The AICPA said Wednesday that it’s considering revising its independence rules as a result of the increasing prevalence of private equity investment in accounting firms.
A task force of the AICPA’s Professional Ethics Executive Committee (PEEC) is seeking public comments on its preliminary conclusions about updating independence rules related to alternative practice structures. PEEC’s Alternative Practice Structures Task Force will ask stakeholders to weigh in on its conclusions and two interpretation options once a discussion memorandum is posted, likely later this month.
Of the top 30 largest public accounting firms by revenue in the U.S., at least 11 have received private equity backing, with a 12th possibly happening soon as CohnReznick is rumored to have a deal in the works.
After these deals are consummated, the accounting firms typically form an alternative practice structure, which splits the firm into two organizations to avoid regulatory scrutiny. Audit and attestation services remain with the original firm, which is owned by CPAs. The accounting firm’s nonattest business and other assets are transferred or sold to a new nonattest services company, and the private equity investor(s) then invest in that nonattest services organization.
The AICPA said Wednesday that its Code of Professional Conduct has had protections in place regarding outside investment in CPA firms for more than 25 years. Only licensed CPA firms can provide attest services, with clearly defined firewalls required for investors taking a piece or outright control of an entity that provides only nonattest services, the AICPA added. Securities and Exchange Commission rules and state law offer additional layers of protection in this area, but with private equity investment in nonattest entities becoming more prevalent, the PEEC concluded that more clarity is needed, particularly around issues involving auditor independence, portfolio companies, and other private equity-related entities.
“Private equity investment in accounting is a great validation of the strength and stability of the profession, and it’s one way for firms to fund technology upgrades and growth acquisitions,” Susan Coffey, AICPA CEO of public accounting, said in a statement. “It’s crucial, however, to make sure integrity of the attest function is not compromised and that the public interest is protected. The PEEC has done extensive work to ensure those guard rails are both well understood and relevant to current practice.”
The PEEC developed its task force two years ago to look into issues raised by private equity investors in accounting. The task force is seeking comment on its preliminary conclusions and two options for a draft interpretation of independence rules—one that includes a specific private equity-related example and another that is more general, the AICPA said. In both instances, the draft interpretations would create a three-step process:
1. Determine which entities associated with the alternative practice structure are network firms, a term defined in the code. Network firms are subject to independence requirements for financial statement audit and review clients.
2. Determine which individuals associated with the alternative practice structure are covered members subject to independence requirements.
3. Determine which additional relationships and circumstances associated with the alternative practice structure create threats to independence, and:
- Identify relationships and circumstances where independence would be impaired.
- Apply the “Conceptual Framework for Independence” (ET sec.1.210.010) to any other relationships and circumstances that the member knows or has reason to believe may exist.
When evaluating the first step, the nonattest entity would be considered a network firm of the attest firm, according to the AICPA. Alternatively, a private equity investor, its funds, and other portfolio companies would generally not be considered network firms, so portfolio companies could conceivably provide nonattest services to any attest clients. However, there may be circumstances where a portfolio company could be defined as a network firm for other reasons that will be spelled out in the task force’s discussion memorandum, the AICPA said.
The task force will take comments through June 15 on its preliminary conclusions and the draft interpretation option stakeholders prefer regarding independence under alternative practice structures. The PEEC would use that feedback to supplement its research and select the preferred option, followed by a formal exposure draft.
Email your comments to ethics-exposuredraft@aicpa.org.
Thanks for reading CPA Practice Advisor!
Subscribe Already registered? Log In
Need more information? Read the FAQs
Tags: accounting firms, AICPA, private equity
