TRACEY SEGARRA: To start off with, can you tell me about the genesis of the new Council task force.
WILLIAM EZZELL: It was a question initially raised by Massachusetts State Society and their question really had two points. One is how Council is organized and, as individual Council members, how each Council member represents the rest of the membership. Are we delegations from a state? Or do we represent the body as a whole as individual Council members? The second point was communications, how members of Council become informed about the grass roots membership and their positions and issues and concerns and vice versa, how Council interacts and communicates with the board and the Board of Council.
At the Council meeting the New York society offered a resolution to examine the (council’s) governance and structure.
We had already established breakout sessions at the Council meeting in response to the Massachusetts request. At the time of the New York resolution we had not reported back the results of those breakouts. So no one had the opportunity or the benefit of the breakout discussions at the time we took up the New York resolution on governance and structure.
So that resolution was tabled at that point because we didn't have any results of the process we'd just gone through to address the initial question that had been asked.
What I've done subsequent to that is take a hard look again at both the Massachusetts request and New York resolution, particularly the individual feedback from the Council. We subsequently had a meeting of the Group of One Hundred in Chicago in November. We had a chance to look over the feedback from that group as well. What became evident from the feedback is that there was significant interest to explore the communications issue and the role of Council itself.
There was not strong support for what I would call a more extensive governance and structure of the entire (institute), and our committee structure, which had last been reviewed and changed in 1990.
So what I've done is to appoint a task force. And I've asked the task force first to look at the role of Council, how it operates and the communication, up and down, members to Council, Council to Board and back.
And I've asked them to consider the issues that were raised in the New York resolution. And to the extent that they have recommendations in that regard, that would become part of their report and then that would give us the basis of whether or not to go further with another study or another task force that would take (in) the rest of the picture.
I picked a couple people that are currently on Council, I've got a couple people that have never served on Council, and none of the people on this task force have ever been on the Board. And we have representation from state societies as well.
TRACEY SEGARRA: Do you personally really believe that it's just a few rogue CPAs who are responsible for the mess that's going on in the profession? Or did the system of ethics break down?
WILLIAM EZZELL: That's an appropriate and somewhat difficult question. Let me approach it this way. One the one hand I say to myself, 340,000 CPAs and 12% of them (give or take) do 17,000 public company audits. And of the 17,000 public company audits, we had too many restatements, but still, looking at it from the other side, you had about 16,950 that are good and on average about 30 where there are allegations of audit impropriety each year, that the audit didn't detect something.
We'll never get to zero because humans are involved and human judgment and therefore human error. So, on the one hand I can say that by and large -- it's a small error rate.
The other side of the coin, the thing that really concerns me is that I think there was a diminution in the -- I'll call it the consciousness of our value systems. I don't know what to attribute it to exactly. I think we'll all understand that better as we look back at this period of the go-go '90s, the exuberance of the markets and all the dot-com craze. Our core values and integrity and objectivity have always been there, but we didn't put enough skepticism, generally.
Too many of our people have gone through that period of time and had not actually seen fraud or seen an inappropriate accounting treatment, or had clients that came forth and said, we've done this transaction, we think this is the accounting.
So there was a lulling, if you will, during this period of time. And we weren't as conscious perhaps of the skepticism we needed, the reminding ourselves how terribly important some of these decisions are, these judgments that are being made.
I think those things all are contributing factors but one of the reasons I want to focus so much on talking with our CPAs about the core values of integrity and objectivity, independence, reminding ourselves of our own value is because I think we did get a little bit away from it during this go-go period here.
BILL CARLINO: Do you think perhaps a switch to a principles-based system might alleviate some of these problems, and is that something that you'd like to see?
WILLIAM EZZELL: I think it has the potential. It's going to be difficult to go from where we are to get there. Even a rules-based system is premised on some overriding principle. I think it has the potential to help in that regard but it's going to be a tough transition to get there, to get companies and to get the auditors to be able to push back far enough.
I saw it back in my own career in leasing. When they first came out with FASB-13. Woo! It had all these pages. And you immediately saw the leasing companies parse through the standard and try to decide what provisions they had to change in a lease depending on which way they wanted to go -- to be operating or capital. That's an example of what our rules-based system has lead us. There's been too much of trying to use the rule to craft an answer that goes around the rule.
Principles will take that away if they work, it's just a matter of how you get there. I think we can get there but it's going to take an awful lot of focus and it’s just not something that can happen over night.
BILL CARLINO: What about the suggestion about replacing the pass-fail audit with a grading system? Do you think it would be a buffet of litigation for trial lawyers if that happened?
WILLIAM EZZELL: Well, I think litigation does drive a number of answers in the current system, more so than it should. I've always felt that. This is something I've spent a lot of my time looking at over the years. I am a proponent of an auditor's opinion that says more than it does today. I think that's a good thing. Sometimes the auditor may want to communicate something and we could use that process to better emphasize matters that the shareholder should be alerted to. I think it has become too much of an all or nothing.
We've asked the Auditing Standards Board to challenge themselves to look hard at that to see whether or not there are better ways and other things we can do to make it more explanatory, and more readable, but also to convey more information from the auditor's perspective.
Some people have suggested we have an accountant's discussion of application of accounting principles, of the choices that were made.
Now the struggle is whether there could be some process where the shareholder benefits from having that information. And we don't want to inappropriately protect people from using it in the wrong way. But if used in the right way, we don't want to have all the companies and all the auditors sued out of existence for trying to do the right thing either. It's something worth exploring.
