Bureau of Competition 

Michael Bloom 

Assistant Director for Policy & Coordination 

Direct Dial 

(202) 326-2475 

Kelly Hnatt 

UNITED STATES OF AMERICA 

FEDERAL TRADE COMMISSION 

WASHINGTON, D.C. 20580 

APR - 9 2010 

Willkie Farr & Gallagher LLP 

787 Seventh Ave. 

New York, NY 10019-6069 

Dear Ms. Hnatt: 

This letter responds to your request for a staff Advisory Opinion concerning the law 

enforcement intentions of the Federal Trade Commission's ("FTC" or the "Commission") 

Bureau of Competition ("BC") with respect to the American Institute of Certified Public 

Accountants' ("AICPA") proposed expansion of its "independence rule."t For the reasons 

discussed below, FTC staffhas no present intention to recommend to the FTC that it challenge 

adoption of the expanded independence rule as it has been described to staff. This present 

intention relies entirely on a review of the written materials you have provided to FTC staff, 

other representations you have made, and an interview with Securities and Exchange 

Commission ("SEC") officials to whom you directed FTC staff. Should there be information 

that we are unaware of that qualifies, modifies, or contradicts any of this information or calls in 

to question the conclusions we have drawn from it, or should the independence rule or its 

implementation change in the future, we may change our law enforcement recommendation 

accordingly. 

Significantly, we cannot conclude, on the facts before us, that competitive concerns with 

respect to AICP A's expansion of its independence rule can be wholly ruled out. Application of 

the expanded independence rule could, at least in principle, produce anticompetitive effects in 

some geographic markets, and facts necessary to evaluate that possibility are lacking. 

Nonetheless, we find that the aggregate benefits of the independence rule expansion are likely to 

be substantial, while the anticompetitive consequences, if any, are speculative and likely to be 

localized. Thus, our present intention is not to recommend a challenge to the expansion of the 

independence rule; however, we will be attentive to any customer complaints to the effect that 

implementation of the expanded rule by a specific AICP A-member network has 

anticompetitively limited available supply of accounting services or otherwise caused 

anti competitive outcomes. Ifwe receive well-founded complaints of that kind, they could result 

in our recommendation to the Commission to challenge the lawfulness of specific AICP Amember networks or our reconsideration of our decision not to recommend that the Commission 

challenge the expanded AICP A independence rule. 

1. Letter from Kelly M. Hnatt to Donald S. Clark requesting an FTC staff Advisory Opinion 

(April 2, 2010). ("Hnatt Letter") 
Summary of Representations and Written Materials 

Based on the representations you have made and the written materials you have provided, 

we understand the following to be accurate: 

• AICPA is a national, professional organization of certified public accountants, with 

approximately 350,000 members.2 Nearly forty percent of AICPA's members perform 

audit services for clients. 3 Membership in AICPA is voluntary.4 

• AICP A has developed a Code of Professional Conduct ("Code") that governs all AICP A 

members.5 The Code is interpreted and enforced by AICPA's Professional Ethics 

Executive Committee ("PEEC"t A member's violation of the Code may result in 

expulsion from the organization.? 

• The Code addresses various ethics principles relevant to the accounting profession, 

including: independence, integrity, and objectivity; compliance with applicable 

standards; responsibilities to clients; and other matters affecting the reputation of the 

profession. 8 

• Some of AICPA's members have formed "networks.,,9 A network is a collaborative 

enterprise that, among other things, can assist small network member-firms to achieve 

some efficiencies of size and scope. 10 

• Accounting networks exist in a variety of forms. 11 PEEC defines a network as an 

association of entities that includes one or more firms that cooperate for the purpose of 

enhancing the firms' capabilities to provide professional services and whose members 

possess one or more of the following characteristics: common brand name; common 

2. Hnatt Letter at 2. 

3. Id. 

4. Id. 

5. Id. 

6. Id. 

7. Id. 

8. Id. 

9. Id. at 4. 

10. Id. 

II. Id. 

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control; sharing of profits or costs; common business strategy; the sharing of significant 

professional resources; and common quality control policies and procedures. 12 The 

extent of economic integration across accounting networks can vary significantly. 13 

