Oral Remarks of Richard Miller,
General Counsel and Secretary of the
American Institute of Certified Public Accountants (AICPA)
Richard Miller, General Counsel and Secretary of the American Institute of Certified Public Accountants (AICPA), made the next presentation to the Commission. The AICPA has a membership of 340,000 CPAs. Forty percent of its membership is in public practice, largely in small and nonpublic businesses (most are in firms of 10 or less). CPAs also work in government, industry and academia. Less than 7% of CPAs work for the Big Five accounting firms. He said accountants espouse the values of integrity, objectivity, competence and commitment to the public interest. Clients have an ongoing relationship with their CPA and don’t see them only when a dispute erupts or there is a crisis. People are oftentimes reluctant to pay the substantial amount of money they perceive a lawyer will cost and to pay the costs to reeducate the lawyer about the family or business situation that the accounting firm already understands. Clients ask AICPA members on a regular basis to draft legal forms. After the accountant declines and directs them to seek the assistance of a lawyer, clients oftentimes buy a form or a computer program so they can prepare the forms on their own. He referenced Judge Barefoot Sanders decision in the Quicken case as evidence that people are using software packages to avoid lawyers. AICPA members say their clients want one place to solve their problems and one team of professionals and they don’t want to reeducate their lawyers. AICPA members want the option to enter into a relationship with a lawyer who can provide the legal services sought by their clients and share fees for the joint engagements. AICPA rules expressly permit CPAs to practice in firms with individuals who are not licensed as CPAs. For example, a small firm can include a CPA, a financial planner, an investment advisor, a human resource consultant and an information technology expert. He read from a Yellow Pages ad for small business accountants who provide accounting and consultation, payroll, computer set-up and training, loan consultation, tax preparation and planning, and financial planning, and commented how helpful it would be for that firm to provide legal advice to their clients in many of these areas. He gave another example of a 50 to 60 member CPA firm providing the above range of services who set up in-house a lawyer with whom they had dealt over the years. The lawyer rented space from the accounting firm and held out separately as a law firm; clients were advised of the arrangement and billed separately. The governing state bar approved this arrangement. Within a few months there were so many clients that the number of lawyers housed within the accounting firm increased to five and they think they could increase to ten if there were someone to run the law operation. Mr. Miller, however, considers this example an uncomfortable model that doesn’t achieve the seamless integrated delivery of services clients want and the team spirit and sharing of risks that support a collective quality control concept. The AICPA faced similar opposition including concerns about the threat to core values, when it considered changing its rules regarding membership in CPA firms. Mr. Miller reported that accountants’ core values have not been compromised and that the profession is still as highly regarded (70% of clients have a favorable view of the accounting profession) as ever. He commented that no profession exists in a vacuum, unaffected by the social, economic and technological changes occurring around it and that the pace of change seems to be geometric. This is illustrated by the following example: Human existence spans approximately 50,000 years; if a lifetime is assumed to be 65 years, that translates to about 770 lifetimes. The first 600 would have spent their lives in caves, only the last 68 would have had any effective means of communication, only the last 6 would have seen a printed word, only the last 4 would have measured time with any precision and only the last 2 would have used an electric motor. Virtually all the changes in today’s world would have occurred in the lifetime of the last person. Understanding that the future couldn’t be extrapolated from the past, the AICPA in collaboration with 54 state societies, created the CPA Vision Project in which the accounting profession sought to assess forces of change in the financial services marketplace, reexamine the role of the accounting profession in that marketplace and chart the course for the future of the profession through the year 2011 and beyond. This was a totally grass roots project, -- over 3400 members cooperated in 200 day-long, town meetings, putting in approximately 21,000 hours or about 13 years of work. The members anticipated that the core services and core competencies that will be needed in the future have not been traditionally provided by accountants. In developing the vision the AICPA took a hard look at its rules to determine whether they permitted continued service to the public, the profession and the changing and diverse needs of clients, while preserving the profession’s core values. After close examination and review it was determined that some of the rules were overly restrictive. Those rules designed to protect the profession against a threat of competition had to be eliminated and those that preserved the integrity of professional values had to be preserved. It was recognized that, like the legal profession, the accounting profession is composed of individuals and its rules should regulate individuals who are licensed and hold themselves out as certified public accountants, and not the firms in which these individuals practice. Current AICPA rules abandon the prohibition on CPA firms having non-CPA ownership