Independence Issues With Former Partners

By Robert Kawa

Rule 101 of the Code of Professional Conduct of the New York State Society of CPAs concerns independence. The rule states that “a member in public practice shall be independent in the performance of professional services as required by standards promulgated by appropriate bodies designated by the Board of Directors of the Society.”

A number of interpretations of Rule 101 have evolved over time. One of these, 101-2, deals with the effect on independence when a former practitioner is employed with an audit or review client. The Society’s Professional Ethics Committee has been asked for interpretations of this rule in a number of cases.

A former practitioner is defined as an owner or equivalent who leaves by resignation, retirement or sale of all or part of the practice. In a number of cases, that individual has taken employment with a client of the firm that he or she has left. Can the firm still be independent in its performance of review or audit services under these circumstances?

Interpretation 101-2 states that a former practitioner is not included in the term, “a member of member’s firm,” provided that:

1. Payment of the amounts due to the former practitioner for his or her interest in the firm and for unfounded, vested retirement benefits according to the payment schedule in effect should be such that they do not cause a substantial doubt about the firm’s ability to continue as a going concern for a reasonable period of time. In addition, such amounts, including all retirement benefits, should be fixed, both as to the amount and payment dates. Such amounts due a former practitioner may be paid over a reasonable period of time, and a reasonable rate of interest may be paid on any unpaid balances. Retirement benefits may be adjusted only for inflation.
2. The former practitioner does not participate in the firm’s business or professional activities, whether or not compensated for such participation. This proscription does not apply to consultations on an advisory basis for a reasonable period of time during the transition period upon leaving the firm.
3. The former practitioner does not appear to participate in the activities of or be associated with his or her former firm. An appearance of participation or association results from such actions as inclusion of the former practitioner’s name under the firm’s name in an office building directory, or inclusion of the former practitioner’s name in the firm’s internal directory without being designated as retired. The former practitioner will not be considered as participating or associating with his or her former firm solely because the former practitioner is provided an office, either in the firm’s suite or in a separate location, and related office amenities such as secretarial and telephone services. (However, see 4, immediately below, for restrictions regarding office space and amenities for a former practitioner who accepts a position of significant influence with a client.)
4. A former practitioner in a position of significant influence with the client must no longer be provided with office space and related amenities by his or her former firm.

In regard to the inclusion of the name of the former practitioner, an interesting situation has arisen in a number of cases.

What if the firm retains the use of the former partner’s name in the name of the firm, while meeting all the other criteria of 3, above? Can the firm still be independent with respect to the client of which its former partner is now an employee?

The answer is yes. If, in fact, the firm meets all the other interpretations of Rule 101 correctly, use of the former partner’s name in the name of the firm is ordinarily not a detriment to independence. In New York, the state education department requires that to use the former partner’s name, the following conditions must be met:

• the firm was registered with the department when the partner was in the firm;
  
• there are as many current partners as there are names in the firm’s name; and
  
• the former partner gives permission for the continued use of the name by the firm.

In the maze of regulations pertaining to independence, the situation of former partners working for present clients presents some practical rules to be followed to ensure accounting firms adhere to Rule 101.