American Association of Attorney-Certified Accountants Response To Question 3, First Sentence In Commission's January 1999 Preliminary Report - Center for Professional Responsibility

DRAFT REPORT TO ABA COMMISSION ON MULTIDISCIPLINARY PRACTICE
RESPONSE TO QUESTION 3,
FIRST SENTENCE IN COMMISSION'S JANUARY 1999 PRELIMINARY REPORT

Submitted by the American Association of Attorney-Certified Accountants
April 8, 1999

_______________________________________________________

Question 3 in the Commission's January 1999 Preliminary Report asks:

"How, if at all, are the professional standards that govern the conduct of accountants and accounting firms different from those that govern the conduct of lawyers and law firms? How do any differences in professional standards impact on the protections offered to clients and the public?"

This report answers the first sentence.

© Copyright, 1999, American Association of Attorney-Certified Accountants, 24196 Alicia Parkway, Suite K,
Mission Viejo, CA 92691, phone 800/CPA-ATTY.

This report does not necessarily reflect the official position of the American Association of Attorney-Certified Public Accountants, Inc.

It has been reviewed by the Dual Rights Committee and the Task Force on Multidisciplinary Practice of the American Association of Attorney-Certified Public Accountants and authorized for release as an informational draft document.

The following members serve on either the Dual Rights Committee, or the Task Force on Multidisciplinary Practice, or both:

Philip D. Brent, Encino, CA
Jay Foonberg, Santa Monica, CA
Silvia Ibanez, Orlando, FL
L. Harold Levinson, Nashville, TN (Reporter)*
Thomas W. McCulloch, Houston, TX
David Ostrove, Los Angeles, CA
Sydney S. Traum, Miami, FL (Chair)

* Professor of Law, Vanderbilt University


Acknowledgments

The reporter and the Association gratefully acknowledge the excellent research assistance provided by the following students, all of whom are candidates for the J.D. degree at Vanderbilt University Law School in 1999:

Leslie C. Crawford **
Cristina L. Eubanks
Angie Godwin McEwen

** Ms. Crawford passed the CPA examination in November, 1998. In addition to performing research, she designed and produced the chart for the analytical summary of contents.

The reporter and the Association also gratefully acknowledge support and research facilities provided by Vanderbilt University Law School.

 

C O N T E N T S

Analytical Summary of Contents
Part One Lawyers' Standards: Regulatory Framework (annotated to CPAs' standards)
Part Two Lawyers' Standards: ABA Model Rules of Professional Conduct (annotated to CPAs' standards)
Part Three CPAs' Standards With No Equivalent in Lawyers' Standards
Appendix A AICPA Ethics Interpretation on Alternative Practice Structures (February 1999)
Appendix B Table of Citations to CPAs' Standards

  

Abbreviations

UAA -- AICPA/NASBA (American Institute of Certified Public Accountants/National Association of State Boards of Accountancy), Uniform Accountancy Act (printed from AICPA website, February 1, 1999)

R -- AICPA/NASBA, Rules to accompany UAA (printed from AICPA website, February 1, 1999)

ET -- AICPA, Code of Professional Conduct, including AICPA Interpretations (printed from AICPA website, February 1, 1999)

Model Rules -- ABA (American Bar Association) Model Rules of Professional Conduct (as amended through 1998)

Restatement -- Restatement of the Law: The Law Governing Lawyers, Proposed Final Draft No. 2 (April 6, 1998) (subject to final action, anticipated in 1999)

Digest -- AICPA/NASBA, Digest of State Accountancy Laws and State Board Regulations (1998 ed.)

 

Note on Selective Use of Sources
Some of the above sources are used selectively. This report is therefore not a comprehensive study of all sources.

 

PART ONE -- LAWYERS' STANDARDS: REGULATORY FRAMEWORK
(annotated to CPAs' standards)

I. INTRODUCTION

A. Regulatory Powers of Courts, Legislatures and Agencies

* Lawyers

State supreme courts have the primary responsibility for regulating lawyers. In some states, the state constitution expressly confers this power on the courts; in other states, courts have exercised this power as one of their implied powers. Generally, the state supreme courts adopt rules of conduct, establish bar admission agencies, establish lawyer disciplinary agencies, and render final appellate judgments in cases involving lawyer admission and misconduct. See generally, Restatement, Sec. 1.

Lawyers may also be governed by the rules of bar associations in those states in which membership is mandatory, infra at 18.

Additionally, state statutes establish some standards. The statutory role is more extensive in some states, including California, less extensive in others. Statutes are especially significant in defining and prohibiting "unauthorized practice of law," in codifying the attorney-client privilege, and in establishing rules of procedure for the courts.

Statutes are sometimes incorporated by reference in court-adopted rules, such as rules referring to "illegal" conduct, or to situations "provided by law."

In litigation, the court has special supervisory powers, including the contempt power.

Federal law applies to practice before federal courts and administrative agencies, including rules of procedure, the Agency Practice Act, SEC rules, IRS rules, etc. Each federal court may adopt its own rules for admission and discipline. Admission to practice before a federal district court is generally a mere formality for a lawyer who demonstrates good conduct in a state bar. Most federal district courts adopt the rules of the state court where they are located. The Federal Rules of Appellate Procedure and the U.S. Supreme Court Rules of Practice establish general standards of conduct.

** CPAs

CPAs are regulated by state legislatures, which enact the general regulatory framework, delegating power to state boards of accountancy to adopt rules and monitor compliance. UAA Sec. 4(h)(4). The actions of the legislatures and the boards are subject to judicial review.

CPAs are subject to some federal regulation, including the Agency Practice Act, which allows CPAs to practice before the Internal Revenue Service, 5 U.S.C. Sec. 500(c). CPAs (as well as other nonlawyers) may also qualify, by examination, to practice before the Tax Court, pursuant to U.S. Tax Court Rules of Practice, Rule 200; if admitted to practice before the Tax Court, they are governed by its rules. And see provisions on taxpayer/preparer confidentiality, 26 U.S.C. Sec. 7525, added by Internal Revenue Service Restructuring and Reform Act of 1998, Sec. 3411, P.L. 105-206, 112 Stat. 750 (Jul. 22, 1998). CPAs are also governed by the rules of some federal agencies, notably the IRS, Circular 230, 31 C.F.R. Part 10, and the SEC, 17 C.F.R. Sec. 210.102(e).

*** Comparison

One of the fundamental differences is that lawyers are regulated primarily by the state courts, while CPAs are regulated primarily by state legislatures and state boards of accountancy.

B. Standards Applicable to All or Limited Areas of Practice

* Lawyers

In general, a state license to practice law entitles the lawyer to engage in all types of law practice within the state. See generally Restatement, Sec. 3. Some states confer specialist designations, which add to the lawyer's reputation but do not increase the permitted areas of practice.

Additional licenses are required for practice in federal courts and the Patent and Trademark Office, 5 U.S.C. Sec. 500(e).

In litigated matters, courts have discretion to admit lawyers from other jurisdictions to practice pro hac vice. In non-litigated matters, the line is unclear between appropriate and inappropriate practice outside the state of licensure.

** CPAs

The UAA makes a radical distinction between (1) the CPA certificate, which allows a person to identify as a CPA, UAA Sec. 3(f)(6), and (2) the permit to practice, which allows a CPA firm (consisting of one or more CPAs) to perform the attest function, UAA Sec. 7. The attest function includes auditing and certain related services; see Part Three.I, infra. Firms which hold permits to practice must comply with a special set of standards, see id.

A CPA who has a certificate, but does not practice in a firm which has a permit, is allowed to perform any function other than the attest function -- but so is anybody else.

[See discussion of the licensing system, infra at 9.]

Note: Some states take significantly different approaches to the issues discussed here.

UAA Sec. 8 also provides for the "registration" of PAs (Public Accountants), under grandfathering provisions during the transition from prior law.

Note: Some provisions of the UAA apply to "licensees," meaning people who hold either a certificate or a permit or a PA registration, UAA Sec. 3(f).

The UAA facilitates interstate practice, by using the concept of "substantial equivalence; see infra at 69.

*** Comparison

The lawyer's license authorizes all types of practice within the jurisdiction, in contrast to the CPA certificate, which does not allow a CPA to perform the attest function unless the CPA practices in a firm which has a permit. A firm with a permit to perform the attest function must conform to special standards. Functions other than the attest function can be performed by anyone, whether a CPA or not.

  C. Broad or Detailed Standards

* Lawyers

The ABA Model Rules of Professional Conduct ("Mod. Rules") deal specifically with many aspects of practice. Some of the rules use general terms, such as the requirement of competence in Model Rule 1.1. Other rules are much more detailed, such as Model Rule 1.7 through 1.12 on conflict of interest.

Lawyers in specialized fields of practice can find guidance in numerous other sources; see infra at 8.

 ** CPAs

The Uniform Accountancy Act (" UAA") and the accompanying rules ("R") establish the regulatory framework, but say almost nothing about standards of practice. UAA Sec. 10(a)(6) requires a practitioner to conform to the Act, the board's rules, and "professional standards." The term "professional standards" incorporates a vast assortment of pronouncements, including the AICPA Code of Professional Conduct ("ET"), various AICPA pronouncements on specialized fields of practice (including auditing, tax, consulting and numerous others), accounting standards promulgated by the Financial Accounting Standards Board, accounting standards for regulated industries promulgated by various regulatory bodies, and the literature on generally accepted accounting principles ("GAAP") and generally accepted auditing standards ("GAAS").

*** Comparison

The ABA Model Rules provide more detailed coverage on standards of practice, but the UAA is more detailed in establishing the regulatory framework, and the UAA also incorporates, by reference, the entire body of "professional standards."

  

II. REGULATORY PRONOUNCEMENTS

A. Enforceable Rules

* Lawyers

Most state supreme courts have promulgated standards, based on the ABA Model Rules of Professional Conduct. The Model Rules consist primarily of enforceable rules and explanatory comments, but some provisions are permissive and some are descriptive; see Model Rules, Scope, para. 1. A few states, including New York, retain their versions of the 1969 ABA Model Code of Professional Responsibility, containing enforceable Disciplinary Rules and unenforceable Ethical Considerations.

Statutes and administrative rules at the federal and state levels are also enforceable.

** CPAs

State legislatures enact statutes, empowering state boards of accountancy to promulgate enforceable rules. The statutes and rules in some states are based on the UAA and its accompanying rules. As noted above, the UAA incorporates, by reference, rules of the Board and professional standards, UAA Sec. 10(a)(6).

The UAA Preface traces the history of the accounting profession and its regulation, noting that in 1896 New York became the first state to enact a law creating the title Certified Public Accountant. The first model accountancy law was proposed in 1916. Most states have enacted statutes based on one version or another of the UAA. The current version is innovative in a number of important respects, summarized in AICPA, "Uniform Accountancy Act: Issue Briefs, Talking Points, Q & As" (1998).

Federal statutes and rules are also enforceable.

*** Comparison

In a few states, lawyers are still governed by a version of the 1969 ABA Model Code of Professional Responsibility, consisting of enforceable Disciplinary Rules and unenforceable Ethical Considerations. With this exception, lawyers and CPAs are governed by enforceable rules.

In most states, CPAs are governed by one version or another of the UAA, which incorporates "professional standards" by reference.

  B. Common-law Standards

* Lawyers

Case law provides common-law standards, both in civil litigation and in judicial review of regulatory proceedings.

** CPAs

The common-law mechanism is the same, although the standards applicable to CPAs are not the same as those applicable to lawyers.

*** Comparison

Same mechanism, applying different standards.

  C. Advisory Standards

* Lawyers

The enforceable standards are supplemented by a wide array of advisory standards, some applicable across the board (such as the Ethical Considerations of the 1969 ABA Model Code of Professional Responsibility), others applicable to specific fields of practice (such as the ABA Standards of Criminal Justice). Advisory standards also come from ethics opinions and aspirational standards of civility.

** CPAs

It is difficult to determine whether any standards applicable to CPAs are merely advisory. This is because UAA Sec. 10(a)(6) requires CPAs to conform to "professional

standards," a term that arguably confers enforceability on every standard found in the literature.

*** Comparison

The lawyers' standards make a reasonably clear demarcation between enforceable and advisory standards, while the CPAs' standards do not make the demarcation clear, if indeed there is one at all.

