AICPA looks to update independence rules amid PE investment

The American Institute of CPAs is planning to revise its independence rules amid the wave of private equity investments in accounting firms. 

In recent years, there has been a rising wave of PE firms buying stakes in CPA firms, prompting many of the firms to set up “alternative practice structures” in which they split off their attest and non-attest sides so the audit and assurance practice won’t be owned by non-CPAs and run afoul of state laws. But the AICPA also sees the need to revise its independence rules for CPAs and plans to seek public comments on possible changes. The AICPA’s Professional Ethics Executive Committee has set up a task force known as the Alternative Practice Structures Task Force that has already reached some preliminary conclusions about revisions to the independence rules related to alternative practice structures. The task force plans to ask stakeholders to weigh in on its preliminary conclusions and two interpretation options once a discussion memorandum is posted on the AICPA website, probably later this month on the committee’s resource page. The committee has been meeting this week to discuss the findings.

For over 25 years, the AICPA Code of Professional Conduct has had protections in place when it comes to outside investment in CPA firms. Only licensed CPA firms are allowed to provide attest services, with clearly defined firewalls required for investors taking a piece or outright control of an entity that provides only non-attest services. Securities and Exchange Commission rules and state law provide additional layers of protection in this area, but with private equity investment in non-attest entities becoming more prevalent, the AICPA’s Professional Ethics Executive Committee decided more clarity is necessary, especially on 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,” said Susan Coffey, the AICPA’s CEO of public accounting, in a statement Wednesday. “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 committee set up its task force two years ago to look into issues raised by private equity investors in accounting. The task force is looking for comments 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’s more general. In both cases, 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

   1. Identify relationships and circumstances where independence would be impaired.
   2. 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 non-attest entity would be considered a network firm of the attest firm. Alternatively, a private equity investor, its funds and other portfolio companies would generally not be considered network firms, so portfolio companies could conceivably offer non-attest services to any attest clients. Nevertheless, 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 task force plans to accept comments through June 15 on its preliminary conclusions and the draft interpretation option stakeholders prefer regarding independence under alternative practice structures.  The committee would then use that feedback to supplement its research and select the preferred option, followed by a formal exposure draft.