Input Sought on How to Revise Interpretations of the AICPA Code of Professional Conduct that Bear on Alternative Practice Structures
NEW YORK (Feb. 5, 2024) – A task force of the American Institute of CPAs’ Professional Ethics Executive Committee (PEEC) will seek public comment on its preliminary conclusions about revisions to independence rules related to alternative practice structures, changes driven by the increasing prevalence of private equity investment in accounting firms. The committee’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.
The AICPA Code of Professional Conduct has had robust 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 non-attest services. U.S. Securities and Exchange Commission rules and state law offer additional layers of protection in this area, but with private equity investment in non-attest entities becoming more common, the PEEC concluded 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,” said Susan Coffey, the AICPA’s CEO of public accounting. “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. In both instances, the draft interpretations would create a three-step process:
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.
Determine which individuals associated with the alternative practice structure are covered members subject to independence requirements.
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 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 provide non-attest 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 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.
For more information on the PEEC, please visit the committee’s resource page.