 

III. QUALIFICATIONS FOR ADMISSION TO PRACTICE

A. Types of Licenses

* Lawyers

As indicated above, lawyers generally need only one license to engage in all types of practice in the jurisdiction; see supra at 5, and see generally Restatement Secs. 2, 3.

** CPAs

A CPA receives a certificate upon passing the CPA exam and completing one year's experience, UAA Secs. 5(i), 6, R. 6, but that certificate does not confer any privilege to practice. As regards non-attest functions, no privilege is needed, because anyone can perform them. As regards the attest function, the CPA must practice with a firm that has a permit, UAA Sec. 7, R. 7. A firm with a permit must conform to special standards of conduct.

Under grandfathering provisions, a Public Accountant (PA) may receive a registration, which is approximately equivalent to a certificate, UAA Sec. 8.

Some UAA provisions apply to "licensees," including holders of certificates, permits and registrations, UAA Sec. 3(f).

*** Comparison

Lawyers need only one license to practice, while CPAs need to practice with a firm with a permit in order to perform the attest function.

B. Educational Requirements -- Professional Ethics

* Lawyers

ABA accreditation standards require all law schools to give a mandatory course in professional responsibility.

** CPAs

AICPA has no comparable requirement. The ethics related to the attest function -- primarily, the requirement of independence -- are likely to be included in courses on auditing, because of possible coverage on the CPA exam. Other ethical requirements may be included in the curriculum, because of possible coverage in the business law part of the CPA exam; see infra at 11.

Note: The AICPA/NASBA Digest, p. 141, lists 34 states which require a special examination or course in professional ethics.

*** Comparison

Law students are required to take a course on professional responsibility. Accounting students are not, but generally cover some ethical issues during their studies.

C. Educational Requirements -- Other

* Lawyers

Before taking the bar exam, law students must generally obtain a 3-year law degree after a 4-year baccalaureate degree. The 3 years of law school include such subjects as constitutional law, criminal law and procedure, civil procedure, contracts, torts, property, administrative law, taxation, corporations, securities, secured transactions, federal courts, environmental law, clinical legal education, law journal experience, and limited-enrollment seminars on various topics. Some of the courses are required, others are elective.

** CPAs

For the first five years after enactment of UAA, CPA candidates must obtain a baccalaureate degree including at least 24 hours of accounting and 24 hours of other business courses. Beginning five years after enactment of UAA, the requirement increases to 150 hours, including a similar concentration in accounting, UAA Sec. 5(c), R.5-2.

Note: The Digest, pp. 129-31, indicates that most states require a baccalaureate degree.

*** Comparison

The educational requirements for lawyers are substantially more extensive than for CPAs.

  D. Bar Examination -- Professional Ethics

* Lawyers

The bar exam includes a special component on professional ethics -- the Multistate Professional Responsibility Examination.

** CPAs

Neither the UAA nor the Rules require the CPA exam to include professional ethics, but the AICPA's Candidate Brochure for CPA exam candidates (Nov. 1998) indicates that one part of the exam covers Business Law and Professional Responsibilities. In that part of the exam, Professional Responsibilities will count for 15% of the grade.

The brochure lists the following topics under the Professional Responsibilities heading: the AICPA Code of Professional Conduct; proficiency, independence and due care; responsibilities in other professional services; disciplinary systems imposed by the profession and state regulatory bodies; common-law liability to clients and third parties; federal statutory liability; privileged communications and confidentiality; and responsibilities of CPAs in business and industry and in the public sector.

And, as indicated above, the Digest lists 34 states which require a special examination or course in professional ethics.

*** Comparison

Neither the UAA nor the Rules require a professional responsibility exam, but the AICPA Candidate Brochure indicates that this subject is tested on the exam, as part of the part on Business Law and Professional Responsibilities. Based on this brochure, the professions both include professional responsibility in the exam, but the legal profession gives the subject greater prominence.

E. Bar Examination -- Other

* Lawyers

Apart from professional ethics, the bar exam covers the general law school curriculum, consisting of one day of multistate and one day of law specific to the state giving the exam.

** CPAs

The CPA exam is national, and includes no state-specific questions. The exam includes accounting, auditing, taxation, and business law. UAA Sec. 5(d), R. 5-5. Current practice include professional ethics in the business law part.

*** Comparison

The bar exam includes state as well as national law, while the CPA exam is national only.

F. Character Requirements for Admission to Practice

* Lawyers

Candidates for the bar must demonstrate good moral character.

** CPAs

Candidates for CPA licenses must demonstrate good moral character. UAA Sec. 5(b).

*** Comparison

Similar.

G. Oath of Office

* Lawyers

A lawyer must take an oath of office before receiving a license.

** CPAs

CPAs have no oath requirement.

*** Comparison

Lawyers take an oath of office, CPAs do not.

  H. Renewal of License

* Lawyers

A license to practice law is generally of indefinite duration, subject to revocation for misconduct, nonpayment of registration fees, failure to remain a member in good standing of a mandatory bar association, etc.

** CPAs

CPA certificates and permits to practice are issued for 3-year renewable terms. UAA Secs. 6(b), 7(b). Renewal may be denied for failure to satisfy continuing education and other requirements.

*** Comparison

Law licenses are for an indefinite duration, while CPA certificates and permits are for limited renewable terms.

 

IV. RESERVED AREAS OF PRACTICE

A. Litigation

* Lawyers

Statutes generally reserve the litigation function to lawyers, except that some statutes permit nonlawyers to appear in limited types of adjudicative proceedings, see Restatement Sec. 4, cmt. c.

** CPAs

In situations where nonlawyers generally are allowed to represent parties in litigation, CPAs have the same authorization. In addition, CPAs are singled out for the privilege of representing parties in some specific types of proceedings. See, e.g., Agency Practice Act, 5 U.S.C. Sec. 500(c), IRS rules of practice, Circular 230, 31 C.F.R. Part 10. CPAs, like other nonlawyers, may practice before the Tax Court upon passing a qualifying examination. Tax Court Rule 200.

*** Comparison

Litigation is generally reserved to lawyers, but CPAs can represent parties in limited situations.

B. Preparing Documents

* Lawyers

The preparation of certain types of legal documents is generally reserved to lawyers. Typical examples include wills, trust instruments, and other documents disposing of property interests. However, nonlawyers frequently prepare documents which produce legal consequences. Federal tax returns are routinely prepared by lawyers, CPAs, enrolled agents, and people who have none of the above credentials.

Cases do not clearly distinguish what types of documents are reserved to lawyers.

** CPAs

CPAs may prepare documents provided they are not reserved to lawyers. The demarcation is not clear, but CPAs can clearly prepare federal tax returns and other documents in connection with their permitted functions regarding federal tax.

*** Comparison

Lawyers have full authority to prepare legal documents, while CPAs may prepare only those which are not reserved to lawyers.

C. Giving Legal Advice

* Lawyers

Lawyers have the reserved authority to give legal advice, especially in situations which require the services of a lawyer. The demarcation is not clear.

** CPAs

CPAs may give advice in situations -- such as federal tax -- which are not reserved to lawyers.

*** Comparison

Lawyers have full authority to give legal advice, while

CPAs may give advice only in situations not reserved to lawyers.

D. Other

* Lawyers

Lawyers are generally the only people who can serve as judges, except in courts of limited jurisdiction, or who can serve as prosecutors.

** CPAs

The attest function is reserved to CPAs who practice in CPA firms, UAA Secs. 7(a), 14(d).

UAA Sec. 14(l) provides, however: "Nothing herein shall prohibit a practicing attorney or firm of attorneys from preparing or presenting records or documents customarily prepared by an attorney or firm of attorneys in connection with the attorney's professional work in the practice of law."

Non-attest services can be performed by anyone, whether a CPA or not, UAA, "Implementation of Governing Principles," para. 1.

*** Comparison

Judicial and prosecutorial office is generally reserved to lawyers. The attest function is reserved to CPAs who practice in CPA firms.

 

V. DISCIPLINARY SYSTEM

A. Procedure

* Lawyers

The process is conducted by agencies under the control of the courts. It protects the due process rights of the respondent. The ABA adopts advisory standards, but does not participate in administering the disciplinary system.

** CPAs

The process is conducted by the board of accountancy under the control of the legislature. It protects the due process rights of the respondent. UAA Secs. 11, 12, R. 12-1. The board may use, among other means, "positive enforcement" based on the board's review of publicly available professional work of licensees, even in the absence of complaint or suspicion, UAA Sec. 11(d). A single act of impropriety is sufficient to support discipline, UAA Sec. 17. Some disciplinary procedures feature cooperation between AICPA and state boards of accountancy.

*** Comparison

Different agencies conduct the process, but each profession receives due process protections. CPA discipline sometimes involves cooperation between AICPA and state boards of accountancy; in contrast, the ABA does not participate in administering the disciplinary process.

B. Types of Discipline

* Lawyers

Lawyers found to have violated the rules of professional conduct can be privately or publicly reprimanded, suspended, disbarred, ordered to make restitution, ordered to take the bar exam or part of it, diverted to treatment programs, etc. See generally Restatement, Sec. 5.

** CPAs

Similar, UAA Sec. 10(a), (b), (c). Injunctions are available to prevent unlawful acts, UAA Sec. 15.

*** Comparison

Similar.

C. Reinstatement

* Lawyers

At the discretion of the court, a lawyer who has been disbarred may apply for reinstatement. Sometimes the disbarment order will prohibit reinstatement until a certain time period has elapsed.

** CPAs

Similar, UAA Sec. 13, R. 13.

*** Comparison

Similar

VI. CONTINUING EDUCATION

A. Requirements -- Professional Ethics

* Lawyers

Most states require lawyers periodically to complete a certain number of CLE hours in professional ethics. Stephen Gillers, Regulation of Lawyers: Problems of Law and Ethics 671 (5th ed. 1998).

** CPAs

Apparently professional ethics is not included in the requirement for CPE (Continuing Professional Education). Some ethical issues may be included, especially as regards the requirement of independence in performing the attest function.

Note: In the state-by-state listing of qualifying subjects for CPE credit, Digest, pp. 152-63, only one state -- Illinois -- includes a mention of professional ethics, and this mention does not indicate that professional ethics is a required subject. Issues of professional ethics may be included in other state CPE programs as part of the auditing curriculum. Further, most states allow "any program of learning which contributes directly to the professional competence of an individual after the individual has been certified." Evidently this broad category could include professional ethics.

*** Comparison

Lawyers in most states are required to complete CLE hours in ethics, while CPAs are not, although ethical issues may be included in CPE on auditing or under a general category of contributing to professional competence.

  B. Requirements -- Other

* Lawyers

Lawyers in the great majority of states are required periodically to complete a certain number of CLE hours. Gillers, supra, at 671, citing ABA Comprehensive Guide to Bar Admission Requirements 1996-97 at 70-71.

** CPAs

The UAA requires all CPAs to complete CPE hours, UAA Sec. 6(d), R. 6-4 to 6-7, R. App. B.

*** Comparison

Similar


C. Monitoring Compliance

* Lawyers

Courts and bar associations have developed standards for the quality of CLE programs, and for monitoring compliance by members of the bar with CLE requirements.

** CPAs

CPE guidelines mandate standards, UAA Sec. 6(d), R. 6-4 to 6-7, R. App. B.

*** Comparison

From a national perspective, CPAs' standards for monitoring are more elaborate than lawyers' standards.

 

VII. PROFESSIONAL ORGANIZATIONS

A. Mandatory

* Lawyers

In some states, all licensed lawyers must be members of the state bar (mandatory or "integrated").

** CPAs

No equivalent to the mandatory bar.

*** Comparison

CPAs have no equivalent to the mandatory bar.

  B. Voluntary

* Lawyers

Voluntary bar associations exist in some states which have mandatory bars, and in all states which do not. At the national level, the dominant voluntary bar association is the ABA.

** CPAs

Voluntary CPA associations exist in all states. At the national level, the dominant voluntary CPA association is the AICPA. Members of AICPA who engage in SEC practice may be required to join the AICPA's SEC Practice Section.

*** Comparison

Similar. 

VIII. CIVIL LIABILITY

A. To Clients

* Lawyers

The Model Rules declare that violation of the rules is not necessarily grounds for civil liability (see infra at 22), and that a lawyer may not obtain a waiver of liability from a client unless permitted by law and the client is independently represented, see infra, Model Rule 1.8(h)(1).

Grounds for civil liability are a matter of fiduciary duty, contract, tort, securities, or other fields of law. See generally Restatement, Sec. 6. In civil liability suits against lawyers, many states admit evidence of violations of the rules of professional conduct.

** CPAs

The UAA gives considerable attention to issues of liability. UAA Sec. 20 adopts a strict rule of privity of contract. Sec. 21 establishes a statute of limitations (one year from when the act was or should have been discovered, three years after completion of the service, or three years after initial issuance of the accountant's report). Sec. 22 provides for proportionate liability.

*** Comparison

The UAA provides CPAs with significant relief from civil liability, without equivalent in the law of lawyering.

B. To Third Parties

* Lawyers

Case law has developed the standards of lawyer liability to third parties.

** CPAs

Same common-law mechanism, but the standards applicable to CPAs differ from those applicable to lawyers. Further, UAA Secs. 20-22 provide CPAs with significant relief from third-party suits.

*** Comparison

The UAA provides CPAs with significant relief from third-party suits.

  C. To Members or Employees of Firm

* Lawyers

Case law and civil rights statutes have enabled some members or employees of law firms to obtain civil relief.

** CPAs

Similar

*** Comparison

Similar

IX. FEDERAL REGULATION

A. Litigation in Federal Courts

* Lawyers

Lawyers who litigate in federal courts are governed by federal rules, including Rule 11 of F.R.Civ.P. (providing sanctions for frivolous pleadings).

** CPAs

Litigation in federal courts is reserved to lawyers, except that CPAs, like other nonlawyers, may be admitted to practice before the Tax Court by passing a qualifying examination, pursuant to Tax Court Rule 200. Upon admission to practice before the Tax Court, CPAs are subject to its rules.

*** Comparison

Federal rules on litigation apply to lawyers. In addition, CPAs who are admitted to practice before the Tax Court are governed by its rules.

B. Practice Before Federal Agencies, in General

* Lawyers

When practicing before a federal agency, a lawyer is governed by that agency's rules.

** CPAs

Same

*** Comparison

Same

  C. Tax Practice

* Lawyers

When engaged in federal tax practice, a lawyer is governed by professional standards, as well as the rules of the IRS or the court where the matter is pending.

** CPAs

Similar. AICPA has promulgated Standards of Responsibilities in Tax Practice, which impose some limits on taking aggressive positions in tax practice; see infra at 44.

*** Comparison

Each profession is governed by its own standards as well as federal standards. CPAs' standards impose some limits on permissible advocacy.

  D. Securities Practice

* Lawyers

When engaged in federal securities practice, lawyers are governed by professional standards as well as the rules of the SEC and the court in which the matter is pending. SEC Rule 102(e) [17 C.F.R. Sec. 210.102(e)] authorizes the SEC to impose discipline for "unethical conduct."

** CPAs

Similar. Since CPAs generally perform the attest function when practicing before the SEC, the required standard of conduct is that of an auditor, not of an advocate.

*** Comparison

Each profession is governed by its own professional standards as well as federal standards. When performing the attest function, CPAs are held to the standard of auditors, not advocates.

 

PART TWO -- LAWYERS' STANDARDS: ABA MODEL RULES OF PROFESSIONAL CONDUCT
(annotated to CPAs' standards)

 

PREAMBLE

* Lawyers

The Preamble, par. 1, starts by describing the lawyer as "a representative of clients, an officer of the legal system and a public citizen having special responsibility for the quality of justice." It ends by noting, par. 12, that "Lawyers play a vital role in the preservation of society."

** CPAs

UAA Sec. 2, Purpose, declares [in part]: "The public interest requires that persons professing special competency in accountancy or offering assurance as to the reliability or fairness of presentation of such information shall have demonstrated their qualifications to do so . . . "

Note: See also the "Vision Statement" resulting from the AICPA Vision Project, in J. of Acctcy., Dec. 1998, CPA Vision Project insert, p. 2:

"CPAs are the trusted professionals who enable people and organizations to shape their future. Combining insight with integrity, CPAs deliver value by:

" Communicating the total picture with clarity and objectivity,

"Translating complex information into critical knowledge,

"Anticipating and creating opportunities, and

"Designing pathways that transform vision into reality.

"Core Purpose: CPAs. . . Making sense of a changing and complex world."

*** Comparison

The missions of the two professions are significantly different.

SCOPE

* Lawyers

The Scope provision includes the following observations: "Violation of a Rule should not give rise to a cause of action nor should it create a presumption that a legal duty has been breached . . . ", par. 6; "[T]hese Rules are not intended to govern or affect judicial application of either the attorney-client or work product privilege. . . . ", par. 7; and "The lawyer's exercise of discretion not to disclose information under Rule 1.6 should not be subject to reexamination.", par. 9.

The Scope provision, para. 1, also notes that some rules are permissive or descriptive, although most are mandatory.

Note: Although the Scope provision disclaims any attempt to establish standards for civil liability, many courts admit evidence of violations of rules in civil liability suits against lawyers.

** CPAs

No comparable provision.

*** Comparison

No equivalent in CPAs' standards.

TERMINOLOGY

* Lawyers

Various terms are defined, including "belief," "fraud," "reasonable," and "substantial."

** CPAs

Various terms are defined, UAA Sec. 3 and R. 3, but the defined terms seem to have more substance than in the lawyers' standards. For example, the defined terms in the UAA include "attest," "certificate," "CPA firm," "license," "permit," "report," and "substantial equivalency."

The AICPA Code of Ethics has its own list of definitions, ET 92.

*** Comparison

The defined terms play a more important part in formulating the CPAs' standards than the lawyers' standards.

 

ARTICLE 1. CLIENT-LAWYER RELATIONSHIP

Rule 1.1 Competence

* Lawyers

Rule 1.1 includes the requirement that a lawyer provide "competent representation." The level may be that of a general practitioner or, in some circumstances, of an expert in a particular field, cmt. 1.

** CPAs

UAA Sec. 10(a)(6) requires compliance with "professional standards," which apparently include the AICPA Code of Conduct as well as the general literature of accounting and auditing standards.

The AICPA Code of Conduct, Sec. 201, calls for professional competence, due professional care, planning and supervision, and sufficient relevant data in the performance of professional engagements.

Note: The requirement of "sufficient relevant data" does not necessarily mean that a CPA must examine all relevant data. The standard form of audit report recites that "An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements." Statement on Auditing Standards 58, Reports on Audited Financial Statements (1988), AU 508.08. The technique of sampling is discussed in Statement on Auditing Standards 39, Audit Sampling (1981), AU Sec. 350.

AICPA Code of Conduct, Sec. 202 requires compliance with standards promulgated by bodies designated by Council (of AICPA). Sec. 203 requires compliance with generally accepted accounting principles ("GAAP"), with very narrow exceptions. Interpretation 501-4 (Aug. 1989) declares that negligence in making false or misleading entries in the financial statements or records of an entity constitutes an "act discreditable to the profession in violation of ET 501."

*** Comparison

The main contrast is that the CPAs' standard of competence can be defined by "bodies designated by Council," that is, certain committees of AICPA. These committees, in effect, can establish standards of competence by using the functional equivalent of the rulemaking power. In addition, the UAA incorporates by reference "professional standards," which are found in AICPA pronouncements and the general literature of GAAP and GAAS.

  Rule 1.2 Scope of Representation

* Lawyers

Rule 1.2 requires the lawyer to "abide by the client's decisions concerning the objectives of the representation," subject to paragraphs (c) [lawyer may limit objective if client consents], (d) [lawyer may not assist criminal or fraudulent conduct, but may assist in making good faith effort to determine validity, scope, meaning or application of law] and (e) [lawyer shall consult with client if client expects improper assistance]. Further, Rule 1.2(b) declares that "A lawyer's representation of a client, including representation by appointment, does not constitute an endorsement of the client's political, economic, social or moral views or activities."

** CPAs

The term "representation" applies to some but by no means all services rendered by CPAs. It can apply, for example, to practice before the IRS. It clearly does not apply to the attest function, and is not used in that connection; instead, a CPA firm is "engaged" to perform the attest function. With regard to consulting services, again the term "engagement" is customarily used.

In the limited area where CPAs perform "representation," their standards of conduct are distinguishable from those of lawyers. See discussion of the AICPA Statement on Responsibilities in Tax Practice, infra at 44. In areas where CPAs do not perform "representation," the closest equivalent to Model Rule 1.2 is the requirement of an understanding with the client, preferably in writing, before a CPA firm performs the attest function, Statement on Auditing Standards 83, Establishing an Understanding with the Client (1997), AU 310.05 - .06.

See also ET 57: "A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services provided."

*** Comparison

The general use of the term "engagement" in the regulation of CPAs, in contrast to "representation" in the

regulation of lawyers, illustrates fundamental differences between the self-perceptions of lawyers and CPAs, and the types of functions they provide.

Rule 1.3 Diligence

* Lawyers

Rule 1.3 requires a lawyer to "act with reasonable diligence and promptness in representing a client."

** CPAs

The need for diligence seems to be implied in the requirements of professional competence; see discussion of Model Rule 1.1, supra at 23.

*** Comparison

Diligence is expressly required in the lawyers' standards, and impliedly required by the CPAs' standards.

Rule 1.4 Communication

* Lawyers

Rule 1.4 requires a lawyer to keep a client reasonably informed about the status of a matter, promptly comply with reasonable requests for information, and explain matters to the extent reasonably necessary to permit the client to make informed decisions.

** CPAs

UAA Sec. 19(b) requires a CPA to return a client's documents, etc. after reasonable notice.

*** Comparison

CPAs' standards are less explicit than lawyers' about the communication requirement.

Rule 1.5 Fees

* Lawyers

Rule 1.5(a) requires a lawyers' fee to be reasonable, and lists factors to be considered. The lawyer shall communicate the basis of the fee to the client, preferably in writing, according to Rule 1.5(b).

Contingent fees

Rule 1.5(c) allows contingent fees, except in domestic relations or criminal defense cases. Where contingent fees are allowed, the agreement must be in writing, containing details set forth in the rule, and the lawyer must give the client a written statement at the end of the representation.

Referral fees

Rule 5.4(a) prohibits fee sharing with nonlawyers (with narrow exceptions, see infra at 51). Rule 1.5(e) allows fee sharing with other law firms, but only if the division is in proportion to the services rendered by each or, by written agreement with the client, each law firm assumes full responsibility for the representation, the client is advised and does not object, and the total fee is reasonable.

** CPAs

CPAs' standards do not deal with fees in general. They do cover two aspects of fees: contingent fees and referral fees.

Contingent fees - attest function

UAA Sec. 14(n) prohibits contingent fees for attest services.

Contingent fees -- tax services

UAA Sec. 14(n) also prohibits contingent fees for

the preparation of original tax returns. This section declares that fees are not regarded as being contingent "if fixed by courts or other public authorities or, in tax matters, if determined based on the results of judicial proceedings or the findings of governmental agencies."

AICPA Code, ET Sec. 302, Interpretation 302-1, gives examples of allowable and prohibited contingent fees in tax matters. A contingent fee is allowable for representing a client in an examination by a revenue agent of the client's federal or state income tax return, or in connection with obtaining a private letter ruling or influencing the drafting of a regulation or a statute.

In contrast, a contingent fee is not allowable for preparing an amended federal or state income tax return for a client claiming a tax refund because a deduction was inadvertently omitted from the return originally filed. The Interpretation explains: "There is no question as to the propriety of the deduction; rather the claim is filed to correct an omission."

Note: Digest, pp. 166-67, shows that most states allow commissions and contingent fees in nonattest engagements.

Referral fees

AICPA Code, Sec. ET 503 states that a member who accepts or pays a referral fee for recommending or referring a client must make disclosure to the client.

*** Comparison

Lawyers' standards are more elaborate than CPAs'.

  Rule 1.6 Confidentiality of Information

* Lawyers

Rule 1.6(a) prohibits a lawyer from revealing "information relating to representation of a client" unless the client consents, except for disclosures that are impliedly authorized in order to carry out the representation, or as stated in paragraph (b).

Rule 1.6(b) allows disclosure only to prevent the client from committing a criminal act likely to result in imminent death or substantial bodily harm, or to establish the lawyer's position in a dispute about the lawyer's services. (The adopted version of this provision varies widely from state to state.)

Rule 1.6 may be trumped by Rule 3.3, infra at 44.

In addition to the duties imposed by Rule 1.6, a lawyer is bound by the attorney-client privilege, including the work product doctrine, as provided in the law of evidence; Rule 1.6, cmt. 5.

