AICPA proposes ethics guidance for alternative practice structures

The AICPA’s Professional Ethics Executive Committee (PEEC) voted Tuesday to publish an exposure draft of proposed changes to the AICPA Code of Professional Conduct related to alternative practice structures, including those involving private-equity investment.

The exposure draft will be posted online later this month, according to a news release, triggering a 120-day public comment period. If the ethics updates are approved in 2027, they would be effective one year after adoption, although firms could implement them earlier.

“The proposed interpretation is not intended to operate as a stand-alone independence model or to replace other provisions of the code,” the exposure draft states. “Rather, it is intended to clarify how existing independence concepts apply when an attest firm operates in close alignment with another entity that has an investor and strengthen independence requirements when investor relationships may create additional threats to independence.”

The AICPA Code of Professional Conduct has had alternative practice structure provisions in place since 2000, according to the release, but the quickened pace of private-equity investment in the profession prompted PEEC to look at ways to refine and clarify rules on independence and conflicts of interest to reflect unique situations when a firm providing audit and attest services is closely aligned with an entity that has financial and operational relationships with an investor.

Under AICPA guidance and state law, attest firms must have at least majority ownership by CPAs. Under an alternative practice structure in which significant outside investment exists, separation must be made between the part of the business doing audit and assurance work and the entity performing nonattest activities.

PEEC’s initial proposal was issued last December, but the revision approved Tuesday incorporates input from 81 comment letters submitted by stakeholders. The revised proposal:

• Refines the definition of “alternative practice structure” to include the involvement of an investor. Complex but more conventional firm structures without an investor are excluded, although these continue to fall under existing independence rules in the code.
• Clarifies the definition of a “closely aligned entity” as one that (1) receives substantial revenue or similar economic benefit from the attest firm, including but not limited to net profits, residual value, or assumption of the entity’s obligations and (2) is integral to the attest firm’s operations by providing resources such as personnel, technology platforms, and office space. Vendors, joint ventures, and other more ordinary business relationships are excluded from the definition.
• Lists the attest firm, closely aligned entity, and a controlling investor of the closely aligned entity as “network firms,” a term within the code that refers to entities subject to independence requirements for financial statement audit and review clients. The previous version did not automatically include a controlling investor as a network firm.
• Broadens the list of those automatically designated as “covered members,” or those subject to independence rules. The CEO of the closely aligned entity, for example, is now included.
• Clarifies that an attest firm cannot provide attest services to other businesses and organizations over which its closely aligned entity’s investor has significant influence. The earlier proposal generally required an assessment involving both the application of affiliate rules within the code and the conceptual framework — a catchall evaluation process for situations not specifically spelled out in guidance — to determine if attest services could be provided.

PEEC is developing tools and other nonauthoritative guidance to help accounting firms, their investors, and others make assessments based on the proposed rules, the news release said.

For more information on alternative practice structures, visit AICPA’s resource center.

— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at Bryan.Strickland@aicpa-cima.com.