expect that: 1)
every owner of a CPA firm has passed the CPA exam and must meet
ongoing CPE requirements; and 2) all the work being done by a
CPA firm’s owners is being conducted under the CPA profession’s
high standards and rigorous Code of Professional Conduct. Anything
less creates a gap between what the public expects from a CPA
firm and what that CPA firm actually delivers.
Do You Stand?
differing perspectives show, this is a complicated issue, and
reasonable people can disagree. It is essential, however, that
the Society learns where its members stand, so it knows which
direction to go and where to put its resources.
So what do
you think? Should the New York State Legislature continue to require
that CPA firms be owned only by CPAs? If not, what percentage
of a CPA firm should New York allow to be owned by non-CPAs? Please
let me know what you think about these questions, or suggest other
pros and cons in the debate.
Publisher, The CPA Journal
Executive Director, NYSSCPA