and permit a CPA to practice in a firm that is not wholly or even partially owned by CPAs. AICPA members now practice in firms that do not hold themselves out as CPA firms or where the CPA is a minority owner as the AICPA recognizes that ownership and exercise of independent professional judgement are not necessarily linked. These changes are reflected in the accounting profession’s model code, the Uniform Accountancy Act, Third Edition. The AICPA is working with representatives of many states to establish uniform accountancy regulations through the adoption of the UAA (he brought copies of the UAA). The rules that make it more difficult, if not impossible, to move across state lines have been eliminated. The AICPA recognizes that a patchwork of different state accountancy regulations is not workable in the global economy. Regulation should turn on whether or not the individual is holding herself out as a CPA while performing public accounting services. Currently the AICPA requires CPAs to own more than 50 percent of a firm that holds itself out as a CPA firm or offers attest services. He put this ownership requirement in perspective by saying it was originally a 100 percent requirement that applied to CPAs any time they practiced public accounting in any form, was changed to a two-thirds requirement in 1994 and modernized to its current majority iteration a few years ago. The only part of public practice in which the current 50 percent ownership requirement applies is services which implicate third-party reliance, the attest services, or where a firm holds itself out as a CPA firm (as opposed to a professional services firm that may have CPAs in it). He said the ownership requirement is on a downward trend. There are no ownership rules for many of AICPA’s public practice members today. The accounting profession learned from the Vision Project that in a market driven by consumer demand there are unlimited opportunities for CPAs to expand their skills, competencies and services, that neither the profession nor the public benefits from artificial limits on these opportunities by preventing CPAs from partnering with other professionals to deliver comprehensive services, and that regulation of the individual achieves the proper balance of protecting the public while allowing CPAs the flexibility of choosing the practice structure that best meets theirs and their client’s needs. He thinks these lessons have value to the legal profession as it evaluates its future and its rules.
Professor Daly started off the questioning by asking about the accounting profession’s experience with limiting those with whom an accountant could partner to an appropriate professional or someone in a compatible profession. Mr. Miller said a number of states have statutes on incompatible occupations and at one time the AICPA had a rule on this. He read the California statute that states a licensee shall not concurrently engage in the practice of public accountancy and in any other business or occupation which impairs the licensee’s independence, objectivity or creates a conflict of interest in rendering professional services. If it’s a relationship that would harm the core values and affect an accountant’s ability to perform services with objectivity then it’s a relationship that’s incompatible with the profession. The incompatible occupations rule is also an attempt to avoid having the CPA or CPA firm also offer commission-type services, which might impair objectivity. Most often this occurred when a CPA was also a broker and the question arose as to how the CPA could be objective in providing financial planning advice if he’s also counseling the client to buy stocks on which he gets a commission. He referenced a Louisiana case that found the CPA was in an incompatible profession as a broker because the relationship affected his objectivity. The AICPA eliminated the incompatible occupation rule because it determined it was redundant as it already had an objectivity rule. Moreover, the rule carried an antitrust flavor at a time when the Federal Trade Commission was already investigating the profession’s rules. The AICPA Council request to eliminate the rule resulted in an outroar from many members, but the rule was ultimately eliminated. He said his concept of incompatible occupations are those which affect the core values of the profession. He thinks whether a CPA should enter into a partnership with a tow truck driver is a business judgment. The number one thing a CPA has that’s salable is the hallmark of the profession. A lot of consolidators – American Express and others – want to buy CPA firms because the CPA is a valuable hallmark. People want it and want to be associated with it and the CPA is careful in the way he does business with it. Ms. Garvey asked about the AICPA Council and the mechanics followed by the AICPA in changing its rules of conduct. Mr. Miller explained that an amendment to the Code of Professional Responsibility or the Bylaws would be considered by the Board, which in turn would make a recommendation to the Council of approximately 265 members. If the Council approved the amendment, it would be considered by all 340,000 members on a membership ballot 90 days after council approval with the entire vote completed within 180 days of council approval. A two-third vote effectuates the change. The AICPA would not recommend a change in the UAA, its joint effort with the National Association of State Boards of Accountancy, unless the change was already reflected in the AICPA rules. He said it’s not as cumbersome to change the UAA. But, to be implemented, the UAA needs to be enacted into legislation in each state. Mr. Miller mentioned the new provision in the UAA Third Edition regarding practicing across state lines (‘substantial equivalency’) that has been enacted in about ten states. The