Explore the latest proposed ethics changes impacting alternative practice structures (APS), with a special focus on private equity involvement in the CPA profession. Join Melisa Galasso as she breaks down key definitions, process updates, and compliance requirements from the Professional Ethics Executive Committee’s latest guidance.
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What defines an alternative practice structure (APS) and how private equity fits into the model
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The meaning of “closely aligned” entities and their operational relationships
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New definitions and examples of upstream entities and significant influence
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Step-by-step process for evaluating independence under the proposed rules
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Key prohibitions, principles-based approach, and when safeguards must be applied to maintain independence
Stay ahead of the evolving landscape in the CPA profession with practical, actionable insights.
Proposed Ethics Changes for Alternative Practice Structures: What CPAs Need to Know
Welcome back to the Genuine Learning Blog! Melisa Galasso is here with an important update on a hot topic affecting many CPA firms today: the proposed ethics changes around alternative practice structures (APS), particularly those involving private equity.
Background: Why Now?
In response to the continued evolution of ownership in CPA firms—especially as private equity (PE) and other investors get involved—the Professional Ethics Executive Committee (PEEC) released a new ethics proposal on December 29. The original guidance on APS dates back to the late ’90s and early 2000s, long before private equity became a major player in the field. As a result, there’s been a gap in guidance around what it means to be a firm and how independence is affected when private equity or public companies invest in CPA practices.
What Is an Alternative Practice Structure?
The proposal defines an alternative practice structure as an organization where the firm providing attest services (“the attest firm”) is closely aligned with another public or private entity (the “non-attest entity”) that is partly or wholly owned by outside investors and provides professional services other than attest work.
Typically, a CPA firm splits into two: the attest firm (which must be CPA-owned per state requirements) and the non-attest entity (where outside investors, like PE funds, invest and where services like HR, marketing, IT, and even consulting or tax may reside). These two entities have strong relationships, often with shared branding and significant financial transactions, making them “closely aligned.”
Key Terms: “Closely Aligned” and “Upstream Entities”
“Closely aligned” means a substantial portion of the attest firm’s revenue is paid to the non-attest entity for administrative services, leased staff, office space, and resources. These entities often have the same look and feel to clients and employees.
The concept of “upstream entities” is also vital. These are entities (like PE funds, investment advisors, general partners) with significant influence or control over the non-attest entity.
It’s Not One-Size-Fits-All
Melisa Galasso walks us through various diagrams that illustrate just how flexible APS arrangements can be—sometimes involving PE investors, fund managers, portfolio companies, or public companies doing all kinds of financial work. Despite different structures, the key concern is always how closely the attest firm is related to the non-attest entity and its upstream investors.
Steps to Comply with the Independence Rules
PEEC proposes several steps for members in APS setups:
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Determine Network Relationships: Figure out which entities count as network firms or are part of the network.
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Identify Covered Members: Determine whose roles need independence evaluation.
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Spot Threats to Independence: Identify relationships and circumstances that could create independence threats.
This approach is largely principles-based, but PEEC does outline several outright prohibitions.
When Is Independence Automatically Impaired?
Independence is impaired—no matter what safeguards you apply—when:
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An individual who governs the non-attest entity serves in a key position at an attest client during the engagement or reporting period.
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Attest clients or their leaders have direct or significant equity interests in the non-attest entity.
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The investor controls the attest client, or the client is material to the investor who has significant influence.
If none of these prohibitions are present, firms must conduct a threats-and-safeguards analysis to determine whether additional measures can reduce potential threats to an acceptable level. If not, independence remains impaired.
Why This Matters & What’s Next
This proposal is a must-read for CPAs involved (or interested) in alternative practice structures, especially as private equity continues to reshape the profession. PEEC is requesting comments by April 30, 2026—participation is as easy as sending an email.