• The business basis for the formation of networks is to enable AICP A members to 

compete more effectively by enhancing their marketing efforts and allowing them to gain 

access to new markets; improving the quality and efficiency of services by leveraging the 

professional skills of other firms; and providing a referral network for clients that need 

non-attest services that their auditors cannot provide. 14 The formation of networks 

permits smaller and medium-sized firms to compete for the business of larger 

companies. 15 This business is currently dominated by the "Big Four" accounting firms. 16 

• Under AICPA's Code, members are obligated to adhere to "independence" standards. 1? 

Independence has two components: independence of mind (also referred to as 

independence in fact), and independence in appearance. 18 The purpose of the 

independence standard is to assure that a CPA performing an audit or other attest service 

acts with objectivity and professional skepticism when performing that service. 

Independence is therefore fundamental to the reliability of auditors' reports and to 

investors' confidence in financial statements. 19 Reliable financial statements reduce 

investor, prospective creditor, and others' risk with respect to evaluating the financial 

health of business entities.20 

• AICPA members perform many professional services, including audit services. 21 An 

audit of a client's financial statements concludes with an opinion by the auditor on the 

fairness of the client's financial statements, in all material respects, with regard to the 

client's financial position, results of operations, and cash flows. 22 The auditor opines 

12. PEEC Interpretation No. 101-17, "Networks and Network Firms." See Exhibit D. 

13. Hnatt Letter at 4. 

14. Id. at 4. 

15. Id. 

16. Id. 

17. Id. at 2. 

18. Id. at 3. 

19. Id. 

20. Id. at 9. 

21. Id. at 4. 

22. Id. at 3. 

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whether the client's financial statements are presented in conformity with generally 

accepted accounting principles ("GAAP,,).23 Audits are conducted in accordance with 

generally accepted auditing standards ("GAAS,,).24 

• AICPA members also perform non-audit services.25 Non-audit services may include, 

among other things, performing management functions; making management decisions; 

preparing source documents used to generate the client's financial statements; 

authorizing, executing, or consummating transactions; exercising authority on behalf of 

the client; having custody of client assets; serving as a director or officer of the client; 

being a lender to the client; supervising client employees; and performing tax, 

bookkeeping, payroll, or consulting services.26 

• Adherence to AICPA's current independence rules generally requires that.a member 

performing audit services for a given client not have performed certain non-audit services 

for that client during the period covered by the financial statements and during the period 

of the professional engagement (e.g., when performing the audit).27 Prohibited non-audit 

services include performing management functions or making management decisions for 

the client; preparation or review of client financial statements or other documents that 

would be inputs to a subsequent audit; authorizing, executing, or consummating 

transactions on behalf of the client; exercising authority on behalf of the client; having 

custody of client assets; serving as a director or officer of the client; being a non-financial 

institution lender to the client; and supervising client employees.28 

• In general, a failure of independence due to an auditor's furnishing prohibited non-audit 

services to a client during the period covered by the financial statement or during the 

audit cannot be purged.29 If, however, a failure of independence would result solely from 

a prospective auditor having a financial interest in a client (e.g., where the prospective 

auditor is an investor in or creditor of the client), the independence rule would be 

satisfied if the prospective auditor severed all financial interests in the client prior to 

commencement of the audit. 30 

23. Id. at 3. 

24. Id. 

25. Id. at 4. 

26. Id. 

27. Id. at 6. 

28. Id. at 6-7. 

29. Id. at 8. 

30. Id. 

4 
• Provided that the auditor complies with certain general requirements, the auditor may, 

under AICPA's independence rule, provide other non-audit services such as performing 

tax, bookkeeping, payroll, or consulting?! 

