Navigating the Complex World of Alternative Practice Structures

By Bonnie Stewart

During a recent session at the National Association of State Boards of Accountancy (NASBA) Annual Meeting, the complexities and misconceptions surrounding private equity (PE) investments in accounting firms were thoroughly discussed. There is no one-size-fits-all strategy when it comes to the diverse structures of private equity.

The conversation highlighted recent trends in the accounting industry, including Employee Stock Ownership Plans (ESOPs) and the emergence of global network models. Participants stressed the critical importance of regulatory compliance, particularly regarding auditor independence. It was noted that as more firms explore alternative structures, challenges such as public confusion and the potential influence of non-attest entities must be addressed.

Key points from the discussion included:

• Diversity of Investment Structures: The panel explained that private equity firms and accounting firms often have differing goals and approaches. Various types of investments, such as minority and majority stakes, lead to different transaction structures and auditing requirements.
• Recent Activity: Over the past four years, there has been significant involvement in alternative practice structures, with reports indicating that a third of the largest firms are now part of private equity arrangements. This trend may even be understated, as many firms are adopting alternative structures without outside investment.
• Regulatory Landscape: The regulatory environment for these alternative structures is complex. Majority ownership must reside with individual CPAs, and any minority non-CPA investments must be actively involved. The application of auditor independence rules poses additional challenges that are not yet fully clarified by the SEC and PCAOB.
• Forming Alternative Structures: The mechanics of creating an alternative practice structure involve separating non-attest assets (such as tax and advisory work) into a new non-CPA firm, while the CPA firm retains its attest assets. This arrangement aims to maintain separate governance and client relationships, ensuring that CPAs remain in control of attest work.
• Risks and Compliance Challenges: The risk of public confusion due to inadequate disclosures was a recurring theme. Participants discussed the potential inappropriate influence of non-attest entities on the attest side and the complexities of maintaining independence across multiple parties. Clear disclosures and operational changes are necessary to comply with regulatory expectations.

The session concluded with insights from a Professional Ethics Committee (PEC) representative, who announced that an exposure draft on independence will be presented to the PEC this month. The importance of understanding these issues and providing guidance to state boards was emphasized, as was the necessity of best practices to mitigate potential pitfalls.

As the accounting profession continues to evolve, the discussions at the NASBA Annual Meeting shed light on the intricate relationship between private equity and accounting firms, highlighting the need for clarity, compliance, and adaptability in this changing landscape.