by Eli Mason
The American Institute of CPAs recently launched an extensive program to promote financial literacy.
This is a commendable effort and should apply to all consumers and producers of financial statements, from shareholders of Fortune 500 companies to local bankers in towns and villages throughout the U.S., and to Aunt Millie in Cherokee, Iowa.
As a shareowner in General Electric Co., I received a weighty, 118-page annual report, which included Management Discussion & Analysis starting at page 44 and ending at page 69. The 25-page MD&A is indeed a lengthy discussion. The GE report is awaiting a one week’s vacation for me to read, digest and hopefully comprehend.
The financial literacy effort reminds me of events that occurred in the latter part of 1968. At the time, I was a vice president and member of the executive committee of the American Institute of Certified Public Accountants. The president of the institute (now called chairman) was Marvin Stone, an intelligent, witty and effective presiding officer. At a meeting of the executive committee held on Aug. 20, 1968, the agenda items were completed early in the afternoon and president Stone, with a gleam in his eye, said, “Would anyone like to say something?”
For several moments, the members chuckled — at the time the executive committee included three future AICPA chairmen, Walter Oliphant, Ralph Kent and Samuel Derieux.
But it was me who interrupted the happy atmosphere and stated: “The accounting profession is at a most crucial point in history. There is a gulf of misunderstanding between the profession and segments of the investing public, the credit-granting public, the financial press and, indeed, within the profession itself. This confusion has recently been amplified by the rash of lawsuits and the circumstances surrounding the Continental Vending case.
“It is a foregone conclusion that suits against accounting firms will increase, and unless the profession takes measures to advise all concerned of the limitations of its ability to perform or, more specifically, of the incorrectness of the public’s concept of the accountant’s role in financial reporting, the result will be a deterioration of the public confidence in our profession.
“Whether we like it or not, millions of readers of financial reports directly associate the CPA with the financial statements. Their eye travels from the name of the accounting firm to the figures in the statements. They pay little attention to the accountant’s opinion, which all agree is dull reading. Many of them believe that (1) the accountants prepared the statements, (2) that the statements are highly accurate, and (3) if, for any reason, including management malfeasance, the statements are inaccurate, the accountants should be held responsible.
“Many of us believe that (1) we did not prepare the statements, (2) the statements are a fair presentation involving areas of judgment and reliance on company representations, and (3) that we should not be responsible per se for ‘inaccuracies,’ some of which may have been caused by corporate malfeasance and were not due to negligence on the part of the accountant.
“The profession in the past has stated that we report on and express an opinion on financial statements prepared by the company, that accounting is an art, not a science, and allows for judgment areas, that we are not sleuths to uncover fraudulent acts and that we cannot be guarantors of financial statements — all this to little avail. We are still being sued and pursued.
“The public is not getting what it wants. It wants someone to affirm the accuracy of financial statements so that they can rely on the financial representations, and they want that someone to suffer the consequences of an incorrect affirmation.
“To some extent, the profession has itself to blame, because the reliance on the report of the independent accountant has become a seal of approval in modern American business. Naturally, we did not discourage this reliance; indeed, we prospered by it. Consider the fact that no company could file a full registration statement with the Securities and Exchange Commission without an accountant’s report.
Consider the fact that millions of annual reports would be unacceptable without the accountant’s opinion. Consider the fact that countless business transactions would be impossible to conclude without the accountant’s report. Despite this awesome status, we may be in a precarious position today. For if the various publics that we serve, and this includes the financial community, the financial press, the investing public and the Securites and Exchange Commission, are not pleased with our concept of our role in the business structure, then they may seek to change that concept and the function which it embodies.
“It is far better to meet the issue head on at this time. If the public thinks we are doing something we are not doing, they should be told. If the public thinks that we should be doing something we cannot do, they should be told. If we do not state in plain and simple language the nature and limitations of our ability to report on financial statements, someone may advise us in precise terms what they expect of the accounting profession.
“In conclusion, we must be sensitive to the public need and adopt an attitude which is neither defensive nor offensive, but cooperative. The examination of our role in the business community is one of the most important tasks confronting the profession today.”
My comments were met with deadening silence.
The members looked at me and I looked to Marvin Stone hoping that he would say something funny. Instead, Marvin said, “Eli, would you please put your comments in writing and send it to members of the executive committee?” Which I did.
After he had read my written statement, Marvin wrote to me and said, “The problems you raise are so basic, so enormous, that one’s first reaction is to lie down until the problems go away. Your perception and willingness to speak out on these critical matters perform an invaluable service to the profession. So long as you and others like you continue to bring these problems out of the closet, we simply will be unable to ignore those problems.”
To my surprise, I received a letter from John Lawler, the then-secretary of the AICPA, stating that a meeting was to be held including managing partners of the Big Eight firms, the managing partners of the next level of firms, and the executive committee, as well as institute staff.
Lawler was a respected individual, a former editor of the Journal of Accountancy, with a pleasing baritone voice. He welcomed the attendees and stated that the purpose of the meeting was to discuss my memo and said, “Would anyone care to start the discussion?”
There were smiles but no volunteers. So, I spoke up and said, “Gentlemen, unless we treat with this problem — the gulf of misunderstanding between the public and the profession — we may regret our inaction.” Surprisingly, the meeting lasted two hours and the attendees voiced their thoughts, including some candid comments.
Financial literacy must start with the producers and not with the consumers. How can you teach Aunt Millie, of Cherokee, Iowa, to comprehend the GE report? Perhaps GE should issue two annual reports, one for Merrill Lynch and one for Aunt Millie. As a certified public accountant whose hair has turned gray, I recently received a copy of the 10-K of a prominent national bank, and it took lots of muscle to lift it.
My high school English teacher, Miss Knapp, repeatedly stated, “When you write, it should be terse, pithy and sparkle.”
Producers of financial reports, take note.
Eli Mason is a past president of the New York State Society of CPAs, a past chairman of the New York State Board for Public Accountancy, and a past vice president of the American Institute of CPAs, as well as the recipient of the American Accounting Association’s Exemplar Award. He recently took time off to write his book, “Conscience of the Profession.”
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