ET Section 505 - Form of Organization and Name 


    .01 Rule 505—Form of organization and name.

    A member may practice public accounting only in a form of organization permitted by 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 CPA owners are members of the Institute.

    [As amended January 14, 1992 and October 28, 1997. Revised May 15, 2000.]

    (See Appendix B.)

    Interpretations Under Rule 505

    —Form of Organization and Name

    [.02] [505-1]—[Deleted]

    .03 505-2—Application of rules of conduct to members who own a separate business.

    A member in public practice 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 paragraph .06 of section 92, Definitions). If the member, individually or collectively with his or her firm or with members of his or her firm controls the separate business (as defined in Financial Accounting Standards Board Accounting Standards Codification 810, Consolidation), 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 example, in applying Rule 503, Commissions and Referral Fees [ET section 503.01], if one or more members individually or collectively can control the separate business, such business would be subject to rule 503 [ET section 503.01], its interpretations and rulings. With respect to an attest client, rule 101 [ET section 101.01] and all its interpretations and rulings would apply to the separate business, its owners and employees.

    If the member, individually or collectively with his or her firm or 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 No. 505-2, with the same title, March 1993, effective March 31, 1993. Revised, effective December 31, 1998, by the Professional Ethics Executive Committee. Revised, July 2002, to reflect conforming changes necessary due to the revision of Interpretation No. 101-1. Revised, effective April 30, 2003, by the Professional Ethics Executive Committee. Revised effective May 31, 2011. Revised March 2013, revisions effective May 31, 2013.]

    .04 505-3—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 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:

    Compliance with all aspects of applicable state law or regulation

    Enrollment in an AICPA-approved practice monitoring program

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

    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 law or regulation, the member is considered to be in compliance with the financial interests provision of the Resolution.

    [Effective December 31, 1998. Revised, July 2002, to reflect conforming changes necessary due to the revision of interpretation 101-1. Revised, June 2009.]

    .05 505-4—Misleading Firm Names

    Rule 505 [sec. 505 par. .01] prohibits a member from practicing public accounting under a firm name that is misleading. A firm name would be considered misleading if the name contains any representation that would be likely to cause a reasonable person to misunderstand, or be confused about, the legal form of the firm or who the owners or members of the firm are, such as a reference to a type of organization or an abbreviation thereof that does not accurately reflect the form under which the firm is organized.

    In addition, the member should consider the rules and regulations of his or her state board(s) of accountancy concerning misleading firm names that may be more restrictive than the requirements contained in this ethics interpretation.

    [Effective August 31, 2012, by the Professional Ethics Executive Committee.]

    .06 505-5—Common Network Brand in Firm Name

    Firms within a network sometimes share the use of a common brand or share common initials as part of the firm name. The sharing of a common brand name or common initials of a network as part of the member’s firm name would not be considered misleading, provided the firm is a network firm, as defined in paragraph .24 of ET section 92, Definitions.

    The sharing of a common brand name or common initials of a network as the entire name of the member’s firm would not be considered misleading, provided the firm is a network firm, as defined in paragraph .24 of ET section 92, and shares one or more of the following characteristics with other firms in the network:

    • Common control (as defined in Financial Accounting Standards Board Accounting Standards Codification 810, Consolidation) among the firms through ownership, management, or other means
    • Profits or costs, excluding costs of operating the network; costs of developing audit methodologies, manuals, and training courses; and other costs that are immaterial to the firm
    • Common business strategy that involves ongoing collaboration amongst the firms whereby the firms are responsible for implementing the network’s strategy and are held accountable for performance pursuant to that strategy
    • Significant part of professional resources
    • Common quality control policies and procedures that firms are required to implement and that are monitored by the network

    Members should refer to Interpretation No. 101-17, “Networks and Network Firms,” under Rule 101, Independence [ET sec. 101 par. .19 ], for independence requirements applicable to network firms.

    [Effective August 31, 2012, by the Professional Ethics Executive Committee.]




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