• AICP A intends to amend its Code so as to apply the independence rule to member 

networks. 32 As amended, the Code would require that each member firm of an 

accounting network be independent of financial statement audit and review clients of the 

other firms in the network.33 Thus, a network member may provide audit or review 

services for a client only insofar as other network members are not providing, and did not 

provide, during the period covering the financial statements, related, prohibited non-audit 

services for that client; and may provide prohibited non-audit services for a client only 

insofar as no other network member is then providing audit or review services. 34 As 

amended, the independence rule is intended to address an ethical issue arising from the 

increasing prevalence of accounting networks, ensuring the public that a firm providing 

an audit or review of a client's financial statements will make required judgments in an 

objective manner without regard to how its judgments will affect the other network 

members. 35 

• The proposed amended AICP A independence rule does not restrict any network member 

from competing with any other network member in the offering of audit or review 

services where no network member is providing, or recently has provided related, 

prohibited non-audit services to the same client; nor does it restrict any network member 

from competing with any other member in the offering of non-audit services where no 

network member is then providing audit or review services. 36 

• Before taking on an audit or review engagement, a network member would have to learn 

from other network members or the prospective client whether any other network 

member has a prohibited relationship with the prospective client. 37 Thus, prior to 

providing audit or review services to a new client, a network member would have to 

31. Id. at 7-8. 

32. Id. at 5. 

33. Id. 

34. Id. "Related prohibited non-audit services" refers to prohibited non-audit services upon 

which a provider of audit services would or might have to rely in the provision of audit services 

in accordance with GAAS. 

35. Id. 

36. Id. at 6-8. 

37. !d. at 8. 

5 
detennine that no other network member was providing, or had recently provided related, 

prohibited non-audit services to that client; and prior to providing non-audit services to a 

new client, a network member would have to detennine whether any other member was 

then providing audit or review services to that client. 38 

• AICP A intends to issue guidance to its members urging them, in evaluating 

independence, to seek needed infonnation from prospective clients to the greatest extent 

reasonably possible, and, where needed infonnation can be obtained only from other 

network finns, to ask only whether the other network finns had potentially prohibited 

relationships with, or provided potentially prohibited non-audit services to, the 

prospective client. 39 The rule would not require the exchange among potentially 

competing finns of any infonnation regarding a network member's bids, bidding 

strategy, capacity to bid, pricing or pricing plans, or other competitively sensitive 

infonnation. 40 

• The SEC requires that publicly-traded companies file audited financial statements with 

the agency that have been prepared by an accounting finn that adheres to SEC 

independence rules. 41 The SEC also requires that broker/dealers submit audited 

statements prepared by accounting finns that adhere to the SEC independence rules, 

regardless of whether the broker/dealer is publicly traded. 42 

• The SEC has detennined that, to be effective, the audits filed with it must be independent 

both in fact and in appearance. 43 The SEC independence rule thus extends to all offices 

of an individual accounting finn, any subordinate units, and any affiliated entities, 

including any joint ventures or networks, including networks as defined by PEEC, to 

which the accounting finn may belong.44 

• AICP A seeks an opinion from FTC staff as to whether the application of the 

independence rule to networks raises significant antitrust concerns or would result in a 

38. Id. 

39. Id. See also Exhibit F to Hnatt Letter. 

40. Id. See also Exhibit F to Hnatt Letter. 

41. Interview with SEC officials, January 20,2010. 

42. Id. 

43. Id. 

44. Id. 

6 
staff recommendation to the Commission that the application of the rule in such a manner 

be challenged.45 

Bureau of Competition Analysis 

The amended Code is aimed at the preservation of independence in the performance of 

audit services by a network member. The antitrust risks, if any, that may arise from blanket 

implementation of the amended Code across all AICP A member networks, regardless of the 

degree of integration or limits on competition that may be inherent in any given individual 

network, concern the degree to which the rule potentially further limits competition at the 

margm. 

