The Big-Five battle: CPAs and non-CPAs square off on auditor independence.

• Author: Ward, Gerald M.

The 1990s have been a turning point for large CPA firms, whose fast-growing consulting practices are gradually overtaking audit as the most profitable - and, in some cases, largest - segments of their business. It's a matter of time until the principal owners of firms providing CPA services will be non-CPAs. In fact, this is happening already.

American Express, for example, is the parent of one of the largest groups of CPA firms in the United States. To avert challenges from state regulators, the attest portion of the business is separated from the non-attest (mostly financial services) business, with leased employees, cost-sharing agreements, non-compete contracts, separate letterheads and similar measures. Given the economic incentives, we can expect many more such instances of in-substance ownership of CPA firms by non-CPAs.

In the information technology arena, consider, too, the well-publicized disputes within Andersen Worldwide. As the consulting practice has grown faster and more profitably than the attest business, CPA partners and IT partners disagree about who owns whom, and who owes whom what. With the advent of strong consulting practices in most CPA firms, the Andersen tug-of-war may well be replicated elsewhere in the profession.

Both examples suggest that, in time, the strong brands and efficient distribution channels of IT and financial services businesses will put them in a good position to dominate the accounting and auditing industry. That raises a number of difficult independence questions - with no clear answers - like this one: What's the effect of the increasing influence of non-CPAs on how auditing firms serve clients and the public?

Some experts warn of real changes in the profession and, indeed, in the proper functioning of financial markets if non-CPA owners compromise the CPA's reputation for objectivity and independence. Others observe that the CPA doesn't have a monopoly on integrity and independence of thought; it may be self-serving for the CPA to assert that financial services and IT giants can't instill and preserve these values. After all, they point out, emerging competitors like American Express have long operated in regulated industries and will no doubt conduct themselves ethically and professionally. Still other pundits say any threat to independence is just an additional risk that business will have to manage - one that's far outweighed by the capital efficiencies, operating synergies and ability to attract talented professionals that will ultimately flow to clients and the public.

The Burning Questions

So should financial services and IT companies in the auditing business be governed by the same rules that apply to traditional CPA firms? Just take a look at each sector's conventions regarding contingent or performance fees, joint ventures with or extension of credit to clients, stock ownership/employee compensation schemes and outsourcing to understand how different the rules are in many substantive respects. On one hand, CPA firm owners in the financial services and IT sectors propose...