The State Board of Accountancy has sent a formal letter to the national body that sets ethics standards for the accounting profession, warning that proposed new rules governing private equity investment in CPA firms are too complex to enforce and don’t do enough to protect the public’s confidence in auditor independence.
During a State Board of Accountancy meeting on Monday, Chairman Timothy Egan said the rules need to be clear enough that regulators can actually enforce them.
“The horse is out of the barn,” Egan said “But I think some guidance is needed — and something simpler would be better.”
The state board voted unanimously Monday to submit the letter to the American Institute of CPAs’ Professional Ethics Executive Committee ahead of an April 30 comment deadline.
The AICPA is the national professional organization for certified public accountants and it sets the ethics standards that most states, including Connecticut, incorporate into their licensing rules.
In December, the AICPA proposed revisions to its ethics code to address the surge of private equity investment in accounting firms, establishing new rules for when an outside investor’s financial entanglement with a firm crosses a line that taints the independence of its auditors.
The updated independence rules would apply to CPA firms that operate as “alternative practice structures” — a business model that has become increasingly common as private equity firms pour money into the accounting industry.
In an alternative practice structure, a firm splits itself in two: one side handles audit work, which must remain CPA-controlled under state law, while the other handles everything else — tax, consulting, advisory services — and can accept outside investment. The two entities share staff, office space and administrative resources under a services agreement, creating a financial dependency that critics say can blur the line between the investor’s interests and the auditor’s independence.
The State Board of Accountancy’s letter argues the AICPA’s proposal falls short in two key ways.
The first concern is complexity. Egan told board members Monday that he read the draft multiple times and still found it difficult to understand — a problem, he said, for a standard that state regulators, CPA firms and peer reviewers need to apply consistently.
The second concern centers on what auditor independence is supposed to mean. The board argues that the draft focuses too heavily on whether a firm’s formal structure meets independence requirements on paper, without adequately considering how those arrangements look to an outside observer.
The letter calls on AICPA to place greater emphasis on “independence in appearance” — the idea that looking independent matters as much as being independent.
The AICPA’s proposal specifically identifies investor pressure on audit partner compensation as an example of an independence threat. But the Connecticut board’s position is that the draft doesn’t go far enough in treating such arrangements as automatic violations, instead leaving too much to case-by-case professional judgment.
State regulations incorporate the AICPA’s Code of Professional Conduct as Connecticut’s own professional conduct standard, meaning any changes AICPA finalizes automatically become binding on Connecticut licensees. Failure to comply can result in disciplinary action.
Connecticut is one of several states, including Nevada and Oklahoma, that have submitted separate letters encouraging AICPA to revise its proposed changes to the ethics code.
The push comes amid a broader debate in the accounting profession about whether PE investment is good or bad for the industry.
Supporters argue outside capital allows firms to invest in technology and talent in ways that traditional partnership structures can’t support. Critics worry that investors focused on returns will inevitably conflict with auditors whose job is to deliver independent, objective opinions.
Read the State Board of Accountancy’s letter below:
