by Roger Russell

New York - American Institute of CPAs president and chief executive Barry Melancon's call for the profession to return to traditional values in the wake of the recent spate of massive accounting scandals, was met with a generally favorable reception by institute's membership.

In his first public speech since passage of the sweeping Sarbanes-Oxley Act, Melancon called on the accounting profession to take the lead in reform, which, ultimately, would help regain lost credibility in the wake of accounting fraud at such companies as Enron, WorldCom and Adelphia.

"What is needed is not just reform of the accounting laws, it is a rejuvenated accounting culture - both internally, in corporate finance offices, and externally, in audit firms," Melancon said during a forum convened by the Yale Graduate School of Manage-ment, here. "The culture must build upon the profession’s traditional values."

"It is a clarion call to do the right thing," said Robert Israeloff, partner in the Garden City, N.Y.-based firm Israeloff, Trattner & Co. "Such a message probably should have been delivered a lot earlier. It’s been many months since the accounting scandals broke. Here it is September and the image of the CPA has suffered greatly in that period."

Israeloff added, "If the profession does implement and follow through on all of those proposals, it will regain much of its standing."

Melancon identified six key roles that the AICPA would play in the wake of the new legislation - in standard setting, improved financial reporting, as a liaison between market institutions and corporations, in research, in education and in promoting strong corporate governance and internal control systems.

"The six roles were good, but I wish he put in a seventh one," said David Costello, president and chief executive of the National Association of State Boards of Accountancy, who attended the speech. "The seventh might have been that the AICPA will work closely with the state boards to assure the appropriate attention to any changes that are required as a result of any federal legislation."

"We face a risk of overreaction at the state level," according to Costello. "The public that we deal with are not impacted by the Enrons or the WorldComs."

Melancon, meanwhile, out-lined several initiatives that the institute would take in combating fraud:

  • The AICPA, the University of Texas at Austin and the Association of Certified Fraud Examiners are jointly establishing an Institute for Fraud Studies.
  • The AICPA is calling on audit and finance professionals that deal with public companies to commit at least 10 percent of their continuing education to the area of fraud detection.
  • The AICPA will initiate discussions with the American Accounting Association, the Federation of Schools of Accountancy, chairs of university accounting programs and college textbook publishers aimed at promptly incorporating fraud prevention materials into the accounting curriculum and university textbooks.

"It was something he had to say," said Ronald Benjamin, a partner in N.Y.-based Mitchell & Titus. "He wanted to get out front as a leader and take a positive position, and communicate this to his members.""He mapped out a good direction for the profession in light of what’s been happening," said Michael Katz, a partner in Edison, N.J.-based Amper, Politziner & Mattia.
Melancon acknowledged that the profession was at least partly to blame for its blackened image in the public eye, noting that there were "some inherent weaknesses in disciplinary and monitoring processes for the profession" in addition to the threat, "real or perceived, of auditor dependency on fees from major clients."

He said that auditors need to abandon the assumption of good intent when they walk into an engagement, and instead inject "each and every audit" with a healthy dose of professional skepticism."

They must also not be afraid to confront companies when they discover any hint of wrongdoing, Melancon said. "Only if auditors are fully prepared to say, ‘No,’ to management will investors be fully prepared to say, ‘Yes,’ to the markets," he added.

Benjamin agreed. "We need to tighten up our position as independent auditors and not be so weak-spined as to give into our clients to maintain fees. That’s what it’s all about on the audit side," he said. "We push the envelope in terms of what the guidelines and standards require. We need to be reminded of our responsibility and stand up to our clients."

"He’s right that the profession cannot afford tolerance of anyone who doesn’t tow the mark," said Stuart Kessler, a partner in the New York firm Goldstein Golub & Kessler, who added, "It’s painful to see what’s happened to the profession because a few people did some dumb things. If the medical profession had as few members who do poorly at their jobs as the accounting profession, we’d all be in great shape."

The AICPA, said Melancon, will play both a watchdog and a leadership role in the upcoming months. "We pledge to be a force for raising new issues and examining issues that are raised by others. We will serve as a common ground for all in the profession and those involved in the financial reporting process to bring their concerns and proposals."

"The emphasis on a new culture being developed by CPAs and industry is good for the profession," said Amper, Politziner & Mattia’s Katz. "It will lead to better exposure of real numbers and a better direction of true financial statements."

"Our concern has been our value as independent auditors and verifiers. It’s a message to the public that they can rely on us. We need this message to regain the public’s trust. Right now, I’m certain that the trust we hold has been tarnished," added Benjamin.

Melancon noted that his speech was the first opportunity to address the issue to an audience outside the accounting profession since President George W. Bush signed the Sarbanes-Oxley Act on July 30. That act, according to Melancon, "included many elements the profession supported - and yes, some that we opposed."

However, he said, "Now that it has been signed into law, our position is unequivocal: We will work to implement it - and to rebuild the faith of investors who depend on us for information critical to the capital markets."

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