AICPA Code of Professional Conduct · Other Responsibilities and Practices · 505 - Form of Organization and Name

505 - Form of Organization and Name

.01Rule 505—Form of organization and name.A member may practice public accounting only in a form of organization permitted by state law or regulation whose characteristics conform to resolutions of Council.

A member shall not practice public accounting under a firm name that is misleading. Names of one or more past owners may be included in the firm name of a successor organization.

A firm may not designate itself as "Members of the American Institute of Certified Public Accountants" unless all of its owners are members of the Institute.

[As amended January 14, 1992 and October 28, 1997.]

(See Appendix B.)

Interpretations Under Rule 505—Form of Organization and Name

[.02 505-1] [Deleted May 1999]

.03505-2—Application of rules of conduct to members who own a separate business. A member in the practice of public accounting may own an interest in a separate business that performs for clients any of the professional services of accounting, tax, personal financial planning, litigation support services, and those services for which standards are promulgated by bodies designated by Council (see ET section 92.09). If the member, individually or collectively with his or her firm or with members of his or her firm (see ET section 101.11), controls the separate business, the entity and all its owners (including the member) and employees must comply with all of the provisions of the Code of Professional Conduct. For the purpose of applying Rule 101, Independence [ET section 101.01], if such control is present, the separate business would be included in the definition of "member or member's firm" as described in item 4 of that definition (see ET section 101.11). Accordingly, rule 101 [ET section 101.01] and all its interpretations and rulings would apply to the separate business, its owners and employees the same as prescribed in ET section 101.11 for the member's firm and, if violated, the member's independence would be considered to be impaired.

If the member, individually or collectively with his or her firm or with members of his or her firm, does not control the separate business, the provisions of the Code would apply to the member for his or her actions but not apply to the entity, its other owners and employees. For example, the entity could enter into a contingent fee arrangement with an attest client of the member or accept commissions for the referral of products or services to such attest client. [Replaces previous interpretation 505-2, with the same title, March 1993, effective March 31, 1993. Revised, effective December 31, 1998, by the Professional Ethics Executive Committee.]

.04505-3—Application of rule 505 to alternative practice structures. Rule 505, Form of Organization and Name [ET section 505.01], states, "A member may practice public accounting only in a form of organization permitted by state law or regulation whose characteristics conform to resolutions of Council." The Council Resolution (the Resolution) requires, among other things, that a majority of the financial interests in a firm engaged in attest services (as defined therein) be owned by CPAs. In the context of alternative practice structures (APS) in which (1) the majority of the financial interests in the attest firm is owned by CPAs and (2) all or substantially all of the revenues are paid to another entity in return for services and the lease of employees, equipment, and office space, questions have arisen as to the applicability of rule 505 [ET section 505.01].

The overriding focus of the Resolution is that CPAs remain responsible, financially and otherwise, for the attest work performed to protect the public interest. The Resolution contains many requirements that were developed to ensure that responsibility. In addition to the provisions of the Resolution, other requirements of the Code of Professional Conduct and bylaws ensure that responsibility:

  1. Compliance with all aspects of applicable state law or regulation

  2. Enrollment in an AICPA-approved practice monitoring program

  3. Membership in the SEC practice section if the attest work is for SEC clients (as defined by Council)

  4. Compliance with the independence rules prescribed by Rule 101, Independence [ET section 101.01]

  5. Compliance with applicable standards promulgated by Council-designated bodies (Rule 202, Compliance With Standards [ET section 202.01]) and all other provisions of the Code, including ET section 91, Applicability

Taken in the context of all the above-mentioned safeguards of the public interest, if the CPAs who own the attest firm remain financially responsible, under applicable state law or regulation, the member is considered to be in compliance with the financial interests provision of the Resolution.

[Effective December 31, 1998.]


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