** CPAs

CPAs "shall not voluntarily disclose information communicated to {them] by the client relating to and in connection with services rendered to the client." UAA Sec. 18. This general rule is subject to exceptions: as required by professional standards for reporting financial information; or in court proceedings, or in disciplinary or regulatory matters, or in peer review (see infra at 72). The comment observes this is not an evidentiary privilege.

ET 301 states that "A member in public practice shall not disclose any confidential client information without the specific consent of the client." This provision contains similar exceptions to those in UAA Sec. 18.

The wording of the general statement on confidentiality is broader in ET 301 ("confidential client information") than in UAA Sec. 18 ("information communicated . . . by the client relating to and in connection with services rendered to the client"). The significance of this difference in wording is not clear.

Privilege may be conferred by statute, e.g. 26 U.S.C. Sec. 7525, added by Internal Revenue Service Restructuring and Reform Act of 1998, P.L. 105-206, Sec. 3411, 112 Stat. 750 (Jul. 12, 1998).

Disclosure may be required by statute, e.g. 1995 Private Securities Litigation Reform Act, 15 U.S.C. Sec. 78j-1(b)(3), requiring independent auditors to report clients' violations to the SEC if clients refuse to do so. The auditor's general obligation, however, is to withdraw from the engagement if the client refuses to make proper disclosure.

*** Comparison

 

The rule on CPA confidentiality in ET 301 ("confidential client information") is similar to the lawyers' rule. In contrast, the rule on CPA confidentiality in UAA Sec. 18 ("information communicated . . . by the client relating to and in connection with services rendered to the client") is significantly narrower than the lawyers' rule.

The exceptions to the CPAs' rule are different from those to the lawyers' rule.

A major distinction between the standards of the two professions is that communications with lawyers are generally privileged, while communications with CPAs are privileged only in narrowly defined situations, pursuant to statutes applicable to specific fields of practice.

Rule 1.7 Conflict of Interest: General Rule

* Lawyers

Rules 1.7 through 1.12 deal with conflict of interest.

Rule 1.7 states the general rule:

"(a) A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:

(1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and

(2) each client consents after consultation.

"(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:

(1) the lawyer reasonably believes the representation will not be adversely affected; and

(2) the client consents after consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved."

** CPAs

The corresponding standards for CPAs fall into two radically different categories: the standard of independence for the attest function, and the standard of objectivity for all functions, including but not limited to the attest function.

Independence (for attest function)

Regarding the attest function, professional standards require the auditor to be independent. The UAA does not develop the standards of independence, and neither do the rules accompanying it. The standards of independence are enforceable as "professional standards" through UAA Sec. 10(a)(6). Additional enforcement can arise in SEC disciplinary proceedings and in civil liability litigation.

The requirement of independence is stated (in a single sentence) in AICPA Code, ET Section 101, Independence:

"A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council."

This sentence is clarified by numerous interpretations, dealing with specific examples, all pertaining to the attest function. The essential notion is that the auditor must be independent of the client, in order to perform the attest function impartially.

A recent example is AICPA Ethics Interpretation 101-14: "The Effect of Alternative Practice Structure on the Applicability of Independence Rules," published in Journal of Accountancy, Feb. 1999, at 82, effective Feb. 28, 1999 (set forth in full as Appendix A, infra). This interpretation observes that the rules on independence apply only to a member (of AICPA) and a member's firm. The issue is whether the parties to certain alternative practice structures should be regarded as the "member's firm" for purposes of applying the standards on independence.

The requirement of independence is developed further in the professional literature on generally accepted auditing standards (GAAS).

The SEC has a continuing interest in the independence of accounting firms that prepare audit reports of publicly traded companies. The SEC disciplines auditors, under Rule 102(e), for various types of improper conduct, including lack of independence from the audit client.

The SEC's position was recently summarized as follows: "[The test is] Whether a reasonable investor, knowing all the relevant facts and circumstances, would perceive the auditor as (1) having neither mutual nor conflicting interests with its audit client, and (2) exercising impartial judgment on all issues brought to the auditor's attention." W. Scott Bayless, quoted in "SEC Sees Firms Ignoring Red Flags," in NASBA, "State Board Report," November 1998, at 2.

Objectivity (for all functions)

While the independence standard applies only to the attest function, the objectivity standard applies to all professional services performed by a CPA. AICPA Code, ET Sec. 102, Integrity and Objectivity, states:

"In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others."

Interpretation 102-2 -- "Conflicts of Interest" includes the following examples of situations that "should cause a member to consider whether or not the client, employer, or other appropriate parties could view the relationship as impairing the member's objectivity":

A member has been asked to perform litigation services for the plaintiff in connection with a lawsuit filed against a client of the member's firm.

A member has provided tax or personal financial planning (PFP) services for a married couple who are undergoing a divorce, and the member has been asked to provide the services for both parties during the divorce proceedings.

In connection with a PFP engagement, a member plans to suggest that the client invest in a business in which he or she has a financial interest.

Interpretation 102-6, "Professional Services Involving Client Advocacy," effective August 31, 1995, opines that the requirement of objectivity applies when a member or a member's firm is requested, by a client, to perform tax or consulting services engagements that involve acting as an advocate for the client, or to act as an advocate in support of the client's position on accounting or financial reporting issues, either within the firm or outside the firm with standard setters, regulators, or others. The Interpretation observes:

"[T]here is a possibility that some requested professional services involving client advocacy may appear to stretch the bounds of performance standards, may go beyond sound and reasonable professional practice, or may compromise credibility, and thereby pose an unacceptable risk of impairing the reputation of the member or his or her firm with respect to independence, integrity, and objectivity. In such circumstances, the member and the member's firm should consider whether it is appropriate to perform the service."

(Compare Model Rule 3.1, infra at 43.)

Finally, Interpretation 102-4, "Subordination of Judgment by a Member," effective Nov. 30. 1993, opines that the requirement of objectivity prohibits a member from knowingly misrepresenting facts or subordinating his or her judgment when performing professional services, for example as an employee of an enterprise.

ET 55, Objectivity and Independence, briefly restates the above standards of objectivity and independence.

*** Comparison

There is a fundamental difference between the lawyers' standard of loyalty to the client, and the attest standard of independence from the client. Further, the lawyers' standard is more detailed, and allows the client in some situations to give informed consent.

There is also a fundamental difference between the lawyers' standards of advocacy and the CPAs' standard of objectivity.

  Rule 1.8 Conflict of Interest: Prohibited Transactions

* Lawyers

Rule 1.8 addresses various types of transactions between lawyer and client that are prohibited (or at least regulated). In summary, the rule addresses:

(a) Business transactions with the client -- prohibited unless the terms are fair and reasonable, fully disclosed to the client in writing, and approved in writing by the client after an opportunity to seek advice from independent counsel.

(b) The lawyer's use of the client's information for the disadvantage of the client -- prohibited unless the client consents or required by Rule 1.6 or 3.3.

(c) The lawyer's preparation of an instrument giving the lawyer or a close relative a gift or testamentary gift -- prohibited unless the client is related to the donee.

(d) Contract for the lawyer to acquire literary or media rights based on information related to the representation -- prohibited prior to the conclusion of the representation.

(e) Financial assistance by the lawyer to the client, regarding pending or contemplated litigation -- prohibited, except that the lawyer may advance litigation costs on a contingent basis, and may pay such costs for an indigent client.

(f) Lawyer's compensation from one other than the client -- prohibited unless the client consents after consultation, there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship, and client information is protected under Rule 1.6.

(g) Aggregate settlements or plea bargains for multiple clients -- prohibited unless each client consents after consultation.

(h)

(1) Agreement prospectively limiting lawyer's liability to client for malpractice -- prohibited unless permitted by law and the client is independently represented.

(2) Settlement of liability claim with unrepresented or former client -- prohibited without first advising client in writing that independent representation is appropriate.

(i) Relationship to opposing counsel -- "A lawyer related to another lawyer as parent, child, sibling or spouse shall not represent a client in a representation directly adverse to a person who the lawyer knows is represented by the other lawyer except upon the consent of the client after consultation regarding the relationship."

(j) Proprietary interest in cause of action or subject matter of litigation -- lawyer shall not acquire, except that the lawyer may acquire a lien granted by law to secure the lawyer's fee or expenses, and may contract for a reasonable contingent fee in a civil case (see supra at

26.)

** CPAs

The only comparable provisions are UAA Sec. 14(m)(1) and ET 503, which prohibit a CPA from recommending or referring any product or service, for a commission, to an attest client. As regards non-attest clients, the CPA must make disclosure about any commission arrangement.

*** Comparison

The CPAs' rules cover only one aspect of the lawyers' rules. The CPAs' rules do not, for example, regulate business deals between practitioner and client.

Rule 1.9 Conflict of Interest: Former Client

* Lawyers

Rule 1.9(a) prohibits a lawyer from representing a new client in the same or substantially related matter in which that person's interests are materially adverse to the interests of a former client, unless the former client consents after consultation.

Rule 1.9(b) elaborates on this principle as applied to lawyers who move between firms. A key element is whether the lawyer acquired confidential client information in the first firm.

** CPAs

No comparable provision.

*** Comparison

No comparable provision in CPAs' rules.

Rule 1.10 Imputed Disqualification: General Rule

* Lawyers

Rule 1.10(a) states the general rule on imputed disqualification: if one lawyer is disqualified because of Rule 1.7, 1.8(c), 1.9 or 2.2, the entire law firm is disqualified.

Rule 1.10(b) elaborates on this principle as applied to lawyers moving between firms. A key element is whether any lawyer remaining in the firm acquired confidential client information.

Note -- some courts allow law firms to escape imputed disqualification by screening the disqualified lawyer from others in the firm. The Model Rules, however, allow screening only under Rule 1.11 (former government lawyer) and Rule 1.12 (former judge or judicial clerk).

** CPAs

Interpretations of the standards of independence for the attest function include various examples of imputation. See, e.g., Interpretation 101-14, "The Effect of Alternative Practice Structure on the Applicability of the Independence Rules," supra at 30. The CPAs' standards of independence do not appear to be affected by the CPA's possession of confidential information about other clients.

*** Comparison

The CPAs' standards recognize that imputation can cause a CPA firm to lose the independence needed for performance of the attest function, but the possession of confidential information about another client apparently does not affect the imputation of independence.

  Rule 1.11 Successive Government and Private Employment

* Lawyers

Rule 1.11(a) allows a law firm to escape imputed disqualification by screening a lawyer who is disqualified because of prior governmental service. The firm must give written notice to the appropriate government agency, and must apportion no part of the fee to the disqualified lawyer.

The remainder of Rule 1.11 establishes detailed standards to prevent misuse of governmental information or public office.

** CPAs

No comparable provision.

*** Comparison

CPA standards have no comparable provision.

Note: Federal and state law restrictions on the conduct of former government employees are also relevant, both to lawyers and to CPAs.

Rule 1.12 Former Judge or Arbitrator

* Lawyers

Rule 1.12, applying to former judges and judicial clerks, is similar to Rule 11, as regards the availability of screening. It also regulates negotiations for the post-judicial employment of judges and judicial clerks.

** CPAs

No comparable provision.

*** Comparison

CPA standards have no comparable provision.

 Rule 1.13 Organization as Client

* Lawyers

Rule 1.13(a) declares that "A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents."

Rule 1.13(b) deals with a lawyer who knows that an individual associated with the organization is engaged in, or intends to commit a violation of that person's legal obligation to the organization, or a violation of law that may reasonably be imputed to the organization, and is likely to result in substantial injury to the organization. The lawyer should take appropriate measures, which may include asking for reconsideration, advising that a second legal opinion should be sought, or referring the matter to higher authority in the organization.

Rule 1.13(c) states that a lawyer "may" resign if none of these measures is effective.

Rule 1.13(d) requires a lawyer to explain the identity of the client when dealing with an organization's constituents, if their interests are apparently adverse to those of the organization.

Rule 1.13(e) allows a lawyer to represent individual constituents as well as the organization, subject to the rules on conflict of interest.

** CPAs

UAA Sec. 3(d) defines "client" as "a person or entity that agrees with a licensee to receive any professional service."

Auditing standards require an audit firm to report certain types of improprieties to progressively higher levels of management, Statement on Auditing Standards 54, Illegal Acts by Clients (1988), AU 317.17; Statement on Auditing Standards 82, Consideration of Fraud in a Financial Statement Audit (1997), AU 316.38.

