March 2000

Commissions and Non-CPA Ownership Debated At Senate Roundtable

Profession's Leaders Discuss Accountancy Reform Legislation

At a New York State Senate-sponsored roundtable discussion on March 8, participants debated two controversial issues in the accounting profession--allowing CPAs to accept commissions and permitting nonlicensed professionals to own CPA firms. The Senate held the meeting to hear views on these issues in relation to S. 4402, a bill introduced by Senator Kenneth P. LaValle that seeks to reform the state's accountancy statute.

Participants, including CPAs, regulators, and other interested parties, presented short statements to Senator LaValle, and the remainder of the four-hour session was an open discussion on the issues.

The State Education Department spoke out against permitting commissions and non-CPA ownership. Johanna Duncan-Poitier, deputy commissioner for the professions, and Daniel Dustin, executive secretary to the New York State Board for Public Accountancy, said that both issues threaten the profession's core values of independence, objectivity, and integrity.

While New York State Board of Regents rules prohibit CPAs from accepting commissions, developments over the past two years, specifically the purchase of the nonattest assets of Goldstein Golub Kessler & Co. by American Express Tax & Business Services of New York Inc., have raised questions as to the authority of state regulators to discipline CPAs. SED has interpreted that its ability to regulate the profession applies to the attest function only. (The department has introduced separate legislation to expand the regulated scope of practice beyond attest to give SED authority over a broader list of CPA services. See the December and February issues of The Trusted Professional or http://www.nysspa.org for more details.)

Commissions

Senate bill 4402, and its Assembly companion, A. 8600, both of which the NYSSCPA supports, allows commissions for nonattest clients and requires CPAs to provide written disclosure about the fee arrangements. While state board members and representatives from the National Conference of CPA Practitioners (NCCPAP) questioned the CPA's ability to maintain independence with a commissions-based fee structure, others at the meeting countered that the public now asks for commissions and other more flexible fee arrangements and the profession must respond to the marketplace.

"Independence is only an issue when you are talking about attest services," former NYSSCPA President Marilyn Pendergast said.

Other participants pointed out that 41 states currently allow CPAs to accept commissions.

Representatives from H.D. Vest, a financial services company with approximately 2,600 CPA representatives nationwide, including several hundred in New York state, who accept commissions, stated that they disclose their fee arrangements to clients. They said the public is further protected because the CPA can lose his or her license for unethical conduct.

"The reason why the public comes to me is that they trust me as an individual," said Vasso LaForest, an H.D. Vest representative in the southern tier of New York. "I know their tax background. They and I see it as an added benefit. They view me as a trusted advisor who will be objective."

Duncan-Poitier said that regardless of other participants' views on ethics rules and other regulations protecting the public against unethical conduct, the code of ethics is not in the law. She reiterated that the state currently cannot discipline CPAs for accepting commissions from nonattest clients.

Diana Georgia, counsel to the Senate Higher Education Committee, responded that S. 4402 may need to include a provision that incorporates or references the code of ethics. She stressed that the legislation must be in the public interest, and she asked the group what guarantees could protect the client.

"We can't guarantee everything," said Terra Gray, H.D. Vest director of government affairs. "We have speed limits but we also have police officers to pull over people. It just doesn't follow through that CPAs will become green-eyed monsters if they accept commissions."

Gray also pointed out that CPAs who offer commissions must comply with regulations from the Securities and Exchange Commission, the National Association of Securities Dealers, and other groups. She said that it is only fair to allow the marketplace to dictate fee arrangements.

"The SEC and NASD take independence very seriously," Gray said. "Our representatives want to provide full financial services. Whenever you restrict compensation arrangements, you hurt the public because you limit their choices."

Georgia, while acknowledging the marketplace's role, said that the fact that other states allow commissions is not always an argument for New York. Public protection is the driving issue.

"This is a defining moment for the state of New York," Georgia said. "We have to think about the consumer. The consumer is demanding a lot of things--changes are happening so quickly these days. New York doesn't want to find itself with its head buried in the sand but also wants to make sure we protect the public. Who is the client? Who is the consumer we are trying to protect?"

Georgia's questions led to a discussion on the definition of "client." Participants said that with individuals and small companies, the attest client is clear and the decision of whether or not to accept commissions is easy. With larger entities, however, defining the client can be more complicated. NCCPAP's Herb Schoenfeld said that in such cases, the decision to accept commissions is subjective at best.

Non-CPA Ownership

As the discussion turned to non-CPA ownership, the group had strong opinions on both the pros and cons. SED, state board, and NCCPAP representatives questioned whether or not nonlicensed professionals could exert undue influence over CPAs that could undermine the integrity of the audit. Others countered that non-CPA owners would have to abide by ethics rules and that S. 4402 also includes a provision that regulates the firm as an entity in addition to individual CPAs. They added that globalization and technology are just two forces that cause firms to need professionals with other skills to better meet the marketplace's needs.

"The marketplace and the profession have changed," said Andrew J. Capelli, who represented the Big Five at the roundtable. "We need to have ownership options available to attract the talent we need to service clients in evolving attest services. The marketplace demands up-to-date financial information, and we need people with technology and other skill sets to respond to the public's need."

Senate bill 4402 requires majority ownership by CPAs regarding voting and equity interest in the firm. Individuals, not corporate entities, can be minority owners, and they must be active participants in the firm. Georgia pointed out that there would have to be some regulation of the person's fitness and character and that the firm and other CPA partners would be responsible for the actions of non-CPA owners.

"This person would have to have some ethics training," Georgia said. "We are not going to put someone in there and just say 'You're an owner now.'"

Frank Muñoz, executive director of the SED Office of Professional Discipline, questioned the department's ability to regulate firms and said that the state's regulatory scheme lies primarily on the professional who is doing the wrong thing. Duncan-Poitier agreed, saying that it did not matter what S. 4402 proposed as allowed percentage of CPA vs. non-CPA owners. She stressed that it is not feasible for the state to regulate the firms.

"We don't have the staff to go out and investigate compliance," Muñoz said.

Participants also discussed non-CPA ownership in relation to big vs. small CPA firms. While NCCPAP representatives and others said non-CPA ownership benefits only the larger CPA firms with many non-CPA principals, others countered that it is not size but the marketplace that is driving the issue.

"Even as a two-partner firm, I would want non-CPA ownership," former NYSSCPA President Brian Caswell said. "Just as other sized firms are specializing, so are small firms. They are just looking for less niches. What if I had the opportunity to grow in employee benefits? I would have to bring on an expert professional with that background. To service my clients, I would need someone equal in stature to me. I am no different than KMPG--it's just on a smaller basis."

Capelli, who also is a former Society president, said that the recent deal that his firm, KPMG LLP, entered into with Cisco Systems--as well as similar arrangements where other Big Five firms have sold or spun off consulting services--does not obviate the need for non-CPAs in CPA firms. Rather, he said, it exacerbates the necessity for ownership compensation packages to attract and retain talent to help provide client attest services. He also took issue with Muñoz's comments on the SEC's recent moves to question the impact of consulting practice on the audit function.

"There is not one case where nonaudit services have affected the integrity of the audit," Capelli said. "[SEC Chair Arthur] Levitt has been challenged on that."

The meeting ended without reaching consensus. Georgia pressed the need for all parties to work out differences in order to move the legislation forward this session.

See http://www.nysscpa.org for a complete list of participants in the roundtable discussion. Watch The Trusted Professional and the Society's website for updates on the accountancy reform legislation. *