December 1999

Views on Non-CPA Ownership Aired at Hearing

The November 16 hearing sponsored by New York State Assembly Majority Leader Michael J. Bragman (Syracuse) and State Assembly Standing Committee on Higher Education Chair Edward C. Sullivan (Manhattan) featured testimony in support and opposition of permitting minority ownership of CPA firms by persons outside the profession.

Current law requires that CPAs own 100 percent of a CPA firm, although up to 35 percent of the firm's net income may be shared with non-CPAs. Assembly bill 8600 and its Senate companion, S. 4402, both propose permitting a simple majority of CPAs to own CPA firms, allowing up to 49 percent non-CPA owners. Under the bills, any non-CPA owners must be actively engaged in the firm or an affiliated organization as their principal occupation.

Profession's Leaders Voice Support

NYSSCPA President Alan E. Weiner spoke in favor of the bill's non-CPA ownership provision and its potential impact on recruiting and retaining staff.

"This change gives recognition of the need for CPA firms to attract and retain professionals from other disciplines to provide needed services to clients," Weiner said. "It will also give the opportunity for firms to give ownership interests to accounting professionals active in the firm who, for a variety of reasons, have not been able to obtain the CPA designation."

Weiner noted that a number of firms have used creative firm structures to work around the current rules and that passage of the accountancy law revisions would make those structures unnecessary.

Responding to questions from Majority Leader Bragman, AICPA Chair Robert K. Elliott testified that increasing capital requirements have necessitated a change in the structure of CPA firms. Elliott said that the demands placed on public accounting firms by the marketplace are driving the need to admit non-CPAs as owners. (See page 1 for more on Weiner's and Elliott's testimonies.)

Jo Ann Golden, NYSSCPA secretary and president of Jo Ann Golden CPA PC in Herkimer, N.Y., said that even in her small practice, clients more and more are asking her to provide expertise in areas in which CPAs traditionally have not offered services.

"One such example would be computer services," she said. "Frequently, I must refer these services to others who may not necessarily understand the intricacies of the accounting profession. To be able to partner with a person who has these skills could provide my clients with much-needed services in a cost-effective manner--a better service to the public. These 'partners' would be subject to the same strict standards we, as CPAs, must follow. This can only be a plus for the public interest."

Louis C. Grassi, an NYSSCPA director and managing partner of Grassi & Co. CPAs PC on Long Island, also testified in favor of non-CPA ownership. He said that he was concerned about being able to compete with companies like American Express Tax & Business Services, the Big Five accounting firms, H&R Block, and others.

"These large financial services firms are entering our marketplace since market research tells them that the business public wants one multidiscipline firm to provide all the services they seek in their business and personal lives," he said.

Grassi pointed out that A. 8600 contains provisions that protect the public interest, a concern that, historically, has been characteristic of the CPA profession.

SED and SEC Among Opposition

First among the speakers opposed to non-CPA ownership was former NYSSCPA President Norman W. Lipshie. He expressed concern about independence issues and the impact of non-CPA ownership on the public interest.

"If a non-CPA attracts a client or becomes dominant in the relationship, how do you stop his participation in the attest function?" he asked. "How do you ensure that his desire to assist a client, not necessarily as an independent, will not be compromised? The public would perceive the firm as not acting in the public interest, but being profit-motivated and not maintaining integrity, objectivity, and independence."

Lipshie also questioned the state's ability to regulate non-CPA owners effectively.

"You can't take away a license from someone who doesn't have one," Lipshie said.

Former NYSSCPA President Eli Mason also opposed non-CPA ownership.

"For New York state to say that a firm 49 percent owned by non-CPAs is a CPA firm is a fraud," Mason said.

Johanna Duncan-Poitier, deputy commissioner of the State Education Department's Office of the Professions, included in her arguments against non-CPA ownership the Securities and Exchange Commission's concern about the negative impact of the profession's move toward consulting services offered by a CPA firm's employees who are outside the profession.

She quoted SEC Commissioner Norman S. Johnson as saying, "It hardly seems accidental that financial fraud has increased at the same time nonaudit services performed by accounting firms have proliferated and become more profitable."

Duncan-Poitier warned that the SED echoes the SEC's concerns and seriously questions non-CPA ownership's impact on the profession's integrity.

Joining the state regulators' opposition was P. Robert Fox, vice chair of the New York State Board for Public Accountancy. Fox also serves on the Uniform Accountancy Act Committee, a joint effort between the AICPA and the National Association of State Boards of Accountancy, though his testimony was not consistent with that committee's efforts to permit non-CPA owners.

"I personally believe that effective regulatory enforcement of a non-CPA owner would be virtually impossible--even with the safeguards suggested in the Uniform Accountancy Act," Fox said. "Further, I do not believe that self-enforcement by the profession provides the public with adequate protection."

Fox closed by predicting a dour future for the CPA profession and the public if the non-CPA ownership provision contained in the bill survives.

"I predict that without effective legislation and regulation, large CPA firms will go public and banks and insurance companies will own CPA firms within ten years," he said. "CPAs will function like doctors in HMOs and pharmacists in large retail pharmacy chains. I believe that economics will be the primary driving force for services rendered. I fear that the principles of the profession that address the public interest and the profession's social obligations will be lost."

Another non-CPA owner opponent was Herbert Schoenfeld, past president of the National Conference of CPA Practitioners.

"Let us not lose sight of the fact that CPAs have been doing consulting, business valuations, litigation support, and other nonattest functions for their clients for many years," Schoenfeld said. "No one seemed to mind that these firms were one hundred percent owned by CPAs and that their clients were pleased with the final product. Third parties relying upon the information gathered were satisfied that a CPA performed this work and were content knowing that integrity, objectivity, and independence were always present. Why change this?"

The Society expects the State Legislature to address A. 8600 and S. 4402 in the next legislative session. Watch http://www.nysscpa.org and The Trusted Professional for updates. *

Ownership and Registration of CPA Firm

A. 8600 amends current law to allow for 49 percent ownership of a CPA firm by non-CPAs, provided that the non-CPA owners actively participate in the firm. Firm must be registered with the State Education Department and undergo peer review once every three years.