The 1995 Private Securities Litigation Reform Act requires an audit firm to exhaust the highest levels of corporate management before notifying the SEC of certain types of improprieties, 15 U.S.C. Sec. 78j-1(b)(2).

*** Comparison

Lawyers' standards are more elaborate than CPAs' standards.

  Rule 1.14 Client Under a Disability

* Lawyers

Rule 1.14 requires a lawyer to maintain a normal client-lawyer relationship, as far as reasonably possible, with a client whose ability to make considered decisions is impaired because of minority, mental disability or other reasons. The lawyer may seek the appointment of a guardian or take other protective action when necessary.

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

Rule 1.15 Safekeeping Property

* Lawyers

Rule 1.15 regulates the lawyer's responsibilities for safekeeping the property of clients or third persons, including trust funds, and requires the lawyer to keep complete records.

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

Note: On the obligation to return the client's files, see infra, Model Rule 1.16.

 Rule 1.16 Declining or Terminating Representation

* Lawyers

Rule 1.16(a) lists grounds which require a lawyer to decline or withdraw from representation:

"(1) the representation will result in violation of the rules of professional conduct or other law;

"(2) the lawyer's physical or mental condition materially impairs the lawyer's ability to represent the client; or

"(3) the lawyer is discharged.

Rule 1.16(b) gives the lawyer discretion to withdraw "if withdrawal can be accomplished without material adverse effect on the interests of the client," or if:

"(1) the client persists in a course of action involving the lawyer's services that the lawyer reasonably believes is criminal or fraudulent;

"(2) the client has used the lawyer's services to perpetrate a crime or fraud;

"(3) a client insists upon pursuing an objective that the lawyer considers repugnant or imprudent;

"(4) the client fails substantially to fulfill an obligation to the lawyer regarding the lawyer's services and has been given reasonable warning that the lawyer will withdraw unless the obligation is fulfilled;

"(5) the representation will result in an unreasonable financial burden on the lawyer or has been rendered unreasonably difficult by the client; or

"(6) other good cause for withdrawal exists."

Rule 1.16(c) requires a lawyer to continue representation when ordered to do so by a tribunal, even if there is good cause for withdrawal.

Rule 1.16(d) requires a lawyer to protect the client's interests upon termination of representation, for example by surrendering papers and property to which the client is entitled. Note, however, that the lawyer may have a lien on the client's property or files, under Model Rule 1.8(j), supra.

** CPAs

CPAs' standards of independence, supra at 29, require a CPA firm to decline an engagement for the attest function if the firm is not independent.

The standards imply that a CPA should decline an engagement if it requires the CPA to violate the standards on objectivity, for example by performing inappropriately aggressive advocacy; see supra at 30.

The standards also require a CPA firm to withdraw from an attest engagement if the client refuses to bring the financial statements into conformity with generally accepted accounting principles.

UAA Sec. 19(b) requires a CPA to furnish various documents to a client or former client, upon request and reasonable notice. ET 501 is similar.

*** Comparison

The lawyers' standards are more elaborate, especially by making a distinction between the grounds for mandatory and permissive withdrawal.

Rule 1.17 Sale of a Law Practice

* Lawyers

Rule 1.17 allows the sale or purchase of a law practice, including goodwill, but only if the following conditions are satisfied:

(a) The seller ceases to engage in the practice of law in the area where the practice has been conducted.

(b) The practice is sold as an entirety to another lawyer or law firm.

(c) Written notice is given to each of the seller's clients, regarding: the proposed sale; any change in the fee arrangement; the client's right to retain other counsel or take possession of the file; and the fact that the client's consent to the sale will be presumed if the client does not object within 90 days. If the client cannot be given notice, the representation of that client can be transferred only upon a court order.

(d) The fees shall not be increased by reason of the sale, but the purchaser may refuse to undertake the representation unless the client consents to pay fees to the purchaser, at a rate no more than the purchaser's fees for rendering substantially similar services before initiation of the purchase negotiations.

** CPAs

The closest equivalent in the UAA is Sec. 19(a), which prohibits the sale or transfer of statements, records, schedules, working papers and memoranda made by a CPA firm, unless the client consents.

A recent insight "on Alternative Practice Structures" is provided by Interpretation 101-14, The Effect of Alternative Practice Structures on the Applicability of Independence Rules (February 1999), set forth in Appendix A, infra. This interpretation presents the following example of an alternative practice structure arising from the sale of an accounting practice:

"[A]n existing CPA practice ("Oldfirm") is sold by its owners to another (possibly public) entity ("PublicCo"). PublicCo has subsidiaries or divisions, such as a bank, insurance company or broker-dealer, and it also has one or more professional service subsidiaries or divisions that offer to clients nonattest professional services (e.g. tax, personal financial planning, and management consulting). The owners and employees of Oldfirm become employees of one of PublicCo's subsidiaries or divisions and may provide these nonattest services. In addition, the owners of Oldfirm form a new CPA firm ("Newfirm") to provide attest services. CPAs, including the former owners of Oldfirm, own a majority of Newfirm (as to vote and financial interests). Attest services are performed by Newfirm and are supervised by its owners. The arrangement between Newfirm and PublicCo (or one of its subsidiaries or divisions) includes the lease of employees, office space and equipment; the performance of back-office functions such as billing and collections, and advertising. Newfirm pays a negotiated amount for these services."

The interpretation implies that the sale of the CPA practice ("Oldfirm") and the related transactions are allowable. The only issue is how to apply the standards on independence to the CPAs in Newfirm when they perform attest services. See supra at 30.

See also Interpretation 301-3 (1990), recognizing that a member may review another member's professional practice in conjunction with a prospective purchase, sale, or merger of all or part of a practice. "The member must take appropriate precautions (for example, through a written confidentiality agreement) so that the prospective purchaser does not disclose any information obtained in the course of the review, since such information is deemed to be confidential client information. Members reviewing a practice in connection with a prospective purchase or merger shall not use to their advantage nor disclose any member's confidential client information that comes to their attention."

*** Comparison

Lawyers' standards are more elaborate and less permissive.

ARTICLE 2. COUNSELOR

Rule 2.1 Advisor

* Lawyers

Rule 2.1 requires a lawyer to render candid advice, based on independent professional judgment. In addition to referring to the law, the lawyer may refer to other relevant considerations such as moral, economic, social and political factors.

** CPAs

AICPA Statement of Standards on Consulting Services (effective 1992), is a "professional standard" which is evidently incorporated in UAA Sec. 10(a)(6).

General standards apply

The Statement on Consulting Services first recalls that the general standards of the AICPA Code, ET 201, apply to all functions, including consulting. These general standards are: professional competence, due professional care, planning and supervision, and sufficient relevant data.

Additional standards for consulting

In addition, the Statement on Consulting Services establishes these standards:

"Client interest. Serve the client interest by seeking to accomplish the objectives established by the understanding with the client while maintaining integrity and objectivity. [footnote omitted]

"Understanding with client. Establish with the client a written or oral understanding about the responsibilities of the parties and the nature, scope, and limitations of the services to be performed, and modify the understanding if circumstances require a significant change during the engagement.

"Communication with client. Inform the client of (a) conflicts of interest that may occur pursuant to interpretations of Rule 102 of the Code of Professional Conduct . . . , (b) significant reservations concerning the scope or benefits of the engagement, and (c) significant engagement findings or events."

A footnote to the above paragraph quotes part of Interpretation 102-02:

"A conflict of interest may occur if a member performs a professional service for a client or employer and the member or his or her firm has a significant relationship with another person, entity, product, or service that could be viewed as impairing the member's objectivity. If this significant relationship is disclosed to and consent is obtained from such client, employer, or other appropriate parties, the rule shall not operate to prohibit the performance of the professional service. . . ."

Professional judgment

The Statement on Consulting Services states:

"Professional judgment must be used in applying Statements on Standards for Consulting Services in a specific instance since the oral or written understanding with the client may establish constraints within which services are to be provided. For example, the understanding with the client may limit the practitioner's effort with regard to gathering relevant data. The practitioner is not required to decline or withdraw from a consulting engagement when the agreed-upon scope of services includes such limitations."

Performance of consulting services for attest clients

The Statement on Consulting Services states:

 

"The performance of Consulting Services for an attest client does not, of itself, impair independence. However, members and their firms performing attest services for a client should comply with applicable independence standards, rules and regulations issued by AICPA, the state boards of accountancy, state CPA societies, and other regulatory agencies."

*** Comparison

CPAs' standards on consulting services are more elaborate procedurally, but do not address the factors set forth in the lawyers' standards. Further, CPAs' standards on consulting services clarify that the performance of consulting services for attest clients does not, of itself, impair independence.

  Rule 2.2 Intermediary

* Lawyers

Rule 2.2(a) allows a lawyer to act as intermediary between clients, if: (1) each client consents after consultation, (2) the lawyer reasonably believes that the matter can be resolved in accordance with each client's best interests, and (3) the lawyer reasonably believes that the common representation can be undertaken impartially and without improper effect on the lawyer's other responsibilities to any of the clients.

Rule 2.2(b) requires the lawyer to consult with each client during the representation.

Rule 2.2(c) requires the lawyer to withdraw as intermediary if any client so requests, or if any of the conditions in paragraph (a) are no longer satisfied. Upon withdrawal, the lawyer shall not continue to represent any of the clients in the matter.

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

Rule 2.3 Evaluation for Use by Third Parties

* Lawyers

Rule 2.3 allows a lawyer to undertake an evaluation of a matter affecting a client for someone other than the client, if the lawyer reasonably believes this is compatible with the lawyer's other duties to the client, and the client consents after consultation.

** CPAs

The attest function is the CPAs' counterpart to this provision. See infra at 70.

*** Comparison

The CPAs' attest function is a highly developed version of the lawyers' standards on this topic.

 ARTICLE 3. ADVOCATE

Rule 3.1 Meritorious Claims and Contentions

* Lawyers

Rule 3.1 states: "A lawyer shall not bring or defend a proceeding, or assert or controvert an issue therein, unless there is a basis for doing so that is not frivolous, which includes a good faith argument for an extension, modification or reversal of existing law. A lawyer for the defendant in a criminal proceeding, or the respondent in a proceeding that could result in incarceration, may nevertheless so defend the proceeding as to require that every element of the case be established."

Similar policies are expressed in F.R.Civ. P., Rule 11.

** CPAs

Interpretation ET 102-6 (1995), regarding the objectivity standard, observes:

"[T]here is a possibility that some requested professional services involving client advocacy may appear to stretch the bounds of performance standards, may go beyond sound and reasonable professional practice, or may compromise credibility, and thereby pose an unacceptable risk of impairing the reputation of the member and his or her firm with respect to independence, integrity, and objectivity. In such circumstances, the member and the member's firm should consider whether it is appropriate to perform the service."

And Statement of Responsibilities in Tax Practice, TX 112.02 (1988), states that a CPA "should not recommend a tax return position that . . . serves as a mere 'arguing' position advanced solely to obtain leverage in the bargaining process of settlement negotiation with the Internal Revenue Service."

*** Comparison

Lawyers' standards allow more vigorous advocacy than CPAs' standards.

Rule 3.2 Expediting Litigation

* Lawyers

Rule 3.2 states: "A lawyer shall make reasonable efforts to expedite litigation consistent with the interests of the client."

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

Rule 3.3 Candor Toward the Tribunal

* Lawyers

Rule 3.3(a) prohibits a lawyer from making false statements to a tribunal, failing to disclose material facts if necessary to avoid assisting the client's fraud, failing to disclose adverse legal authority, or offering evidence the lawyer knows to be false.

Rule 3.3(b) makes the above duties applicable until "the conclusion of the proceeding," and makes them applicable even if they require disclosure which would otherwise be protected by Rule 1.6.

Rule 3.3(c) permits a lawyer to refuse to offer evidence that the lawyer reasonably believes is false.

Rule 3.3(d) requires the lawyer, in ex parte proceedings, to inform the tribunal of all relevant facts, whether or not they are adverse to the client.

** CPAs

The CPAs' standards include a general prohibition against false statements, infra at 64.

CPAs sometimes perform litigation support services, such as presenting expert testimony on the amount of damages. Evidently the general standards apply; see ET Sec. 100 (integrity and objectivity), ET Sec. 201 (professional competence, due professional care, planning and supervision, and sufficient relevant data), and ET 203 (accounting principles). The Code does not provide any standards dealing specifically with litigation support services.

