The Need for Expanding Organizational Options for CPAs

By Rimerman, Thomas W. | Journal of Accountancy, October 1991 | Go to article overview

The Need for Expanding Organizational Options for CPAs


Rimerman, Thomas W., Journal of Accountancy


The current litigation crisis is doing more than causing some CPA firms to shut their doors. It's also preventing some firms from opening. Today, more than ever before, pursuing a career in public accountancy may mean risking your savings, your home and other personal assets for the possible negligence or actions of partners serving clients for whom you have never worked. For some, the risk is clearly too great. Although we are having some success at liability reforms, the accounting profession cannot reverse the effects of the litigation explosion. However, we should not stand in the way of CPAs seeking to minimize an unreasonable degree of personal liability exposure.

In November, members of the American Institute of CPAs will be asked to vote on proposed changes of Rule 505--Form of Organization and Name of the AICPA Code of Professional Conduct. The current rule and existing state accountancy laws and regulations limit Institute members to practicing in proprietorships, partnerships or professional corporations (PCs). The proposed rule change would allow members to practice in any form approved by state law or regulation, including a general corporation and a limited liability company (LLC). (An LLC is an entity that is treated similarly to a corporation for purposes of determining liability of shareholders, directors and officers but is treated as a partnership for tax purposes. Seven states currently permit their formation: Colorado, Florida, Kansas, Nevada, Utah, Virginia and Wyoming. However, in the state of Virginia, the statute does not permit professionals to form LLCs.)

This rule change may not seem monumental, yet, in reality, it could be a significant step in helping to ensure the profession's future viability.

CPA firms of all sizes need a structure that insulates them from unreasonable legal liability. They also need a structure that affords the flexibility to respond to the changing needs of the marketplace, to operate cost-effectively and to position themselves for future growth. Changing Rule 505 will provide AICPA members with expanded organizational options so they can better meet those needs.

At present, Rule 505 deprives members of the liability protection offered by practice as a general corporation, an LLC or any other organizational form that in the future may be permitted under state accountancy laws or regulations. Such an obstacle not only makes CPA owners who perform quality work and have not committed any wrongdoing vulnerable to excessive liablity exposure for mistakes made by those in practice with them but also may impeded the CPA profession from attracting and retaining the most talented individuals.

In The Litigation Explosion, published in April 1991, Walter Olson, a senior fellow at the Manhattan Institute, emphasizes accountants' vulnerability to litigious actions: "Litigation and its threat have begun to metastasize to virtually every sector of the economy. Retailers sue manufacturers, franchisees sue franchisers, commercial tenant sue office and mall developers, and everyone sues accountants."

In such a litigious environment, CPA firms deserve to be on a level playing field with other business enterprises, including their own clients, many of which are organized as corporations.

The AICPA is alone among national groups in restricting members' form of practice. Other associations, such as those for lawyers and doctors, do not dictate their members' form of practice and rely instead on state licensing regulations. I believe the AICPA should change its rules to reflect the public policy decisions made by the legislatures where its members practice. Our members should be given the right to practice in the same forms as other responsible enterprises.

KEEPING PACE WITH THE TIMES

We are all acutely aware that times have changed. The profession is changing and the proposed amendments to Rule 505 are, in part, a reflection of the changing times. …

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The Need for Expanding Organizational Options for CPAs
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