The accounting profession has taken some very serious hits over the last few years. Much of the criticism is deserved. Some of thtions and recommendations are reasonable and proper and some are not. And there is a serious problem that some of the solutions will be enforced against the entire profession, instead of the areas that have caused the troubles.
The overriding difficulty with the entire situation is that of little understanding, on the part of Congress, the public, regulators and the media, of what the profession is. Therefore, when one tries to assess blame for the travesties of Enron, WorldCom and others, who does one look upon as the culprits?
The CPA profession, of course!
Isn't it reasonable, then, in trying to correct the condition, to apply the solution to the entire profession?
The first question that must be addressed is, "What is the profession?"
* Is it an organization called the American Institute of CPAs?
* Is it all CPAs?
* Is it all practicing CPAs?
* Is it the Big Four accounting firms?
* Is it auditors of public companies?
It seems that Congress, regulators and the media think of the AICPA and the Big Four as the accounting profession.
When Congress enacted the Sarbanes-Oxley legislation, it was for the purpose of preventing abuses that were ignored by the AICPA and widely engaged in by the Big Four. Congress realized that the so-called self-regulation promoted and endorsed by the AICPA was a fiction, and set about to relieve the AICPA from that state of affairs. States are now faced with the task of changing the rules and regulations of the accounting profession to conform to SOX. A major part of the problem is that the solution to the problem is being applied to the entire accounting profession.
Is it fair? Is it proper?
Can the rules and regulations of the Sarbanes-Oxley Act fit all categories? Do state legislative bodies recognize the diverging needs of each group? Does the media understand the width and breadth of the different constituencies? Does the public realize what the fuss is all about?
Unfortunately, most state authorities now have the dilemma of deciding, "What is the profession?" Should the Big Four and smaller practice units be subjected to the same rules?
How do the media and the public get to understand that there is a tremendous difference between the AICPA, the Big Four firms and the more than 47,000 practicing CPA firms that service the millions of small, local and regional businesses that make up the backbone of the great American economy?
What went wrong?
Corporate and personal greed, lack of ethics, absence of enforcement of existing rules and audit practice, seeming disregard of historical independence practices by the AICPA leadership, and disrespect of the public good appear to be the primary causes of the deceptions of recent years. Sad to say, the dishonesty continues. We hear about the restatements almost every day.
The standards that were promulgated over the years were established as guidance for auditing public companies. Properly conducted, the audit is a valuable tool for investors and management. The situation at Enron and other acts of malfeasance were brought about by fraud, greed, misstatements, general avoidance of the truth and lack of independence of the auditors. It would appear that the lure of big bucks and the desire to please the client by looking the other way led to the problems that have made such good reading and led to the sudden upsurge of a demand for strict accounting regulation by the members of Congress.
First on the agenda should be to define who and what the accounting profession is.
Second is to recognize that the public has restored (or never really abandoned) its faith in the credibility of CPAs. The media and some of the congressional darlings have and continue to bring up the credibility issue for their own selfish purposes - the media to sell newspapers and politicians to get re-elected.
Attracting the best and the brightest of college students is an economic issue. With all of the publicity, and with the increase of audit fees and the realization that auditing can be more than just tick marks, college students have and will continue to come into the "profession" (whatever it might be).
There is much discussion about the need to change the appearance of the balance sheet in order to give investors more information. I think that the balance sheet should not look much different than today's report. The non-financial information that seems to be desired by some could be added as a supplementary report on a page (or pages) following the balance sheet.
When judgments are made, they should be reported. When estimates are submitted, they should be reported. When there are differences between the auditors' judgment and that of management, it should be reported. Asset valuations may not be hard and fast, but they can reported as such in plain English. A separate page or pages titled "Differences in Judgment" could be added to the report for clarity.
Reporting standards should be prepared clearly and simply, in such a way as to attest to the propriety of the statements and less to the avoidance of the legal implications that may arise from dissatisfied readers or stockholders, or from nefarious legal beagles who try to build fees.
More firms, more depth
The "consolidation" of the industry is, in itself, a problem. In the good old days, it used to be called the accounting profession. Consolidation of practices fed on the manufactured belief that the only way to succeed was to grow bigger. That need created the consolidation in the profession and narrowed the choices of companies seeking auditors. Legal suits, judgments and out-of-court settlements for hundreds of millions of dollars (without, of course, admitting guilt or responsibility) discouraged many capable firms from doing audits.
I do not understand why regulators should seek to maintain public confidence in the surviving Big Four, unless the Big Four earn and prove themselves worthy of that confidence. It is difficult to maintain or increase the level of confidence when one reads, almost daily, of huge settlements of suits against the largest firms.
With the setting of strict oversight and all the publicity of recent years, audits have become profit centers, rather that the loss leaders of yesteryear. As a result, companies are paying realistic audit fees, which should enable the Big Four and other firms examining public companies to do proper audits, eliminating shortcuts and minimal oversight.
What has been seriously deficient has been the utter lack of ethics on the part of the Big Four partners and managers. They have all of the necessary literature for training. What seems to be missing is the desire to follow the rules. Until recently, the AICPA had been rather quiet about ethics.
Time will create more firms and more depth in the auditing firms entering the area. As the effects of Sarbanes-Oxely and Securities and Exchange Commission regulations and regulators become better organized and effective, more second-tier firms will enter the market. Companies will seek them out and the marketplace will, by itself, adjust.
Changing the current regime
With adequate oversight and more vigorous enforcement of ethics, auditing rules and regulations, independence conventions, greater transparency and proper senior auditing firm control, the recent frauds should fade. There must be the realization that it is virtually impossible to uncover frauds where collusion is involved, but fraud can be detected with proper attention to the knowledge and operations of the firm being examined. The public should be made aware of the purpose of an audit, and the auditor must be made to realize that discovering fraud is an underlying part of the audit process.
Much of the hue and cry of recent years was the result of political judgments of people who really had no idea of the facts and the history of the situation. The AICPA and members of Congress willingly conspired to ignore and defeat recommendations of the then-SEC chairman, Arthur Levitt, which might have averted the Enron-type situations. When the material hit the fan, the very same people and organizations and Congress that refused to try to correct the problem jumped on the bandwagon to severely regulate the accounting profession, without any clear understanding of what really happened or why it happened or what the accounting profession is.
The profession has changed greatly in the last couple of decades. Auditing, the raison d'être of the profession, went from a noble endeavor to a loss leader for more profitable engagements for the largest firms, and then, with the help of the Enron and other scandals, back to a position of honor.
It will take time for the financial community to weed out all of the misstatements that we learn about on an almost daily basis, but have faith - CPAs will regain their position as the most trusted professionals.
Edwin J. Kliegman, CPA, co-founded the accounting firm of Marcum & Kliegman LLP.