accountant, with certain qualifications, need not relicense in the other state but merely notify the Board of his intent to enter that state under the UAA provision, allowing a national practice and practice through the Internet. The ownership requirement change has recently been enacted by at least ten states. Ms. Garvey asked whether an accountant is considered a fiduciary. Mr. Miller said that depends on what he’s doing. If he’s an auditor, every court in the country that has considered the issue has agreed that he is not a fiduciary, because a service that requires independence is obviously inconsistent with fiduciary duties. When practicing in other areas, an accountant will be considered a fiduciary. For example, where a CPA handles the checkbook for someone in the entertainment industry they are considered fiduciaries. It isn’t the function of the CPA, but rather the function of the relationship that makes a person a fiduciary. Mr. Miller agreed with Ms. Garvey that an accountant per se is not automatically a fiduciary. He clarified that accountants have a commitment to the public interest and that responsibility demands serving the public interest with integrity, objectivity, honesty and good faith to professional ethics and not passing rules that harm the public interest. Accounting firms contribute to religious, charitable or arts organizations because they regard participation as part of their responsibility of being good businessmen. Ms. Garvey saw these differing commitments (lawyers have a pro bono requirement) as indicating different cultures. Mr. Miller disagreed; he thinks the cultures are quite similar. He doesn’t regard the aspirational commitment to pro bono work in the Model Rules as something that demonstrates a cultural difference. Ms. Garvey took the culture question out of the business framework and asked about the obligation occasionally to undertake unpopular causes and the lawyer’s inability to withdraw at times when withdrawal might be the best of all possible worlds for the lawyer but not for the client. Mr. Miller acknowledged that CPAs are not subject to the same withdrawal restrictions as lawyers, but said lawyers can withdraw in all situations except those that harm the client. He said accountants can’t easily withdraw from their contractual relationships with their clients because they get sued if they do. His experience is that accounting firms don’t terminate clients to take on better clients. If they did, they won’t have too many clients after a while. He’s not sure a lawyer can’t withdraw in the middle of a contract negotiation, and so he doesn’t see a problem with the withdrawal requirements in integrating a law and an accounting firm. Ms. Garvey expressed concern that in the attest function an auditor may be obligated to withdraw or render an "unclean" opinion and it is exactly those circumstances where a lawyer’s withdrawal might cause comment and potential client harm. He said if you’re at loggerheads with a client in an audit you don’t necessarily withdraw – but you might be fired. A public client, however, must file an 8K disclosure as to why the auditor was fired, and so many public clients find a way to settle differences with their auditors. Ms. Katz asked about the difference between the fiduciary duty of the lawyer and the duty to the public of the auditor and how the two can mesh. She gave an audit letter, often carefully crafted to protect client confidences, as an example of the problem arising when the lawyer and the auditor are from the same entity. Mr. Miller said the rules of the Independent Standards Board (that is now considering this issue) and the Professional Ethics Executive Committee of the AICPA determine whether or not the conflict creates an independence problem for the firm. He stated that the client and the client’s lawyer would know up front, going into a case, whether a case would have a material affect on the client’s financial statements, and if the client’s auditor was in the same firm, the lawyer wouldn’t take on a representation. Ms. Katz thought that was simplistic as the client and the client’s lawyer don’t always know whether a case will have a material effect until it evolves. This is especially true in a complex case, where other parties may become involved and more liability may be at issue. In such circumstances the client may have to get another law firm. Mr. Miller said if the client is required to hire another law firm the client usually works it out that they do not pay for that service. He said the situation arises today where an accounting firm has taken on an engagement it later finds it shouldn’t have taken on (and the firm withdraws) and the client expects the firm to bring the new firm up to speed and pay any costs. Explaining materiality, he said there is a difference between when a law firm defends a billion dollar company in an employee suit for several hundred thousand dollars, and when the firm is suing to maintain the lease on the only factory the client has. Ms. Katz commented that this need for the clients to understand the interplay of the functions may be part of the question of client choice. Mr. Miller cautioned that working in the public interest doesn’t make the CPA a fiduciary to the public. Ms. Lamm asked about the 50% ownership requirement that only applies for accountants if the firm holds itself out as a CPA firm. Mr. Miller said the AICPA thought a firm representing itself as a firm of CPAs needed to have a majority of CPAs in order not to be misleading. But a professional service firm that offers CPA services and other services need not be majority owned by CPAs. Likewise, he sees no reason for a 50% ownership requirement for lawyers who are not holding themselves out as a law firm, as they are not being misleading. He said there is no expectation that the multidisciplinary