*** Comparison

Lawyers' standards are more elaborate than CPAs'.

  Rule 3.4 Fairness to Opposing Party and Counsel

* Lawyers

Rule 3.4 requires fairness to the opposing party and counsel in litigation. For example, the rule prohibits abuse of the discovery process, counseling a witness to testify falsely, or stating a personal opinion as to the justness of the cause.

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

  Rule 3.5 Impartiality and Decorum of Tribunal

* Lawyers

Rule 3.5 prohibits a lawyer from using improper means to influence a judge or juror, communicating ex parte except as permitted by law, or engaging in conduct intended to disrupt a tribunal.

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

  Rule 3.6 Trial Publicity

* Lawyers

Rule 3.6 regulates out-of-court statements by lawyers about pending litigation in which they participate. Paragraph (c) gives a limited right to reply to improper statements made by others.

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

  Rule 3.7 Lawyer as Witness

* Lawyers

Rule 3.7 prohibits a lawyer from acting as advocate at a trial at which the lawyer is likely to be a necessary witness, with some exceptions, including substantial hardship to the client.

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

  Rule 3.8 Special Responsibilities of a Prosecutor

* Lawyers

Rule 3.8 addresses the special responsibilities of a prosecutor in a criminal case, for example, to disclose to the defense any exculpatory evidence. The comment observes that "A prosecutor has the responsibility of a minister of justice and not simply that of an advocate." Cmt. 1.

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

  Rule 3.9 Advocate in Nonadjudicative Proceedings

* Lawyers

Rule 3.9 states: "A lawyer representing a client before a legislative or administrative tribunal in a nonadjudicative proceeding shall disclose that the appearance is in a representative capacity and shall conform to the provisions of Rules 3.3(a) through (c), 3.4(a) through (c), and 3.5."

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

 
ARTICLE 4. TRANSACTIONS WITH PERSONS OTHER THAN CLIENTS

Rule 4.1 Truthfulness in Statements to Others

* Lawyers

Rule 4.1 prohibits a lawyer, during a representation, from making a false statement to a third person, or from failing to disclose a material fact to a third person when disclosure is necessary to avoid assisting a client's criminal or fraudulent act, unless disclosure is prohibited by Rule 1.6.

The Comment observes that statements of price, value, or amounts of acceptable settlements are not covered by this rule, since they are not statements of "fact" under generally accepted conventions in negotiation. Cmt. 1.

** CPAs

No equivalent, but consistent the general requirement of honesty, UAA Sec. 10(a)(5).

*** Comparison

No equivalent in CPAs' standards.

  Rule 4.2 Communication with Person Represented by Counsel

* Lawyers

Rule 4.2 states:

"In representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized by law to do so."

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

  Rule 4.3 Dealing with Unrepresented Person

* Lawyers

Rule 4.3 prohibits a lawyer from claiming to be disinterested when dealing with an unrepresented person. A lawyer should make reasonable efforts to correct such a person's misunderstanding of the lawyer's role.

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

  Rule 4.4 Respect for Rights of Third Parties

* Lawyers

Rule 4.4 states:

"In representing a client, a lawyer shall not use means that have no substantial purpose other than to embarrass, delay, or burden a third person, or use methods of obtaining evidence that violate the legal rights of such a person."

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

 

ARTICLE 5. LAW FIRMS AND ASSOCIATIONS

Rule 5.1 Responsibilities of a Partner or Supervisory Lawyer

* Lawyers

Rule 5.1 states:

"(a) A partner in a law firm shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that all lawyers in the firm conform to the rules of professional conduct.

"(b) A lawyer having direct supervisory authority over another lawyer shall make reasonable efforts to ensure that the other lawyer conforms to the rules of professional conduct.

"(c) A lawyer shall be responsible for another lawyer's violation of the rules of professional conduct if:

(1) the lawyer orders or, with knowledge of the specific conduct, ratifies the conduct involved; or

(2) the lawyer is a partner in the law firm in which the other lawyer practices, or has direct supervisory authority over the other lawyer, and knows of the conduct at a time when its consequences can be avoided or mitigated but fails to take reasonable remedial action."

** CPAs

AICPA Code, ET 201, General Standards, par. C, requires adequate planning and supervision of the performance of professional services.

Firms that perform attest services are subject to more intensive regulation than other firms; see infra at 71.

For example, UAA 7(c)(3), (4) and R. 10-1(c)(6) impose certain experience requirements on CPAs who sign, authorize or supervise attest functions. The details of these requirements are to be established in professional standards; see infra at 73.

 *** Comparison

The CPAs' requirements are more elaborate as regards the attest function, otherwise less elaborate than lawyers' standards.

Rule 5.2 Responsibilities of a Subordinate Lawyer

* Lawyers

Rule 5.2 states:

"(a) A lawyer is bound by the rules of professional conduct notwithstanding that the lawyer acted at the direction of another person.

"(b) A subordinate lawyer does not violate the rules of professional conduct if that lawyer acts in accordance with a supervisory lawyer's reasonable resolution of an arguable question of professional duty."

** CPAs

AICPA Code, ET 102, Integrity and Objectivity, states: "In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others."

An auditing standard allows a subordinate accountant to file a written "difference of opinion" if he or she disagrees with a supervisor's decision to render an audit report. The supervisor must file a written response. Statement on Auditing Standards 22, Planning and Supervision, par. 12 (1978), codified as AU 311.14.

*** Comparison

Lawyers' standards are more elaborate.

  Rule 5.3 Responsibilities Regarding Nonlawyer Assistants

* Lawyers

The responsibilities set forth in Rule 5.3, regarding nonlawyer assistants, are substantially similar to those in Rule 5.1 regarding the supervision of lawyers.

** CPAs

AICPA Code, App. B. Council Resolution Concerning Rule 505 -- Form of Organization and Name (as revised May 7, 1997) declares: "Non-CPA owners [of firms performing the attest function] would have to abide by the AICPA Code of Professional Conduct. AICPA members may be held responsible under the Code for acts of co-owners."

*** Comparison

Lawyers' standards apply to nonlawyer assistants, while CPAs' standards apply to non-CPA owners.

  Rule 5.4 Professional Independence of a Lawyer

* Lawyers

Rule 5.4 states:

"(a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that:

(1) an agreement by a lawyer with the lawyer's firm, partner, or associate may provide for the payment of money, over a reasonable period of time after the lawyer's death, to the lawyer's estate or to one or more specified persons;

(2) a lawyer who purchases the practice of a deceased, disabled, or disappeared lawyer may, pursuant to the provisions of Rule 1.17, pay to the estate or other representative of that lawyer the agreed-upon purchase price; and

(3) a lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement.

"(b) A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.

"(c) A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services.

"(d) A lawyer shall not practice law with or in the form of a professional corporation or association authorized to practice law for profit, if:

(1) a nonlawyer owns any interest therein, except that a fiduciary representative of the estate of a lawyer may hold the stock or interest of the lawyer for a reasonable time during administration;

(2) a nonlawyer is a corporate director or officer thereof; or

(3) a nonlawyer has the right to direct or control the professional judgment of a lawyer."

** CPAs

If the firm performs the attest function, a simple majority of owners must be CPAs, UAA Sec. 7(c). (State statutes vary on this requirement.) Non-CPA owners of interests in the firm must be active participants in the firm or in "affiliated entities."

If the firm does not perform the attest function, there is no requirement for any owners to be CPAs, because non-CPAs are allowed to perform all accounting functions other than the attest function, UAA Sec. 14(c). But CPAs who perform non-attest functions must comply with professional standards such as competence, confidentiality and objectivity, etc.

Three recent AICPA pronouncements deal with non-CPA ownership of interests in CPA firms. The first is Council Resolution (as revised May 7, 1997), published as Appendix B to ET 505. It addresses the conditions under which non-CPAs may own interests in CPA firms.

(1) A majority of the ownership of the firm, in terms of financial interests and voting rights, must belong to CPAs. Each non-CPA owner must be actively engaged in providing services to the firm's clients as his or her principal occupation.

(2) A CPA must have ultimate responsibility for all attest engagements.

(3) Non-CPA owners must not assume final responsibility for any attest engagement.

(4) Non-CPAs becoming owners after the date of the Resolution must possess a baccalaureate degree and, beginning in 2010, must have obtained 150 hours of education at a college or university.

(5) Non-CPA owners may use the title "principal," "owner," "officer," "member" or "shareholder," or any other title permitted by state law, but may not hold themselves out to be CPAs.

(6) Non-CPA owners must abide by the AICPA Code of Professional Conduct. AICPA members may be held responsible under the Code for the acts of co-owners.

(7) Non-CPA owners must meet the same continuing professional education requirements as AICPA members.

(8) Owners must own their equity in their own right. Provision must be made to transfer ownership to the firm or to other qualified owners if a non-CPA ceases to be actively engaged in the firm.

(9) Non-CPA owners are not eligible for membership in AICPA.

The second pronouncement is Resolution of the AICPA Council, effective December 31, 1998, compiled as an annotation to ET 505, Form of Organization and Name. The Resolution elaborates upon ET 505, which states that "A member may practice public accounting only in a form of organization permitted by state law or regulation whose characteristics conform to resolutions of Council."

The annotation states:

"The Council Resolution (the Resolution) requires, among other things, that a majority of the financial interests in a firm engaged in attest services (as defined therein) be owned by CPAs. In the context of alternative practice structures (APS) in which (1) the majority of the financial interests in the attest firm is owned by CPAs and (2) all or substantially all of the revenues are paid to another entity in return for services and the lease of employees, equipment and office space, questions have arisen as to the applicability of rule 505 [ET section 505.01].

"The overriding focus of the Resolution is that CPAs remain responsible, financially and otherwise, for the attest work performed to protect the public interest. The Resolution contains many requirements that were developed to ensure that responsibility. In addition to the provisions of the Resolution, other requirements of the Code of Professional Conduct and bylaws ensure that responsibility:

"a. Compliance with all aspects of applicable state law or regulation

"b. Enrollment in an AICPA-approved practice monitoring program

"c. Membership in the SEC practice section if the attest work is for SEC clients (as defined by Council)

"d. Compliance with the independence rules prescribed by Rule 101, Independence [ET section 101.01]

"e. Compliance with applicable standards promulgated by Council-designated bodies (Rule 202, Compliance with Standards [ET section 202.01]) and all other provisions of the Code, including ET section 91, Applicability

"Taken in the context of all of the above-mentioned safeguards of the public interest, if the CPAs who own the attest firm remain financially responsible, under applicable state law or regulation, the member is considered to be in compliance with the financial interests provision of the Resolution."

The third pronouncement is Interpretation 101-14, The Effect of Alternative Practice Structures on the Applicability of Independence Rules (February 1999). Attached, as Appendix A, infra, is the full text of this interpretation, together with a related news story entitled "Ethics Keeps Up With New World Order," in J. of Acctcy. (Feb. 1999) at 12-13, 82-83.

As noted supra at 30, this interpretation portrays, without disapproval, a structure which results from a public entity's purchase of a CPA practice. The public entity has subsidiaries or divisions such as a bank, insurance company or broker-dealer, and it also has one or more professional service subsidiaries or divisions which offer nonattest services to clients (such as tax, personal financial planning, and management consulting).

In connection with the acquisition, the partners of the old CPA firm form a new CPA firm to provide attest services. A majority of the owners of the new firm are CPAs, including the former owners of the old firm. The new firm provides attest services under the supervision of its owners. The arrangement between the new firm and the public entity includes the lease of employees, office space and equipment; the performance of back-office functions such as billing and collections; and advertising. The new firm pays a negotiated amount for these services.

*** Comparison

Lawyers' standards prohibit nonlawyer ownership, control or fee-sharing. CPAs' standards require only a majority of owners to be CPAs in firms providing the attest function, and establish no ownership qualifications for firms which do not provide the attest function. CPAs' standards include some regulation of non-CPA owners of interests in CPA firms.

 Rule 5.5 Unauthorized Practice of Law

* Lawyers

Rule 5.5 states:

"A lawyer shall not:

(a) practice law in a jurisdiction where doing so violates the regulation of the legal profession in that jurisdiction; or

(b) assist a person who is not a member of the bar in the performance of activity that constitutes the unauthorized practice of law."

** CPAs

UAA Sec. 14(d) prohibits performance of the attest function by anyone other than a CPA firm that holds a permit to practice, see supra at 5.

As regards multistate practice, see infra at 69.

