Recognized for his leadership within the accounting profession, James Castellano served as chairman of the American Institute of CPAs' board of directors for 2001-02, as the industry coped with the fallout from the Enron accounting scandal. He remains chairman of the AICPA Private Company Financial Reporting Task Force and is an ex-officio member of the AICPA Council.
In the summer of 2004, Castellano was elected chairman of RubinBrown's board, after serving for many years as the firm's managing partner. Founded in St. Louis in 1952, RubinBrown employs a staff of more than 270 and was ranked No. 58 on Accounting Today's 2005 list of Top 100 Firms, with revenues of $31.5 million. In October 2004, he was named chairman of the board of directors for Baker Tilly International, a network of 116 independent accountancy and business service firms in 67 countries.
In an interview with WebCPA, Castellano spoke about the work he is continuing to advance with the AICPA, the changes to the profession since the implementation of the Sarbanes-Oxley Act of 2002, and the importance of larger firms having access to international resources.
While serving as chairman of the AICPA, you talked about a need to modernize the accounting model, moving beyond basic financial statements to make reports timelier and auditing more continuous.
Three years later, is the industry any closer to realizing a better model, and how has the age of transparency impacted what you said as chairperson?
JC: The Sarbanes-Oxley Act actually advanced the concept of continuous auditing faster than I imagined would be possible. My testimony before Sen. Paul Sarbanes and the Senate Banking Committee included a call for auditing the controls of public companies and modernizing the financial reporting model. The work that is being done today by public companies and their external auditors to comply with the complex requirements of Section 404 of the Sarbanes-Oxley Act is essentially continuous auditing.
However, progress on modernizing the accounting model to improve the relevance of information reported is lagging somewhat. Significant work is still being done on the enhanced business reporting model.
You serve as chairperson of the AICPA Private Company Financial Reporting Task Force, and an update is expected at Fall Council on progress toward developing GAAP for private companies.
What issues have spurred the major debates in discussions?
JC: The financial reporting model is clearly focused on the needs of public company stakeholders. The move towards fair value accounting is one concept that is important to public company stakeholders. However, fair value accounting is of little, if any, relevance to stakeholders of private companies. The users of private company financial reports are more interested in stewardship and accountability, rather than valuation. The Financial Accounting Standards Board is faced with increasingly difficult challenges to promulgate financial accounting standards that are relevant to both public and private company stakeholders.
If such principles are to be adopted, I believe you've said you favor that they be "market-driven." Can you explain why?
JC: I believe the users of private company financial reports will be pleased to accept financial statements prepared in accordance with generally accepted accounting principles designed for the distinctly different needs of private companies. The extensive research conducted by our task force confirms this belief. Those private companies that need to report on public company GAAP will do so at their stakeholders' request. But most private companies, I believe, will be pleased to report under GAAP for private companies, as long as such accounting standards are recognized in the marketplace as of equal quality to accounting standards for public companies. This is essential to the success of private company financial reporting.
As a super-regional firm in the Midwest, is RubinBrown seeing a significant amount of work evolving out of Sarbanes-Oxley, especially with regard to audits of public companies and Section 404 work?
JC: Many super-regional or major firms are experiencing unprecedented growth. A new market has opened to these firms because of Sarbanes-Oxley. Many private companies, nonprofit and public sector organizations and small public companies are choosing major firms because they more clearly fit their profile today. In addition, Sarbanes-Oxley has opened a new market to the major firms. Public companies that would, in the past, always turn to their external auditors for many non-audit services, now, by choice or by law, are choosing to engage major firms for tax, internal audit, valuation services, qualified plan audit services, merger and acquisition, and many other services. Our revenues increased 26.4 percent in the past fiscal year without mergers. This growth was driven principally by the transformation that has taken place in the accounting profession.
It seems like every day firms are sending out press releases about their new practice offerings. Are you seeing changes to the business model for larger accounting firms?
JC: The business model for most firms is set; the international firms are focused on auditing public companies, and firms that serve private companies are continuing to develop their capabilities to provide multi-disciplinary services.
You're nearly a third of the way through a three-year term as chairman of Baker Tilly International's board of directors. Do you see membership in international associations taking on a more important role for accounting firms? What other memberships are important?
JC: International resources are of critical importance to major firms today. The displacement of substantial private companies has created enormous opportunities for the major firms. However, those firms must have high-quality, seamless international service capabilities to attract and retain substantial private companies today. Baker Tilly International is the eighth largest international network in the world. Our independent firms are very well positioned to serve the needs of many organizations that are choosing to be served by major firms like those comprising the Baker Tilly network.
Other memberships of importance to firms and managing partners include the AICPA Audit Quality Centers, the Private Companies Practice Section of the AICPA and, if applicable, the Center for Public Company Audit Firms.
As past chairman of the AICPA's Future Issues Committee, how do you view the No. 1 issue for most firms -- staffing? What do you think are the solutions available to most firms?
JC: This is an issue that rises to the top of the practice management agenda every few years. Sometime in the future, it will fade. Accounting is the most popular major in colleges and universities today. Eventually, the supply will, once again, catch up with the demand. The most successful firms focus on recruiting and retaining talent at all times, not just in periods of high demand. Programs that lead to hiring the most talented professionals available should be on the top of every managing partner's agenda at all times.
As a former managing partner at your firm, what things did you do well day to day, and in planning for the future?
JC: About five years ago, I initiated a succession planning process in our firm, and, as a result, we now have progressed to a third generation of leadership. John Herber is doing an outstanding job as our managing partner, and I am serving as chairman. Generally, strategy development and implementation, effective presentation skills, and new business development are my strengths. There are many things I could do better. Fortunately, my weaknesses are minimized by the extremely talented and diverse team we have at RubinBrown, who compensate for my shortcomings.
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