Scope of practice: Independence and MDP

CPA Journal, The, Feb 2001 by Colson, Robert H

Multidisciplinary practice (MDP), auditor independence, and state regulation of accounting practice are three themes that run through this issue of the Journal. All rely on a common keystone of professional accounting practice: its scope. For each, however, the structure emanating from the keystone differs fundamentally, subjecting the practice of accounting to beliefs, values, and forces that work at times in contradictory ways.

Clients, impressed with the integrity, objectivity, and quality of services provided by their CPAs,would like accounting firms to provide services beyond traditional audit, tax, and accounting system advice.The bar, the SEC, and the state, on the other hand, have stakes in restricting the scope of accounting firm practice. The essential ethical dilemma of accounting professionals pits their interest in serving the expanding needs of their clients against the requirements of auditor independence.

Auditor Independence

Auditor independence has become the focal point for opponents of expanding the professional services provided by accounting firms. For example, the principal, substantive concern expressed by opponents of MDP is the distinction between the operation of independence in the two profes sions: Accountants must be independent of the financial interests of their audit clients, whereas lawyers must be independent of any interests that conflict with their clients' interests. Likewise, the SEC's focus on auditor independence is linked to its interest in restricting the scope of nonaudit services and the mutual interests between management and auditors that result. State regulators have struggled with scope of practice issues for years.

The accounting profession itself, until quite recently, has understood independence primarily as a subjective state of mind that ensures the accountant's impartiality and objectivity in the exercise of professional judgment, never suborning it to someone else's desired outcomes.When accounting practices were organized in relatively small partnerships, a firm's success depended on its reputation for independence. However, as accounting firms merged and grew, often as a defense against the devastating costs of securities litigation, the resultant consolidation of SEC auditing in a few very large firms reduced the market incentives for professional independence and created pressure to regulate the appearance of independence through rulemaking. Although the SEC has recently codified rules, the profession's experience in this new arena is short, and its institutions are in the beginning stages of articulating the concept. Moreover, there is no reason to believe that pitting auditors against management in an adversarial relationship would lead to higher quality financial reporting. The ISB's framework for addressing independence, in which independence is a means to an end, offsets threats with safeguards to independence, a realistic approach not in favor at the SEC.

Look to the Service, Not the Provider

All debate aside, sharing some form of organizational structure among professionals for the provision of certain services seems inevitable. The client-- attorney privilege never becomes an issue in many legal services; nor do auditor independence rules apply to many accounting services. Precluding the possibility of common organizations by asserting an incompatibility between the extreme ends of accountants' and lawyers' responsibilities ignores that most of their services share the common ethical ground of serving the client's interests. CPA firms that hire lawyers and other professionals have discovered that sharing ownership becomes a condition of retention. Law firms also hire CPAs and other professionals for various purposes, and they, too, will experience similar pressures. The essential consideration for both professions should be the substance of the service to the public rather than the form of the provider.

The MacCrate Report, which more CPAs and attorneys should study, identifies correctly that resolving the ambiguities in current definitions of the practice of law is a prerequisite for an effective consideration of MDP.

Accountants should find it reassuring that other professions struggle with defining scope of practice issues, too. The report is also insightful in discussing the balance between serving the public by restricting some services to lawyers and making other services accessible through other professional groups. CPAs interested in scope of practice issues would benefit from understanding the MacCrate Report's approach.

Real Experiment or Abstract Debate?

Those CPAs and attorneys that believe that they and the public would benefit from MDP will have to take positive steps to make it happen. An abstract debate will not accomplish this.The Law Society of England and Wales has announced that it is supporting the creation of Legal Practice Plus, which will allow minority ownership by nonsolicitor partners. Such forward-looking experiments will indicate whether the market niche filled by MDPs appeals to clients and improves services.