CPAs' standards do not include a provision on assisting others to engage in unauthorized practice.

*** Comparison

CPAs' standards do not include a prohibition against assisting others in the unauthorized practice.

  Rule 5.6 Restrictions on Right to Practice

* Lawyers

Rule 5.6 states:

"A lawyer shall not participate in offering or making:

(a) a partnership or employment agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement; or

(b) an agreement in which a restriction on the lawyer's right to practice is part of the settlement of a controversy between private parties."

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

Rule 5.7 Responsibilities Regarding Law-Related Services

* Lawyers

Rule 5.7 states:

"(a) A lawyer shall be subject to the Rules of Professional Conduct with respect to the provision of law-related services, as defined in paragraph (b), if the law-related services are provided:

(1) by the lawyer in circumstances that are not distinct from the lawyer's provision of legal services to clients; or

(2) by a separate entity controlled by the lawyer individually or with others if the lawyer fails to take reasonable measures to assure that a person obtaining the law-related services knows that the services of the separate entity are not legal services and that the protections of the client-lawyer relationship do not exist.

"(b) The term 'law-related services' denotes services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a nonlawyer."

The Comment includes accounting in a list of examples of law-related services, together with providing title insurance, financial planning, trust services, real estate counseling, legislative lobbying, economic analysis, social work, psychological counseling, tax return preparation, and patent, medical or environmental consulting. Cmt. 8.

 ** CPAs

Interpretation 505-2 (as revised, effective December 1998) states [subheadings added]:

[Member's interest in separate business]

"A member in the practice of public accounting may own an interest in a separate business that performs for clients any of the professional services of accounting, tax, personal financial planning, litigation support services, and those services for which standards are promulgated by bodies designated by Council (see ET section 92.09).

[Separate business controlled by member]

"If the member, individually or collectively with his or her firm or with members of his or her firm (see ET section 101.11), controls the separate business, the entity and all its owners (including the member) and employees must comply with all of the provisions of the Code of Professional Conduct.

[Independence for purposes of attest function]

"For the purpose of applying Rule 101, Independence [ET section 101.01], if such control is present, the separate business would be included in the definition of 'member or member's firm' as described in item 4 of that definition (see ET section 101.11). Accordingly, rule 101 [ET section 101.01] and all its interpretations and rulings would apply to the separate business, its owners and employees the same as prescribed in ET section 101.11 for the member's firm and, if violated, the member's independence would be considered to be impaired.

[Business not controlled by member]

"If the member, individually or collectively with his or her firm or with members of his or her firm, does not control the separate business, the provisions of the Code would apply to the member for his or her actions but not apply to the entity, its other owners and employees. For example, the entity could enter into a contingent fee arrangement with an attest client of the member or accept commissions for the referral of products or services to such attest client."

*** Comparison

CPAs' standards are more elaborate than lawyers' standards, and CPAs' standards make significant distinctions, depending on whether the member (and affiliated persons) control the separate business.

 

ARTICLE 6. PUBLIC SERVICE

Rule 6.1 Voluntary Pro Bono Publico Service

* Lawyers

Rule 6.1 states that "A lawyer should aspire to render at least (50) hours of pro bono publico legal services per year." The rule gives details and examples, but is not enforceable through the disciplinary process, cmt. 11.

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

  Rule 6.2 Accepting Appointments

* Lawyers

Rule 6.2 prohibits a lawyer from seeking to avoid appointment by a tribunal except for good cause. The rule gives some examples of good cause.

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

  Rule 6.3 Membership in Legal Services Organization

* Lawyers

Rule 6.3 allows a lawyer to serve in a legal services organization apart from the firm where the lawyer practices, even though the organization serves persons with interests adverse to those of a client of the lawyer, but the lawyer should not knowingly participate in the organization's decision or action which would create a conflict.

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

Rule 6.4 Law Reform Activities Affecting Client Interests

* Lawyers

Rule 6.4 allows a lawyer to participate in a law reform organization notwithstanding that the reform may affect the interests of a client of the lawyer. If the interests of a client may materially benefit from a decision in which the lawyer participates, the lawyer shall disclose that fact but need not identify the client.

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

 

ARTICLE 7. INFORMATION ABOUT LEGAL SERVICES

Rule 7.1 Communications Concerning a Lawyer's Services

* Lawyers

Rule 7.1 prohibits false or misleading communications about a lawyer's services. The rule includes some examples.

** CPAs

AICPA Code, ET Sec. 502 is similar.

*** Comparison

Standards for both professions are similar.

 Rule 7.2 Advertising

* Lawyers

Rule 7.2 allows advertising, including direct mail and recorded communications. The lawyer must keep copies of written communications for two years. Any communication must include the name of at least one lawyer responsible for its content.

Paragraph (c) adds:

"A lawyer shall not give anything of value to a person for recommending the lawyer's services except that a lawyer may

(1) pay the reasonable costs of advertisements or communications permitted by this Rule;

(2) pay the usual charges of a not-for-profit lawyer referral service or legal service organization; and

(3) pay for a law practice in accordance with Rule 1.17.

** CPAs

AICPA Code, ET Sec. 502 allows advertising.

Interpretation 502-5 allows members to accept clients through the efforts of third parties, provided the promotional efforts of the third parties are within the bounds of the Code.

*** Comparison

Lawyers' provisions are more elaborate, including the requirement that lawyers retain a copy of all advertisements.

  Rule 7.3 Direct Contact with Prospective Clients

* Lawyers

Rule 7.3 states:

"(a) A lawyer shall not by in-person or live telephone contact solicit professional employment from a prospective client with whom the lawyer has no family or prior professional relationship when a significant motive for the lawyer's doing so is the lawyers' pecuniary gain."

Paragraph (b) prohibits other types of solicitation if the prospective client has indicated to the lawyer a desire not to be solicited, or if the solicitation involves coercion, duress or harassment.

Paragraph (c) requires targeted written or recorded communications to include the words "Advertising Material."

Paragraph (d) relaxes the prohibitions in paragraph (a) for lawyers who participate in prepaid or group legal service plans.

Note: The Eleventh Circuit recently upheld the Georgia version of Model Rule 7.3, as applied in an ambulance-chasing situation, against a challenge on First Amendment grounds. Falanga v. Georgia State Bar, 150 F.3d 1333 (11th Cir. 8/19/98), reh. en banc denied, 163 F.3d 1362 (11th Cir. 11/18/98). A petition for certiorari is pending in the Supreme Court, Docket No. 98-1325, filed 2/19/99, USLW 3542, 3562.

** CPAs

AICPA Code, ET Sec. 502 allows solicitation by CPAs, provided they do not engage in coercion, over-reaching or harassment.

*** Comparison

CPAs' standards allow solicitation (provided it is not false, deceptive, coercive, harassing, etc.), while lawyers' standards prohibit solicitation (unless the lawyer has an existing relationship, or the solicitation is not motivated by pecuniary gain).

  Rule 7.4 Communication of Fields of Practice and Certification

* Lawyers

Rule 7.4 states:

"A lawyer may communicate the fact that the lawyer does or does not practice in particular fields of law. A lawyer shall not state or imply that the lawyer has been recognized or certified as a specialist in a particular field of law except as follows: . . . " The rule makes exceptions for patent attorneys, admiralty attorneys, and those who qualify under state-approved specialty designation programs.

In jurisdictions without such programs, a lawyer may communicate the fact of certification by a named organization, provided the communication states that there is no procedure in this jurisdiction for approving certifying organizations. This statement is not required, however, if the organization is ABA-accredited.

** CPAs

A CPA or CPA firm may not communicate its availability to perform the attest function unless it holds a permit. UAA Sec. 7(a), 14(d), (f), (g).

*** Comparison

CPAs' standards deal only with communications about the attest function.

  Rule 7.5 Firm Names and Letterheads

* Lawyers

Rule 7.5(a) allows law firms to use trade names, provided they are not deceptive.

Rule 7.5(b) allows a firm with offices in more than one jurisdiction to use the same name in each jurisdiction, but identification of lawyers in an office of the firm must indicate the jurisdictional limitations on those not licensed to practice where the office is located.

Rule 7.5(c) prohibits use, in the firm name, of the name of a lawyer holding public office, during any substantial period in which the lawyer is not actively and regularly practicing with the firm.

Rule 7.5(d) prohibits lawyers from stating or implying they practice in a partnership or other organization, unless this is a fact.

** CPAs

UAA Sec. 14(i), UAA Rule 14-1 and AICPA Code, ET Sec. 505 prohibit the use of misleading firm names, but allow the use of the names of one or more past owners in the firm name of a successor organization.

*** Comparison

Lawyers' standards are more elaborate.

 

ARTICLE 8. MAINTAINING THE INTEGRITY OF THE PROFESSION

Rule 8.1 Bar Admission and Disciplinary Matters

* Lawyers

Rule 8.1 prohibits applicants for admission to the bar or lawyers in connection with the disciplinary process from knowingly making false statements of material fact or failing to disclose necessary facts.

** CPAs

Similar, UAA Sec. 10(a)(1), (11), R. 10-1(c)(3).

*** Comparison

Similar.

  Rule 8.2 Judicial and Legal Officials

* Lawyers

Rule 8.2 prohibits lawyers from knowingly making false statements or making reckless statements about judges or judicial candidates. The rule also requires lawyers who are judicial candidates to comply with the Code of Judicial Conduct.

** CPAs

No equivalent.

*** Comparison

No equivalent in CPAs' standards.

  Rule 8.3 Reporting Professional Misconduct

* Lawyers

Rule 8.3 states:

"(a) A lawyer having knowledge that another lawyer has committed a violation of the rules of professional conduct that raises a substantial question as to that lawyer's honesty, trustworthiness or fitness as a lawyer in other respects, shall inform the appropriate professional authority.

"(b) A lawyer having knowledge that a judge has committed a violation of applicable rules of judicial conduct that raises a substantial question as to the judge's fitness for office shall inform the appropriate authority."

Paragraph (c) allows an exception if the lawyer obtained the information as a member of an approved lawyers' assistance program [that is, a program to rehabilitate impaired lawyers].

** CPAs

R.10-1(d)(4) requires a CPA to provide information upon request.

*** Comparison

CPAs must provide information upon request, but are not required to initiate reports on another practitioner's misconduct.

Rule 8.4 Misconduct

* Lawyers

Rule 8.4 sets forth the grounds for discipline, as follows:

"It is professional misconduct for a lawyer to:

(a) violate or attempt to violate the rules of professional conduct, knowingly assist or induce another person to do so, or do so through the acts of another;

(b) commit a criminal act that reflects adversely on the lawyer's honesty, trustworthiness or fitness as a lawyer in other respects;

(c) engage in conduct involving dishonesty, fraud, deceit or misrepresentation;

(d) engage in conduct that is prejudicial to the administration of justice;

(e) state or imply an ability to influence improperly a government agency or official; or

(f) knowingly assist a judge or judicial officer in conduct that is a violation of applicable rules of judicial conduct or other law.

** CPAs

UAA Secs. 10 and 14 set forth the grounds for discipline, as follows:

Sec. 10. Reasons for enforcement:

"(1) Fraud or deceit in obtaining a certificate, permit or registration;

"(2) Cancellation, revocation, suspension or refusal to renew a license or practice rights for disciplinary reasons in any other state for any cause;

"(3) Failure, on the part of a holder of a certificate or permit under Sections 6 or 7 or registration under Section 8, to maintain compliance with the requirements for issuance or renewal of such certificate, permit or registration or to report changes to the Board under Sections 6(f) or 7(f);

"(4) Revocation or suspension of the right to practice before any state or federal agency;

"(5) Dishonesty, fraud, or gross negligence in the performance of services as a licensee or in the filing or failure to file the licensee's own income tax returns;

"(6) Violation of any provision of this Act or rule promulgated by the Board under this Act or violation of professional standards;

UAA Rule 10-1 adds, as examples of violations of this section:

"(c)(1) Using the CPA title or providing attest services in this State . . . without properly qualifying to practice across state lines under the substantial equivalency provision of the Act;

"(c)(3) Making any false or misleading statement, in support of an application for a certificate, registration or a permit filed by another;

(c)(4) Failure to cooperate with the Board's investigations;

(c)(5) Failure to satisfy continuing professional education requirements;

"(c)(6) Failure to comply with professional standards as to the attest experience requirement for those who supervise attest engagements and sign reports on financial statements;

(c)(7) Failure to comply with peer review requirements."

