Academic journal article Accounting Horizons

The Effects of Corporate Ownership on Public Accountants' Professionalism and Ethics

Academic journal article Accounting Horizons

The Effects of Corporate Ownership on Public Accountants' Professionalism and Ethics

Article excerpt

SYNOPSIS: The current trend toward corporate acquisitions of CPA firms poses potential threats to the autonomy and ethical standards of public accounting professionals. This recent consolidation movement suggests that for the first time a significant number of public accounting professionals are subject to the supervision and control of nonprofessionals. In addition to acknowledging the potential threats to auditor independence and objectivity, this paper suggests that these new organizational arrangements for the provision of public accounting services have other negative effects on professionalism and ethics such as desensitizing CPAs to traditional professional values, and subverting professional institutions to the goals of corporate employers. This paper develops a framework that identifies several specific research questions related to the effects of corporate ownership on professionalism and ethics in public accounting.


A major issue currently facing the accounting profession is the effects of changes in organizational structures on CPA professionalism and ethical standards. Public accountants, like other professionals, historically worked in professional partnerships or sole proprietorships. For many years professional accounting associations effectively controlled the form of CPA organizations through explicit, formal restrictions. Non-CPA ownership of public accounting firms was prohibited and "holding out" or advertising as a CPA was restricted to those employed by one of these firms. However, auditing or attestation is the only professional service for which CPAs have a legal monopoly and the right to place restrictions on the form of practice. Professional associations are therefore unable to dictate the organizational forms through which nonauditing services, such as tax preparation and consulting, are provided.

This lack of control over nonauditing services opened the door for financial service corporations to expand their menus to include accounting and consulting. In the past few years several publicly held "consolidators," including American Express and H&R Block, entered the public accounting market by acquiring the nonattestation practices of CPA firms. American Express mounted a successful legal attack on the "holding out" restrictions in Texas and Florida, and subsequently ran a series of TV commercials touting the fact that they employ CPAs (Pustorino and Rabinowitz 1997).

Given that the performance of attestation engagements is restricted to traditional CPA firms, the consolidators developed a variety of approaches that allow the CPA firm and the financial services corporation to legally coexist subsequent to the consolidation of their practices. In cases like American Express, the employees of the CPA firm work for the consolidator corporation, and the CPA practice leases office space and employees from the corporation to perform attestation engagements. In other cases like H&R Block, the employees continue to work for the CPA firm, and are leased on an as-needed basis to the consolidator corporation. The CPA firm partners still sign the audit reports and are usually employed by both the consolidator corporation and the CPA firm, giving them dual employment status (Independence Standards Board [ISB] 1999).

These arrangements, commonly referred to as alternative practice structures (APS), raise concerns about auditor independence and objectivity. Questions arise over issues such as appropriate compensation schemes for partners with dual employment status, potential financial relationships between the public corporation and audit clients of the CPA firm, and whether independence requirements should be extended to non-CPA supervisors of CPA employees (ISB 1999). Because it can be argued that, in substance, public corporations are performing audit engagements, at a recent New York State Board of Regents Conference on the Professions, the public accounting profession was criticized for allowing audits to be performed through these types of organizational arrangements (Huefner 2000). …

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