The Ethics of Alternative Practice Structures in the Accounting Profession

Elizabeth Pittelkow Kittner CFO and Managing Director, Leelyn Smith LLC
Exploring Ethics in Business & Finance Today

Ownership models within the accounting profession have evolved over the past several years, specifically with private equity (PE) investment increasingly sought by growth-minded firms. According to a May 2025 Wall Street Journal (WSJ) article, since 2021, roughly two dozen of the nation’s 100 largest accounting firms have either sold an ownership stake to PE investors or have been acquired by firms that have. As interest grows in the alternative practice structures that have emerged as a result of PE deals, ethics will become increasingly important for firms to consider.

NAVIGATING ALTERNATIVE PRACTICE STRUCTURES

Importantly, the AICPA and several state boards of accountancy allow alternative practice structures provided they comply with independence, governance, and public interest rules from a combination of regulatory bodies, including the AICPA, individual states, United States Securities and Exchange Commission, and Public Company Accounting Oversight Board.

The most common alternative practice structure components include:

• Attest services entity and non-attest services entity distinction: Certified public accountants (CPAs) are required to serve as majority owners in the attest entity, and the non-attest entity can be owned by non-CPAs, including PE investors. The CPA ownership of the attest entity must be in line with the AICPA Code of Conduct’s Independence Rule and Form of Organization and Name Rule.
• Administrative services agreement: Through this agreement, a non-attest services entity may provide administrative services (e.g., HR, IT, marketing, or legal) to a CPA-owned attest services entity. The CPA-owned attest services entity is required to be independent in its operations.
• Parent company ownership: A parent company may own several subsidiaries, including a CPA firm performing attestation services, technology consulting, advisory services, etc. The parent company is prohibited from interfering with the professional responsibilities of the CPA firm performing attestation services. The CPA firm must also have control over attest functions and follow independence rules.

Of course, there are several advantages and disadvantages for accounting firms to consider before forming an alternative practice structure.

The advantages may include:

• Increased access to capital and partner compensation: PE investment can bring more funds to accounting firms, which can improve employee benefits, recruiting, marketing, sales efforts, merger and acquisition activity, and technology (especially around firm planning, workflow, and client experience platforms). Additionally, PE investment makes it easier for existing partners to cash out at attractive valuations.
• Improved operational efficiencies: Many PE-backed firms focus on bringing in expertise to streamline processes and reduce unnecessary complexities. For example, PE firms generally have more access to experts in their network to help with growth, allowing firms to scale faster, offer additional services, and become more competitive.
• Better profitability: Based on the nature of PE investments, PE firms are usually focused on rapid transformation and fast changes that improve the profitability and sustainability of the organizations they own. For example, one strategy that PE firms may utilize is purchasing several accounting firms to merge for synergies and growth. Alternatively, PE firms may try to quickly boost the profitability of the accounting firms they have invested in by increasing offshoring as a talent strategy.

In contrast, the disadvantages may include:

• High cost of profitability: PE firms have a reputation for taking a short-term view, often focusing on cutting costs and increasing profits to be able to create a quicker return on investment. This focus could mean reduced staff, deprioritized professional development, or fast operational changes. One concern is that the human element of working with people could be eroded with more attention toward profit goals. According to the May 2025 WSJ article, doctors have reported increased patients and decreased time with patients because of PE ownership; similarly, accounting firms could experience an increase in client workload, leading to less time per client.
• Heightened independence risks: PE ownership could create attest service independence issues. Even if attest firms have their own governance, PE interests could exert pressure on the attest firm based on the relationships of the PE members with the attest firm. For example, consider the influence on an attest firm owned by a parent company that is under PE ownership or influence.
• Weakened firm culture and industry identity: It is important to remember that accounting firms center around integrity, and they exist to improve public trust by holding accountability with clients who require attest services. Therefore, accounting firms with alternative practice structures need to ensure they can still serve the public interest even while their profits may be prioritized by owners and investors. We have evidence that financial motives by PE ownership could negatively impact the perception of attest firms. For instance, in January 2025, a U.S. Senate committee investigation—led by Sens. Chuck Grassley (R-IA) and Sheldon Whitehouse (D-RI)—released a bipartisan report concerning results from PE investment in health care. The investigation revealed that PE-influenced entities were “putting their own profits before patients, leading to health and safety violations, chronic understaffing, and hospital closures.”

MITIGATING ETHICAL RISKS

To help mitigate ethical risks involved with alternative practice structures in the wake of PE investments, firms should consider these key actions:

• Establish effective governance: Firms should put people in roles who will consistently monitor compliance and ethics, especially as they relate to undue influence on attest services. An independent governance structure for the attest firm may be ideal since investors in a non-attest entity could exercise undue influence on an attest entity if they are closely related firms. In other words, CPAs need to retain majority ownership and influence of the attest entity. For guidance, please refer to the AICPA Code of Conduct, Section 1.810.050 under Alternative Practice Structures.
• Implement a strong administrative services agreement: Firms should adopt an administrative services agreement that clarifies the parties involved, defines the roles of non-attest services versus attest services, and describes how non-attest affects the attest services firm operations. This agreement should outline in-scope and out-of-scope services. In-scope services could include functions like HR, IT, marketing, and legal. Out-of-scope services could include any services that may compromise independence or compliance, like non-attest firm client acceptance or issuance of audit reports. The agreement should also include pricing between the entities and have clear documentation of how CPAs will be in full control of attest functions and decisions.
• Communicate openly with stakeholders: Firms should transparently communicate to their people, clients, and the public about their ownership structures and how they have implemented safeguards to maintain objectivity and independence. This communication can be accomplished through meetings with employees and clients, written FAQs, engagement letters, the firm’s website, press releases, and dedicated sessions for employees to discuss the safeguards. These communication opportunities highlight the firm’s commitment to ethics and openness.

As your firm may set its eyes on growth via an alternative practice structure, keeping ethics top of mind will be key to maintaining the public’s trust. Ultimately, the firms that effectively balance profit and protect the public interest will succeed in their growth goals while still preserving the profession’s ethical reputation.

Related Content:

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• Breaking the Partner Model: Will Employee-Owned Firms Become the Norm? As accounting firms struggle to find effective solutions to their talent acquisition and retention challenges, one creative restructuring practice has made its way into the profession—but will it last?