AICPA members are already subject to AICPA's independence rule on an individual 

basis. They are also subject to compliance with the SEC's independence rule, both individually 

and as part of any networks, to the extent they perform audits for publically-traded companies 

and for broker/dealers that will be filed with the SEC. Thus, were AICPA to amend its 

independence rule as proposed, the impact would be felt on accounting services for nonpublicly-traded businesses and other entities that are not required to file audited financial 

statements with the SEC. 

For these firms, application of the rule may reduce the number of AICP A members that 

would be able to bid for contemporaneous audit and prohibited non-audit work. Specifically, 

once the AICPA independence rule is expanded to cover networks, the individual members of 

that network may not compete for the audit work of a business during the time surrounding the 

provision of prohibited non-audit services to that same business by any single member of the 

network; nor may the individual members compete for the prohibited non-audit work of a 

business while any single member of the network is engaged to perform audit work for that same 

business. Such a situation could potentially significantly reduce competition in localized 

geographic markets in which there are few, if any, accounting competitors outside of the AICP A 

network. As a result, some local privately-held businesses seeking both audit and prohibited 

non-audit services could face higher bids because of the expanded independence rule. 

As a general matter, the FTC recognizes that collaboration among competitors can be 

pro competitive when it results in cost-saving efficiencies or creates a new competitor. 

Collaboration, however, also may be anticompetitive if it eliminates one or more competitors or 

reduces incentives to compete. The joint FTCIDOJ Antitrust Guidelines for Collaborations 

Among Competitors provide the analytical framework for determining the net competitive 

effects of any given joint venture.46 

45. Hnatt Letter at 1. 

46. See FTCIDOJ, Antitrust Guidelines for Collaboration Among Competitors (April 2000). 

Specifically, except where an agreement among competitors is per se unlawful, the agencies 

apply the "rule of reason" to assess competitor collaborations. In so doing, the agencies weigh 

any procompetitive effects of the collaboration against the potential for competitive harm. The 

agencies generally will not challenge collaborations where the net effect is competitively benign 

or procompetitive. Significantly, the Guidelines do not attempt to divide all collaborations into 

7 
Even assuming that existing AICP A member networks satisfy the "rule of reason" test, 

implementation of the expanded independence rule may, at the margin, tip the balance in the 

other direction. On the facts provided, however, it is not possible to make that determination for 

all potentially affected geographic markets. The analysis would depend on the number and size 

distribution of market participants, as well as on some measure of any integrative efficiencies 

appertaining to any given network of AICPA members. 

Nonetheless, the potential for net competitive harm arising from expanding the AICP A 

independence rule to AICP A networks appears, based on the information presently available, to 

be small.47 Audits of publically-traded companies are already covered by the stricter SEC 

independence rule. In addition, significant benefits to the capital markets, even respecting 

investors in non-publicly-traded businesses, can be expected to arise from AICPA's adoption of 

an expanded independence rule to cover networks. Moreover, additional procompetitive benefits 

can be expected to the extent that AICP A networks are better able to compete against larger 

accounting firms for the business of larger privately-held clients. By contrast, potential 

anticompetitive consequences are speculative, occurring, if at all, most likely in localized 

geographic markets where there may be only a limited number of accounting firms available to 

compete for the accounting work of local businesses. 

Network members seeking to comply with the expanded independence rule will need to 

obtain select information about recent and current engagements and activities of other network 

procompetitive or anticompetitive lists. Rather, 

the Agencies hope to assist businesses in assessing whether the Agencies will challenge a 

competitor collaboration or any of the agreements of which it is comprised. However, 

these Guidelines cannot remove judgment and discretion in antitrust law enforcement. 

The Agencies evaluate each case in light of its own facts and apply the analytical 

framework set forth in these Guidelines reasonable and flexibly. 

Id. at 2 (citations omitted). 

