Paul B.W. Miller and Paul R. Bahnson

(We submitted this column before the nomination of William Donaldson to chair the SEC. We decided to let the column run as is because this appointment confirms what we have written about the profession’s diminished influence.)

In Part 1, our column in the previous issue, we presented our interpretation of a series of political events that began in August 2001 when Harvey Pitt was appointed Securities and Exchange Commission chair and continued as he struggled to find a chairman of the Public Company Accounting Oversight Board.

His first choice, John Biggs, was nixed by the accounting establishment, which apparently used Rep. Michael Oxley, R-Ohio, as their messenger. Pitt abruptly dumped Biggs and pushed through William Webster, only to discover too late that he was spoiled goods.

In closing, we observed that millions of political contributions from accountants have swirled down the drain. For PAC money to work, the recipients must be willing to bend decisions to serve the donors’ special interests.

Because of the profession’s damaged reputation, but even more because of the embarrassment created by the high-profile gaffes of the profession’s hand-picked SEC chair, the Bush administration is unlikely to choose SEC and PCAOB chairs who are establishment-friendly. We don’t even think that advice will be sought from the Final Four or the American Institute of CPAs, despite their past huge political contributions.

As we look beyond this situation to a bigger picture, we see that it has created an unprecedented power vacuum surrounding the regulatory system.

Specifically, auditors have long had tremendous influence over the standard-setting process, as well as the SEC’s enforcement and rule-making activities. This power dates back to the 1930s, when CPA audits were made mandatory for all registrants. And it has continued through auditor representation on and participation with standard-setting bodies.

In the early days, auditors had nearly complete control, but more recently they have yielded substantial power to their corporate clients. Nonetheless, they still managed to remain influential, thus ensuring that generally accepted accounting principles would be "auditor friendly." (The flap over non-audit services showed just how much power they held.) However, this power began slipping almost from the day that Pitt took office, largely because of Enron, but not entirely. By the time he resigned, their power had virtually disappeared.

But, wait, there’s more!

In addition, the previously strong influence of corporate lobbies over legislation, rule-making and enforcement has been seriously diminished by revelations of boardroom winks, nods, blind eyes, backscratching, robbery, pillage and plunder. This seemingly endless string of business and ethical failures has made it unwise for politicians to publicly align themselves with managers’ interests, much less to push their agendas. As a result, just how could Congress or the Financial Accounting Standards Board accommodate preparers’ complaints about proposed changes in financial reporting?

The significance of this political collapse can barely be expressed. For more than 25 years, FASB’s ability to implement true reform has been stifled by power emanating from executive suites. For example, the board’s foray in the 1980s toward a market-value-based conceptual framework was bludgeoned by corporate pressure. Accounting for foreign currency translation was reversed purely because of this lobby. The same is true for pensions, other post-employment benefits, cash flow reporting, combinations, investments, income taxes and so forth. Of course, options accounting is the quintessential example.

This double vacuum of power in the regulatory system has at least three important implications. First, FASB has unprecedented (but not unlimited) freedom to propose and pass major reforms without serious opposition. Of course, preparers and auditors will still criticize proposals, but they won’t easily succeed in stirring either public or congressional support, thus putting the board in a far different position than it has ever been in before.

It has already moved to expand its authority by taking over the vestiges of power held by the AICPA’s Accounting Standards Executive Committee. A big test will come when it debates its October exposure draft proposing new disclosure requirements about stock options. An even bigger test will ensue if the board decides to follow the lead of the International Accounting Standards Board, which published its own November release that labels as inferior the U.S. practice of disclosing the expense and proposes that all employee options be expensed using their market value at the grant date.

Because the IASB is insulated from U.S. threats and because of the vacuum in the U.S. system, there doesn’t seem to be anyone who can exert the kind of pressure that jackhammered FASB in 1995.

Second, just as air rushes into an opened vacuum-sealed bottle, someone will rush into the power vacuum in regulation. It is only a matter of time until someone tries to take the dominant position. We would prefer for the user community to make this move and finally promote its interests in the increased credibility and usefulness of financial statements.

But if users don’t, someone else will. And the one we fear the most is Congress, because of its dismal record in understanding the capital markets and the role of financial reporting. It’s just not equipped to author reporting policies.

We have described a third implication in several previous columns. Although the AICPA leaders’ use of PAC money and political maneuvering over the last 15 years to gain influence may have made them feel sophisticated and powerful, it’s now clear (to us and many others) that their ambitions created our profession’s largest crisis in at least 70 years. Can there be any good reason for keeping the authors of this misbegotten strategy in office?

On the other hand, optimists like us believe that a crisis brings not only danger but also opportunity. We will close by focusing on the latter.

Never before has the general and investing public been as aware of the value of trustworthy auditors and accountants. Never before has there been greater demand for significant financial reporting reform and expansion. Never before has there been a more complete confluence of conditions conducive to true reform.

Specifically, the political demise of preparers and auditors has come precisely at the point in time when there is no SEC chair, no chief accountant and no PCAOB chair. We also see a re-energized FASB with a new, reform-minded chairman, Bob Herz. And, there is probably no more powerful and committed reformer than Sir David Tweedie, the chair of the relatively young but increasingly influential IASB.

In response, we call on our fellow professionals, regardless of position, to adopt a new "spirit of accounting" that truly aims to advance the public interest in more complete and more useful financial reporting. It is time to abandon the thoroughly discredited, self-serving, inward-looking attitudes and practices that have produced one disaster after another. The old era must be closed.

A new dawn is coming. With the right vision, a strong commitment, and the bold courage to take hold of the future, the profession can achieve an incredibly higher level of service, satisfaction and prosperity. On the other hand, if the wrong powers fill the vacuum, we’re in for a long dark night.

Which will happen? It actually depends on all of us. For sure, this is no time to abdicate power back into the hands of leaders who performed so poorly.

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