"(7) Violation of any rule of professional conduct promulgated by the Board under Section 4(h)(4) of this Act;

"(8) Conviction of a felony, or of any crime an element of which is dishonesty or fraud, under the laws of the United States, of this State, or of any other state if the acts involved would have constituted a crime under the laws of this State;

"(9) Performance of any fraudulent act while holding a certificate or permit issued under this Act or prior law;

"(10) Any conduct reflecting adversely upon the licensee's fitness to perform services while a licensee;

UAA Rule 10-1(d) gives the following examples:

"(1) Adjudication as mentally incompetent;

"(2) Fiscal dishonesty of any kind;

"(3) Presenting as one's own a certificate, registration or permit issued to another;

"(4) Concealment of information regarding violations by other licensees of the Act or the Rules thereunder when questioned or requested by the Board; and

"(5) Willfully failing to file a report or record required by state or federal law; willfully impeding or obstructing the filing of such report or record, or inducing another person to impede or obstruct such filing by another; and the making or filing of such a report or record which one knows to be false."

"(11) Making any false or misleading statement or verification, in support of an application for a certificate, registration or permit filed by another."

 UAA Sec. 14, in its listing of unlawful acts:

(a) reserves the attest function to licensees.

(b) requires licensees, when performing attest services, to provide them "pursuant to statements on standards relating to those services adopted by reference or directly by the Board."

(c) prohibits unlicensed persons from using the title "certified public accountant" or "CPA" or any other designation implying the person is a CPA.

(d) prohibits any firm from providing attest services or using the title "certified public accountants" or "CPAs" unless (1) the firm holds a valid permit under Sec. 7 and (2) ownership of the firm is in accord with the Act and rules promulgated by the Board.

(e) prohibits use of the title "public accountant" or "PA" or any other similar designation unless the person holds a valid registration under Sec. 8 (see supra at 6).

(f) prohibits a firm not holding a valid permit under Sec. 7 from providing attest services or using the title "certified public accountant" or "CPA" or similar designation.

(g) prohibits a person or firm not holding a valid certificate, permit or registration under Secs. 6, 7, or 8 from using the title "certified accountant," "chartered accountant," "enrolled accountant," "licensed accountant," "registered accountant," "accredited accountant," or any other title or designation likely to be confused with the titles "certified public accountant" or "public accountant," and from using any of the abbreviations "CA," "LA," "RA," "AA," or similar abbreviations likely to be confused with "CPA' or "PA." The title "Enrolled Agent" or "EA" may only be used by individuals so designated by the Internal Revenue Service.

(h)(1) prohibits non-licensees from using "language in any statement relating to the financial affairs of a person or entity which is conventionally used by licensees in reports on financial statements. In this regard, the Board shall issue safe harbor language non licensees may use in connection with such financial information."

UAA Rule 14-3 sets forth the following disclaimer that can be used by non-licensees:

"I(we) have prepared the accompanying (financial statements) of (name of entity) as of (time period) for the (period) then ended. This presentation is limited to preparing in the form of financial statements information that is the representation of management (owners).

"I(we) have not audited, reviewed or compiled the accompanying financial statements and accordingly do not express an opinion or other form of assurance on them. I(we) am(are) not licensed by this state to provide those types of services."

Note: the above language is a negative version of language used in attest engagements. The approved form of language for use in attest engagements does not appear in the UAA, UAA Rules or AICPA Code, but is found in statements on auditing standards, and is therefore incorporated in the "professional standards" requirements of the UAA.

(h)(2) prohibits any person or firm not holding a valid certificate, permit or registration to use any title that includes the words "accountant," "auditor" or "accounting" in connection with any other language that implies that person or firm holds such a certificate, etc., or holds special competence as an accountant or auditor -- but this does not prohibit an officer, employee, etc. of any organization from signing that organization's financial information and designating that person's title, nor any official act of a public official.

(i) prohibits the use of misleading firm names.

UAA Rule 14-2 adds: "A fictitious firm name (that is, one not consisting of the names or initials of one or more present of former partners, members or shareholders) may not be used by a CPA firm unless such name has been registered with and approved by the Board as not being false or misleading."

(j) permits foreign licensees to provide services in the state to foreign-based clients, if the licensees are identified by their foreign title (translated into English if necessary) and by the name of their country.

(k) prohibits any holder of a certificate from performing attest services in any firm that does hold a valid permit under Sec. 7.

(l) "Nothing herein shall prohibit a practicing attorney or firm of attorneys from preparing or presenting records or documents customarily prepared by an attorney or firm of attorneys in connection with the attorney's professional work in the practice of law."

(m) prohibits a licensee from receiving a commission for recommending any product or service to a client for whom the licensee performs the attest function.

(n) prohibits contingent fees for performing the attest function.

AICPA Code, Sec. ET 501 states: "A member shall not commit an act discreditable to the profession." Interpretations include:

Retention of client's records after demand is made for them.

Discrimination and harassment in employment practices.

Failure to follow standards and/or procedures or other requirements in governmental audits.

Negligence in the preparation of financial statements or records.

Failure to follow requirements of governmental bodies, commissions, or other regulatory agencies in performing attest or similar services.

Solicitation or disclosure of CPA examination questions and answers (May 1996 or later).

*** Comparison

The CPAs' standards are more detailed, and include detailed regulation of the use of the CPA title.

  Rule 8.5 Disciplinary Authority; Choice of Law

* Lawyers

Rule 8.5(a) states:

"A lawyer admitted to practice in this jurisdiction is subject to the disciplinary authority of this jurisdiction, regardless of where the lawyer's conduct occurs. A lawyer may be subject to the disciplinary authority of both this jurisdiction and another jurisdiction where the lawyer is admitted for the same conduct.

Rule 8.5(b) is a choice of law provision, to determine which jurisdiction's rule applies.

** CPAs

UAA Sec. 23(a), "Substantial Equivalency," allows a CPA to practice, in person or electronically, outside the state where the CPA's principal place of business is located, provided:

(1) the NASBA National Qualification Appraisal Service has verified that the licensing state is in substantial equivalence with UAA, or

(2) the NASBA Service has verified that the individual CPA's qualifications are in substantial equivalence with the UAA's requirements for CPA licensure.

"Substantial equivalency" is defined in UAA Sec. 3(p).

The out-of-state CPA must notify the Board of his or her intent to enter the state, UAA Sec. 23(a). By exercising the privilege conferred by this section, the licensee accepts the Board's jurisdiction, agrees to comply with the Act and the Board's rules, and appoints the State Board of the licensing state as agent for service of process.

UAA Sec. 23(b) declares that a licensee of this state is subject to discipline in this state for an act committed in another state "for which the licensee would be subject to discipline for an act committed in the other state."

If a CPA wants to establish a principal place of business in another state, the CPA must obtain a certificate there.

UAA Sec. 6(c) establishes the qualifications: four years of experience after passing the CPA exam and within the ten years immediately preceding the application for a certificate in the new state.

The UAA deals also with public accountants from foreign countries. UAA Sec. 6(g) provides for the issuance of a certificate to the holder of a substantially equivalent foreign designation, and UAA Sec. 14(j) allows the holder of a foreign certificate to practice for foreign clients, with proper identification, and without the need for a certificate from a state in the United States.

Note: Along similar lines, a number of states issue licenses to foreign legal consultants. See Louis B. Sohn and ABA Section of International Law and Practice, Report to the House of Delegates, Model Rule for the Licensing of Legal Consultants, 28 Int'l. Law 207 (1994).

*** Comparison

Both the lawyers' and the CPAs' standards confirm the licensing state's disciplinary authority over the licensee for acts committed out of state. The lawyers' standards have a more elaborate provision on choice of rules, while the CPAs' standards include an elaborate provision on automatic permission to practice out of state under the substantial equivalency concept.

 

PART THREE -- CPAs' STANDARDS WITH NO
EQUIVALENT IN LAWYERS' STANDARDS

I. ATTEST FUNCTION

A. Reservation of Attest Function

The UAA reserves attest function to CPA firms holding permits to practice, UAA Sec. 14(a); see supra at 5.

B. Definition of Attest Function

UAA Sec. 3(a) defines "attest" services as follows:

"(1) any audit or other engagement to be performed in accordance with the Statements on Auditing Standards (SAS);

"(2) any review of a financial statement or compilation of a financial statement to be performed in accordance with the Statement on Standards for Accounting and Review Services (SSARS); and

"(3) any examination of prospective financial information to be performed in accordance with the Statements on Standards for Attestation Engagements (SSAE)."

AICPA has adopted standards for each of the above types of engagements, and has established standard reporting forms for audits, reviews and compilations. These standards and reporting forms are part of the professional standards of CPAs, and are therefore incorporated by reference in UAA Sec. 10(a)(6), which imposes sanctions for violation of . . . professional standards."

Excerpts from the standard reporting forms for audit, review and compilation engagements are set forth as follows:

Standard form for audit report (excerpt)

. . . These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements . . . present fairly, in all material respects, the financial position of X Company as of (date), and the results of its operations and cash flows for the (year) then ended in conformity with generally accepted accounting principles.

Standard form for reporting on a review engagement (excerpt)

A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an examination in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion.

On the basis of our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles.

Standard form for reporting on a compilation engagement (excerpt)

A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them."

C. Special Regulation of Attest Function

The attest function, defined in UAA Sec. 3(a), may be performed only by a CPA (who holds a certificate under UAA Sec. 6), while working in a CPA firm which holds a permit under UAA Sec. 7. UAA Secs. 3(m), 14(a).

The firm must undergo peer review every three years. UAA Secs. 3(j), 7(h); see infra at 72.

CPAs who supervise attest engagements for their firms, or who sign or authorize reports on financial statements, must meet experience requirements. UAA Sec. 7(c)(3), (4).

Firms must be able to show, during peer review, that attest services are under the control of CPAs with the required experience. UAA Sec. 7(h).

A majority of owners of the firm must be CPAs, UAA Sec. 7(c)(1), and the non-CPA owners must be active participants in the firm or its affiliated entities, Sec. 7(c)(2)(B). The firm must designate a CPA licensed in the state who is responsible for the proper registration of the firm. Sec. 7(c)(2)(A). The firm name may not include the name of a non-CPA if the firm name includes "CPAs." R. 14-1.

Note: Some states take different approaches, regarding ownership of CPA firms.

The firm and its members must conform to standards regarding the attest function, including independence. UAA Secs. 10(a)(6), 14(b).

Firms cannot accept commissions or contingent fees for products or services provided to clients for whom they also perform attest services. UAA Secs. 14(m), (n).

 

II. PEER REVIEW

UAA Sec. 3(j) defines "peer review" as:

"a study, appraisal, or review of one or more aspects of the professional work of a CPA firm that performs attest services, by a person or persons who hold certificates and who are not affiliated with the CPA firm being reviewed."

UAA Sec. 7(h) requires firms to undergo peer review once every three years, in order to be qualified to perform the attest function. The review may be performed under the Board's guidelines, see R. 7-3, or by an equivalent organization (such as AICPA).

Note: Digest pp. 168-69 indicates that most states have quality review programs, some of which overlap with UAA peer review requirements.

 

III. EXPERIENCE REQUIRED

A. Before Obtaining a Certificate

In order to obtain a certificate for the first time, an applicant must demonstrate one year's experience. UAA Sec. 5(i) explains:

"This experience shall include providing any type of service or advice involving the use of accounting, attest, management advisory, financial advisory, tax or consulting skills all of which was verified by a licensee, meeting requirements prescribed by the Board by rule. This experience would be acceptable if it was gained through employment in government, industry, academia or public practice."

The comment observes that the experience may be supervised by a nonlicensee, so long as it is verified by a licensee. R. 6-2 defines "one year of experience" as "full or part-time employment that extends over a period of no less than a year and no more than three years and includes no fewer than 2,000 hours of performance" of qualifying services.

It appears that the experience requirement can be satisfied either before or after passing the CPA exam, since neither the UAA nor the rule specifies when the requirement can be satisfied.

Note: Digest pp. 129-31, 140 indicates that the experience requirement varies from state to state.

B. Before Being Qualified to Sign, Authorize or Supervise Attest Engagements

UAA Sec. 7(c)(3), (4) requires a CPA who supervises, signs, or authorizes someone else to sign the firm's reports in attest engagements to "meet the experience requirements set out in the professional standards for such services."

Comments to the UAA indicate that this is an innovative requirement which has not yet been implemented in the professional standards.

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