Question

Research and Discussion Case LO 1-3 Smith & Co., a local Dallas public accounting firm, is incorporated as a professional corporation, with three shareholders, all CPAs. The shareholders have developed a combination of marketing, software, and professional expertise that has allowed them to perform the accounting service of compiling individuals' personal financial statements in an 1-40.

Answer 1

Smith & Co. Case Study:

(a)The following arguments for allowing public accounting firms to sell ownership interests to individuals not in public accounting through incorporation:

1)From the perspective of the public accounting firm, the possibility of liability that is limited to the amount of corporate assets is appealing.

2)Because public accounting firms compete against companies that are allowed to obtain capital in such a manner, they should not be constrained to capital available from accountants and loans.

3)The fact that in this case the CPAs own 51 percent of the stock limits any possible negative effects on service quality which might result from non-accountant involvement.

4)Access to capital is improved and will lead to an efficient allocation of resources within the economy.

5)CPAs compete internationally, and it does not serve this country's interests to limit their ability to obtain capital.

(b)The following arguments might be advanced in favor of the restriction of firm ownership:

1)Keeping the ownership to only those in public accounting ensures that those individuals not in public accounting don’t act in an unethical manner in which the firms CPA’s would have to answer for, and ultimately bear the consequences for as the primary responsibility is supposed to be to the public interest of the shareholder and other investors who rely on the professional performance of the CPA’s decisions as it relates to how individuals invest their money.

2)The professional yet personal nature of the service involved may be affected negatively as shareholders exert pressure on CPAs which negatively affects the quality of their work. Any limits on personal liability may negatively affect those harmed by negligent performance by the firm.

3)Limiting public accounting firms to sole practitioner, partnership and professional corporation status has served the public well over the years and there appear to be only limited advantages to allowing public ownership.

(c)I really don’t think that ownership of public accounting firms should be restricted to only those in public accounting, as it does take a variety of profession to conduct the audit services and operation the organization as a whole. If there are imposed restrictions, it limits the number of employees who could potentially take advantage of the opportunity to become a partner in the firm, which means, those professional employees would probably find employment where they would be welcomed to prosper and advance. If companies are precise in their policies and regulations, than there should not be an anticipation of a conflict of interest to occur in offering ownership to those not in public accounting. I believer doing so would be more so beneficial to the potential growth and development of the firm.