NON-CPA OWNERSHIP OF CPA FIRMS
STATEMENT IN OPPOSITION 44
TESTIMONY

I am testifying on behalf of the New York State Board for Public Accountancy in opposition to non-CPA ownership of CPA firms. I have had a special interest this issue since becoming a member of the New York State Board for Public Accountancy in 1995 and the Uniform Accountancy Act Committee in 1998. 1 have assembled numerous articles that evaluate non-CPA ownership. I will comment on two articles today and conclude with my personal opinion. The two articles are excerpts from the CPA Journal Reprint Series. The CPA Journal is published by the New York State Society of Certified Public Accountants. The articles are included as appendices to my presentation.

The first article, The Status of Non-CPA Ownership of CPA Firms, was published in 1997. The authors, Anthony R. Pustarino, CPA and Allan Rabinowitz, CPA were professors at Pace University when they wrote the article. Mr. Pustarino was a past chairman of the State Board of Accountancy. Mi. Rabinowitz was formerly vice-president-finance of MacMillan Publishing Company and president of The Scribner Book Companies. This article provides a balanced report. It summarizes the pros and cons of non-CPA ownership. It lists firm characteristics that are acceptable to the AICPA and summarizes rules in the Uniform Accountancy Act. It concludes with a survey of State Society Executive Directors for selected states.

The Pros and Cons of Non-CPA ownership in this article follow a pattern that is consistent with virtually every study I have seen. I would summarize the essence of the arguments as follows:

PROPONENTS FOR NON-CPA OWNERSHIP

1. Focus on the economic needs of CPAs.

2. Assume that non-CPA partners could be subjected to regulation.

3. Minimize the need for public awareness.

OPPONENTS OF NON-CPA OWNERSHIP

1. Express concern over potential pressures that a non-CPA owner might exert to tie independent audit services to other services that generate higher profits.

2. Object to granting rights and benefits to non-licensees without requiring all the professional obligations.

3. Recognize the practical difficulties in policing unprofessional acts of non-licensee owners.

Public accounting is evolving to such a broad range of services that the profession itself cannot define public accountancy. The expanding range of services has created the clamor for non-CPA ownership. The attest function (i.e. audits, reviews and similar services) is the one function that is reserved for the profession through government regulation. In this article, SEC Chairman Arthur Levitt is quoted on the importance of the attest function. He said "the accounting industry should view auditing as the very soul of the public accounting profession - not as a loss leader retained as a foot in the door for the higher fee consulting services." The expansion of CPA services has, in fact, made audits a commodity. While the public may be enjoying cost savings. I believe the public is receiving reduced quality and less protection despite the profession's protestations to the contrary. I believe that many CPAs take business risk into consideration when conducting an audit today (i.e. less reliable alternative testing). I am personally aware of two civil suits that have come about as a result of this business risk attitude. I believe that non-CPA ownership would not only encourage ftirther proliferation by minimizing the importance of the attest function, but would also encourage more auditors to take business risks.

Independence is the cornerstone of the CPA profession. In this article, SEC enforcement director William McLucas said: "The complex entanglement of services with clients pose, in my view, a subtle but very real threat to Independence." The ethics of the profession require that there be independence both in appearance and in fact. It provides the public with confidence that CPAs will be objective. The SEC clearly recognizes the threat of expanded services. Complex structures and unenforceable rules will most Uely lead to an environment that encourages disregard for laws and regulations.

The second article, The Case Against Non-CPA Ownership in CPA Firms, was published in 1993. The author, Norman W. Lipshie, was a former president of the New York State Society of Certified Public Accountants.

While Mr. Lipshie wrote this article over six years ago, it still is right on target today. Mr. Lipshie identifies a small number of large CPA firms as the primary beneficiaries of non-CPA ownership. He also accurately points out that even the AICPA Task Force that studied this issue recognized that restricting and controlling a non-CPA owner would not be easy. 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. Further, I do not believe that self-enforcement by the profession provides the public with adequate protection.

Independence, which is the cornerstone of the accounting profession, is prominently addressed in Mr. Lipshie's article. He expresses concern about pressures that the non-CPA owner might place on a CPA firm as a business unit to produce more profits. The SEC expressed similar concerns in the prior article.

Mr. Lipshie accurately predicted the future in this article. He envisions a time when non-CPA owners could include attorneys, financial planners and consultants. Recently, there has been a suit by the American Bar Association against a CPA firm for practicing law without a license. Consolidators, like American Express and H R Business Services, have created legal structures that give them an opportunity to significantly influence a CPA firm. And, consultants have become so powerful in one international CPA firm affiliate that there is an internal dispute and a probable split-up.

Ask yourself these questions when you think of the public interest:

How can an attorney and a CPA be partners and still protect the public interest when the former is asked to be an advocate while the latter is asked to be independent and objective?

How can a CPA give objective advice when there might be a substantial commission available if a certain choice is made?

How can a CPA issue an objective opinion on the effectiveness of a business process if the CPA installed it?

Mr. Lipshie states that "the public has the right to assume that every owner of a CPA firm is a CPA." Ask yourself. "Should CPA firms remain a niche or do you want them to be the source of one-stop shopping?" The trade associations (AICPA and NYSSCPA) are promoting one-stop shopping. I do not believe that the one-stop shop is in the public's best interest. I believe that Mr. Lipshie was thinking of the public interest too. He put principal above economic gain.

Mr. Lipshie's article concludes with seven criteria that distinguish a profession. T two are particularly poignant. They are:

1. There should be a public interest in the work that the practitioners perform.

2. There should be recognition by the profession of a social obligation.

I am concerned that the two aforementioned criteria have been significantly diminisl today's competitive environment.

As a practicing CPA who is nearing retirement, it is tempting to support non-CP ownership. It would most assuredly increase my income and the value of my partnership interest.

As a member of the New York State Board for Public Accountancy, I have committed myself to protect the public interest I believe that preserving the Independence Standard is a critical factor in protecting the public interest. I see non-CPA ownership as one of the straws that will break the back of the Independence Standard and public interest considerations.

I believe that a review of the evolution of the non-CPA ownership issue predicts the future. Evolution is defined in Webster's dictionary as "the process of unfolding, growing, or developing, usually by slow stages." Originally, the AICPA stated that ownership should be two-thirds CPAs and one-third non-CPAs. Today a 51/49 relationship is acceptable. In my opinion, consolidators have created legal structures that effectively allow unlicensed individuals to have significant influence over a CPA firm today. I predict that without effective legislation and regulation large CPA firms will go public and that banks and insurance companies will own CPA firms within ten years. 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.

I urge you to support our opposition to non-CPA ownership. Our position is based on principle. I urge you to reject the temptation to support the economically driven proposal for non-CPA ownership. The public interest hangs in the balance.