By Goldwasser, Dan L.
The CPA Journal , Vol. 69, No. 10
New Standards May Be Required
A number of factors have given a distinct economic advantage to large practice units that, in turn, have raised questions regarding the utility of existing independence standards. The SEC has recognized the need for reassessment of those standards through its involvement in the creation of the Independence Standards Board (ISB).
The alluring growth of the Big Five, particularly in consulting services, prompted American Express and other commercial organizations to acquire accounting practices with the aim of developing a national accounting practice to sell a broad range of business and tax consulting services to mid-sized businesses. In order to acquire larger local or regional firms, American Express began a successful assault on "holding out" regulations and eventually developed an alternative firm structure to deal with ownership requirements.
The ISB has identified two possible approaches to developing independence standards, and there are variations of both. After deciding upon an approach, it must also develop standards addressing the wide variety of consulting services being provided to clients and the nontraditional firm structures employed by consolidators. In developing these standards, the ISB must develop a regulatory scheme for safeguarding auditor independence that will be sufficiently flexible to accommodate the rapid changes in the accounting profession.
The independence of auditors has long been a concern of both the accounting profession and its regulators and serves as a means of providing assurance to the public that relies upon audited financial statements that such reliance is justified. Without independence standards, an accountant's report would provide little credibility as to the reliability of the client's financial statements.
Many of the independence standards in effect today were devised in a very different economic era. In fact, most such standards were placed into effect even before accountants became heavily engaged in tax preparation services, when the principal endeavors of CPAs were accounting and auditing services. Today, accounting firms offer a wide variety of services, many of which have either a direct or indirect effect upon the profitability of their clients. Equally important, the proliferation of professional standards, the growth of business enterprises, and the advent of new technologies have given a distinct economic advantage to larger practice units. This, in turn, has raised additional questions regarding the current utility of existing independence standards. The time has come for those standards to be reassessed. The SEC has demonstrated this need through its involvement in the creation of the Independence Standards Board (ISB).
Changes in Accounting Firm Structure
Accounting firms have traditionally been organized as partnerships, and by the early 1960)ss eight firms (dubbed the "Big Eight") had become dominant in the United States, each employing over 5,000 professionals. Following these firms were another eight large firms employing from 70 to 2,000 professionals (commonly referred to as "second tier" firms); and following those were a few dozen other firms with 100 to 300 professionals (generally referred to as large local or regional firms). Over the ensuing 30 years, the ranks of the second tier firms have been greatly depleted, largely by acquisitions by the Big Eight, which have contracted to five through mergers.
Today, only two of the original second tier firms still exist while three of the former regional firms have grown substantially, although their practices must still he characterized as regional, rather than national, in scope. This has left something of a void in the servicing of mid-size companies that fall below the radar screens of the Big Five and are too large to be successfully serviced by local CPA firms. Moreover, most local firms and many regional (PA firms lack the expertise to offer a full spectrum of services to mid-size companies and do not have the resources necessary to create them. …