47. In California Dental Ass'n v. F.T.C, 526 u.S. 756 (1999), the Court observed that, in the 

context of professional services where members of the public may not possess the specialized 

knowledge to evaluate the quality of provided services, the likelihood of net anti competitive 

effects arising from ethical codes that otherwise restrict competition is not "comparably 

obvious" relative to restrictions in non-professional services situations. Id. at 771-772. For this 

reason, the Court held that a "quick look" rule-of-reason analysis is inappropriate in these 

instances. Id. at 780-781. On the one hand, the Court's opinion suggests that AICPA's 

expansion of its independence rule to cover networks may be a proper stand-in for lenders' 

(assumed) inability to evaluate the quality of an audit of a non-publicly-traded business, thus 

enhancing economic value. On the other hand, the Court's precise holding highlights the 

difficulty presented here, namely our inability to do more than render a "quick look" judgment 

about the likely competitive effects of the expansion of the independence rule, given the 

unavailability of facts required to assess the likely impact of the expanded independence rule on 

the lawfulness of particular networks in specific localized geographic markets. 

8 
members, and they might seek this information from other network members that are their 

potential competitors. The exchange among competitors of some kinds of information could 

itself result in anti competitive outcomes in some markets, for example by reducing accounting 

firms' uncertainty as to the capacity or interest of other network members in competing for new 

clients. The reduction of uncertainty as to potential rivals' bidding intentions may, where only 

one or a few likely viable competitors remain, permit firms to increase bid prices for affected 

accounting services. The exchange of certain kinds of information among competitors may 

cause anti competitive outcomes through other mechanisms as well. 

Compliance with the expanded independence rule, however, will not require network 

members to seek from other network members any information about current or future capacity 

or bidding intentions. Moreover, in most instances a network member will be able to obtain the 

limited information needed to determine whether it may provide audit or prohibited non-audit 

services to a prospective client from the prospective client, with little or no risk to competition. 

AICP A intends to encourage the networks to do so, further reducing any risk of information 

sharing among network members that harms competition. 

On balance, FTC staff has concluded that, although, in principle, there may be instances 

in which the expansion of the AICP A independence rule to networks reduces competition, the 

likelihood that the expanded rule would significantly reduce competition does not appear to be 

high. By contrast, the countervailing benefits of that expansion-in enabling small- and mediumsized accounting firms to increase their effective size and scope to compete for additional 

accounting work while ensuring the public that their audit work is untainted by auditor selfinterest-appear substantial. On that basis, Commission staff has no present intention to 

recommend an enforcement action were AICP A to adopt the expanded rule. Having reached this 

conclusion, however, we note that its basis rests on incomplete facts respecting the specific 

geographic markets in which AICPA member networks do business. Therefore, although we do 

not at present intend to pursue further investigation, we also do not intend this Advisory Opinion 

to be construed as a blanket assessment that the expansion of the rule to networks could not raise 

competition concerns sufficiently great to induce future agency action. If more complete facts 

about individual networks come to light, or if the FTC receives specific complaints about higher 

bidding respecting individual AICPA networks because of the implementation of the expanded 

independence rule, our conclusion may change.48 

Conclusion 

Based on the above, the Bureau does not intend to recommend a law enforcement action 

to the FTC at this time. 

This letter expresses the current opinion of FTC staff, and is predicated on the accuracy 

of the information that you have provided to us. In accordance with normal practice, BC 

reserves the right to reconsider the questions involved and, with notice to the requesting party, to 

rescind the opinion if actual conduct in compliance with the Code proves to be anticompetitive 

48. Additional facts, in this case, does not mean "changed" facts. It should also be 

understood that if known facts change, our conclusion could similarly be revised. 

9 
in any purpose or effect or if facts change significantly in the future such that it would be in the 

public interest to bring an enforcement action. 

The views of FTC staff contained herein are provided as authorized by Rule 1.1 (b) of the 

Commission's Rules of Practice, 16 C.F.R. § 1.1 (b). Under Commission Rule 1.3( c), 16 c.F.R. § 

1.3(c), the FTC is not bound by this staff opinion. 

Assistant Director for Policy & Coordination 

Bureau of Competition 

Federal Trade Commission 

600 Pennsylvania Ave. N.W. 

Washington, D.C. 20580 

10