American Institute of CPAs president and CEO Barry Melancon told AICPA members at the Spring Meeting of Council in Washington, D.C., on Monday about the Institute’s efforts to improve audit quality and the peer review process.
The effort comes in anticipation of a report that the Department of Labor is releasing that criticizes the quality of approximately one-third of audits of employee benefit plans (see AICPA Works on Fixing Employee Benefit Plan Audit Problems Ahead of Damaging Report). Last week, the AICPA released a proposed plan for improving audit performance for employee benefit plans, private company financial statements and governmental entities (see AICPA Proposes Six-Point Plan to Improve Audit Performance).
“The fact is that this report, and some facets of this report, will be very critical about the quality of the profession in the area of employee benefit plan auditing,” said Melancon. “The most important thing, I think, is what the profession is doing as it relates to a commitment to enhancing audit quality. We’re making a significant investment of time and talent and dollars as it relates to trying to move that sort of needle, if you will, to focus on areas where we can improve and things that we can control and to collectively provide leadership on the notion of communicating that the profession as a whole needs to move that needle. I think it’s important to understand this isn’t necessarily going to be easy.”
He said that peer review would need to evolve to improve audit quality.
“We have to find a way of enhancing peer reviewers,” said Melancon. “We’re looking at deeper-dive processes in certain regulated or at-risk industries. How do we do a deeper dive, with more robust targeting of risk areas in the process? The DOL report will talk about certain risk areas. How can peer review be responsive to that?”
However, he noted that the AICPA would need to find the right balance to avoid discouraging firms from providing the services. “We can say we want to improve the quality of peer reviewers and we might move that needle, but we can’t move the needle so much that we break the needle, and we have people not interested in peer reviews, because that of course would not achieve the outcome we want,” said Melancon. “Where is the right balance? Where is the judgment in that process? This is going to be tricky. What will improve quality as opposed to turning people off to actually doing the services?”
The AICPA’s Peer Review Board will be issuing exposure drafts about the suggested improvements and Melancon urged people who do employee benefit plan audits, as well as state CPA societies and the like, to respond to them thoughtfully. “The collective wisdom here is probably going to be the most powerful wisdom that we can have,” he said.
He predicted there might be some objections to several of the Peer Review Board’s proposed improvements, such as the collection of Employer Identification Numbers and inventory information from firms to make sure that the peer review process is working effectively. The changes in the peer review process are expected to move firms towards a proactive practice-monitoring system of the future.
The DOL study also calls for greater communication and cooperation on enforcement processes for employee benefit plan audits, Melancon noted, and the AICPA is going to work more with the DOL and state boards of accountancy on this area.
Another crucial area in improving audit quality is the CPA Exam, which the AICPA administers with the National Association of State Boards of Accountancy.
“As part of that process, we invest heavily in examining what’s the right way to test and, every year we’re looking at what are the right things to test,” said Melancon. “How do we really engage in using the exam to create a change management process at colleges and universities and to test as best we can for the CPA?”
The AICPA plans to issue an exposure draft on ways to improve the testing process, including issues such as when the blackout dates are and how long people can take the exam, in cooperation with the state boards.
The AICPA is developing an Advanced Placement course in accounting for high school students. “That has a long-term impact on quality,” said Melancon.
The AICPA is working on adjusting the quality control standards, and considering revisions in auditor reports in the employee benefit plan area. “Are there ways that we can address in a limited-scope audit in the report something that is clear and does not send the wrong message to the firms and the auditors as well as to the users of the financial statements?” said Melancon. “That’s being looked at as well.”
The AICPA is aiming to improve continuing education to improve competencies in the employee benefit plan area. The AICPA recently launched a competency and learning tool that could help improve skills in employee benefit plan audits.
Changes in the Profession
During his wide-ranging presentation, Melancon also touched on a number of other topics of interest to AICPA members.
He noted that the profession is going through a period of massive commodification in which many businesses don’t want to pay for services such as a compilation or audit. However, he pointed to positive trends such as the ability to leverage data analytics to outperform competitors. Services such as sustainability reporting are growing in other parts of the world, although he acknowledged that it has not grown as much in the U.S.
Melancon argued that the accounting profession has evolved into being a crucial part of the overall business ecosystem. “We’re not CPA firms anymore,” he said. “We are CPA-led firms.”
The aging population and workforce have posed a challenge for many CPA firms that have to compete for young talent. To stay relevant, Melancon urged CPA firms to increase their commitment to developing a talent pipeline.
The AICPA has conducted research on what prompts young people to join the accounting profession. Among other things, it found that many young people joined the profession if they have a relative who is also an accountant. Increasingly, though, firms are hiring young people who did not graduate with a degree in accounting. In the five years between 2007 and 2012, the percentage of new hires at accounting firms who were not accounting grads rose from 13 to 24 percent.
Last month, the AICPA launched an online personality quiz at yourtrueCPAtype.com, mainly aimed at young CPAs.
Melancon also urged firms to work on greater diversity. He said the Institute has developed some online tools that firms can use to assess their own level of diversity. The AICPA recently used it to assess its own staff and senior officials and found there is room for improvement. While the profession has made some progress, underrepresented groups feel that the profession is not diverse or inclusive enough.
Melancon encouraged CPAs to move to adopt newer technologies such as cloud computing. Only 10 percent of CPA firms have adopted cloud accounting technology, and it can provide a competitive opportunity for those that have as many small business clients are already using such technologies.
Melancon also sees opportunity for CPAs to provide independent assurance on security and privacy. The AICPA’s Assurance Services Executive Committee is looking at how CPAs can provide such services amid growing concerns about cyber security. In addition, the AICPA is considering a way for CPAs to provide assurance for private company financial information, authenticating businesses to validate that they really are what they say they are online.
Melancon also noted that the AICPA is now offering a computerized exam for the Chartered Global Management Accountant, or CGMA, designation that the AICPA provides in collaboration with the Chartered Institute of Management Accountants.
Last week, the AICPA launched a Not-for-Profit Section for people who work in the nonprofit sector (see AICPA Debuts Not-for-Profit Section). More than 100 people signed up on the first day, according to Melancon.
He also discussed topics such as the Private Company Council, whose outgoing chairman, Billy Atkinson, addressed the Spring Council on Sunday. Melancon agreed with Atkinson that after three years, the PCC is at a critical stage and its work is far from finished in recommending changes in accounting standards for private companies. He urged CPAs to stay diligent in making sure that it retains a role in the standard-setting process.
The AICPA’s lawsuit against the Internal Revenue Service over the IRS’s Annual Filing Season program for voluntary testing and continuing education of tax preparers is slowly working its way through the legal system. In the meantime, the AICPA is working on a legislative proposal for Preparer Tax Identification Numbers and continuing to work on CPA firm mobility across the states. Melancon noted that so far, 25 states have adopted the AICPA’s comprehensive definition of attest.
The AICPA and NASBA are working on a Future of Learning Initiative for CPE standards. The AICPA is also planning to hold mini regional meetings between December 8 and 17 to discuss some of the strategic issues in the profession.
The AICPA’s CPA Powered marketing campaign is showing how CPAs can help businesses. “We are a profession that embraces change,” said Melancon.
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