firm is owned by lawyers and there’s no expectation it’s owned by CPAs. Mr. Nelson was told that the partners in the Big Five firms who are not accountants are not subject to the accounting profession’s rules. The AICPA has dealt with the changing practice structure by regulating the individual, and the individual is responsible for the services of those under their supervision or with whom they associate in providing the service. There is also always a business risk involved. Mr. Traynor asked what accounting firms typically tell new clients about their conflicts policy and limitations on privilege for confidential communication. Mr. Miller said he didn’t know. There are no disclosure requirements, however. He said there is no expectation for privilege today except in the tax area and in the tax area, privilege is probably explained. Professor Hazard raised the point that the rules, whatever they may be, are operationally very significant in civil liability, i.e., malpractice claims, but that they are infrequently encountered at the level of subtlety being discussed by the Commission in the discipline context. Mr. Miller said in his long years of practice he could recall no cases brought against an accounting firm alleging a conflict of interest, not even in civil litigation. Professor Hazard asked whether a court would handle conflict of interest issues differently for accounting firms with a law department as opposed to an accounting firm that works collaboratively with a law firm on a continuing basis. Mr. Miller said if the situation could be considered a conflict, client waiver generally should be sought. He thinks, however, there is a difference between separate firms with a relationship and an integrated firm, and prefers the integrated firm. There is a big difference between partners who share the risk of gain or loss and an affiliation between firms where the lawyer can go elsewhere any time he wants; he said these are wholly different environments, with different cultures. In response to Mr. Rosner’s question on how the Big Five deal with the 50% requirement in the attest part of their practice, Mr. Miller said he was not an expert on how the Big Five are structured, but he knows they follow the rule. He said that under the AICPA rules at least 50 percent of the partners need to be CPAs in order to do attest work within the multidisciplinary firm. Mr. Miller was pretty sure none of the Big Five had formed a separate affiliate or division to deal with the attest function. Mr. Rosner asked what Mr. Miller thought about New York applying its rule on law firm discipline to multidisciplinary practice firms. Mr. Miller said because New York may also regulate CPA firms such a move would make regulation unclear. He reiterated favoring individual responsibility and objected to regulators getting into the ownership business. In response to the comment that partners and members of multidisciplinary firms who may be rendering services may not be regulated at all, Mr. Miller said there is no need to regulate everybody in everything they do and that the civil justice system is an excellent regulator. If everyone in the firm is not licensed, why is there a need to regulate the firm in which they practice. The question of how to answer the profession’s ‘fear of Sears’ prompted Mr. Miller to comment on the case where American Express sued the Florida Board of Accountancy challenging a rule that prohibited American Express from holding out as CPAs those CPAs it had hired to perform non-attest services. He said the court in that case concluded that individuals will follow their ethics code. He thinks there are three reasons people comply with their ethics codes: 1) they have integrity, 2) fear of losing their professional license, or 3) fear of being sued. Mr. Miller was asked whether he could live with Model 5 plus segregation of functions and physical segregation, a training and mentoring obligation, duty to disclose who is and who is not a lawyer, periodic review of the firm’s operations every five years, protection for lawyers who are whistle blowers, and prohibition on exclusive contracts (lawyers and accountants inside could make referrals to outside accountants or lawyers). Mr. Miller said he didn’t understand and couldn’t live with the physical separation concept. He said peer review is a part of accountants’ culture as they review certain parts of practice now. Lawyers keep attempting to obtain peer review work papers, which is a problem for the process and he thus wishes the self-critical analysis privilege would be advanced. He wondered how you could figure out a way to review a lawyer’s practice. He said the lawyer needs to hold out and create an expectation regarding whether he’s functioning as a lawyer and that’s when the rules should apply and the client should know who the lawyer is. As there is a CPE requirement in the accountancy rules, he has no problem with training but expressed concern that the expense not be so onerous as to prevent small law firms and small accounting firms from joining together. Asked how he knew clients wanted multidisciplinary practice, Mr. Miller said his evidence was anecdotal. However, understanding the market is a CPA core value and understanding business trends and strategic thinking is a future core value. At a recent meeting he attended, small CPA firm representatives expressed great interest in combining to provide multidisciplinary services. He clarified that there are 134,000 CPAs in public practice and 6.5 % of AICPA’s total membership or 22,000 CPAs are with Big Five firms. Although the big fire may be the Big Five, the greater interest in the long run may be with the smaller CPAs and the solo and small law firms. He thinks accountants would have no objection if in many multidisciplinary situations the law firm is the driving force.