TRACEY SEGARRA: Membership in the SEC practice section is expected to be reduced from 1,200 to about 400 firms over the next few years because of Sarbanes-Oxley. How will that affect the profession itself? And how will the loss of these dues from AICPA members financially affect the Institute?
WILLIAM EZZELL: That number will likely shrink. And we're hearing anecdotal evidence that firms are saying, "We have two clients and we're transitioning out of them. So, yes, it's going to go in that direction.
Most of the funds that support the SEC Practice Section come directly from the firms and are only used in the activities of the Practice Section. So, economically, although there'll be some ancillary issues if the partners and others in a firm that drops out of the practice section also were to decide not to be members of the Institute, the monies that are collected for the activities of the SEC Practice Section are collected from the member firms and used in that environment. So to the extent that the need goes away, so do the funds and I'm not anticipating a huge economic impact unless we have that sort of secondary impact.
TRACEY SEGARRA: What about just the general impact on the profession of losing smaller firms doing public company audits?
WILLIAM EZZELL: I think that's a bad thing. Some people argue that one of the other things that may come out of this is that we may not have 17,000 public companies to audit any more either. A number of the smaller public companies may choose to go private themselves because of Sarbanes-Oxley. But I think there's a valuable role to be played by smaller firms serving that they're capable to audit. They have enough people and do an excellent job. It's going to be unfortunate if they choose to get out in large numbers. But time will tell. We'll see. As the PCAOB begins its process and gets its registration of firms going, we'll be able to see this summer what those numbers are going to look like.
TRACEY SEGARRA: The new fraud standard is being touted as one of the ways that the AICPA is working to help restore the profession and show that CPAs are on top of things. But it looks to the outside world like accountants weren't minding the store before and now they're saying, "Well, we didn't do it before but now we're going to. And we're the only ones who know how to do it so you have to trust us." Well, if you weren't doing it before, why should the public trust you?
WILLIAM EZZELL: We don't have the full autopsy yet on Worldcom or (the other accounting-related scandals). On the ones we have of more recent vintage, these become not so much matters at all of the standards themselves but the performance of individuals against those standards.
I fully believe that while we may find some things that we can improve, it's a matter of adherence to the standards and performance against the standards. We're going to find situations where there are large non-audit services and we're also going to find situations where there were no non-audit services. So it's very difficult to define cause and effect in each one of these cases.
TRACEY SEGARRA: If it's not the standards themselves, then why is improving the standards going to help?
WILLIAM EZZELL: The thing we're trying to improve most with this new standard is this notion of skepticism. In other words, even though you have no reason to suspect there's a problem, you must, in the process of the audit, twist your thinking around and ask yourself, how could there be a problem?
We have been lead by risk assessment towards detecting many, many frauds that we never hear about. The company made the adjustment and it was within the quarter or within the year and it wasn't a restatement and they got it right and nobody knows. It's a tree falling in the woods kind of thing.
But now we're saying to that auditor, even in those good situations, ask yourself one more time what could go wrong and test in that direction. That's the skepticism we're focusing on.
TRACEY SEGARRA: Doesn’t this new standard open CPAs up to more litigation if they don’t find fraud?
WILLIAM EZZELL: Well, it gets back to the absolutes again. If you had a standard that says it's the role of the auditor to find all fraud, then I don't know how you would ever finish the audit. I don't know how much work you could possibly do to remove all absolute, total doubt that there was still perhaps a fraud, particularly with collusive fraud. So there has to be some cut off point.
Now this new standard is going to push us further than we've been before. It may result in more litigation. We'll see. Time will tell on that front.
BILL CARLINO: What do you say to the critics who say the Institute was focusing on ancillary projects like the failed global designation and the CPA2Biz Web portal instead of mainstream concerns such as fraud?
WILLIAM EZZELL: My response is that throughout all of the period that I’ve been involved in the AICPA, it was never a matter at all of stopping or diminishing or slowing down in any way our activities in the audit arena..
TRACEY SEGARRA: AICPA chairmen have a one-year term. Is one year long enough to do anything? Shouldn't it be longer?
WILLIAM EZZELL: It is difficult in one year to effect any real long lasting change. That is true. But the process we go through in that prior year as Vice Chair is very helpful, certainly in terms of preparation. The Vice Chair really does play an active role in the process and leadership. So while I get to be Chair for a year, I've been Vice Chair for a year preceding that, participating on the board, participating in the leadership. So on balance it works very well.
Right now we have a lot of issues to deal with. And one could argue that sometimes it might be better to have a little longer term. It's not something I would advocate right now, but I can certainly see that as times change and the complexities of issues change, it can be a lot to handle long term.
BILL CARLINO: What do you say to the criticisms that the Board is a clubby atmosphere and not really receptive to change?
WILLIAM EZZELL: I haven't seen that. I would go so far as to say I've become a little surprised actually at how active, how involved, how many different points of view and opinions are brought together in the Board room.
I don't know that it's a process that we get the right people, but maybe when they get here they feel the obligation to really, really speak their mind. I think everybody has a chance to get in there and mix it up and there's not full agreement on everything we do. There are lots of points of view. There are points of view that we might be forty-five minutes into debating an issue and looking at all sides of and all of a sudden somebody comes in with a thought that just pulls it in a different direction.
I have been very impressed by the professionalism of the people and the commitment they have. Our Board meetings are not simple affairs, they go on for a day and a half. People are very, very conscientious. So I don't think they'd allow that to happen. They're not going to vote for something they're not comfortable with.
BILL CARLINO: You have been a longtime lobbyist for the accounting profession as a member and chair of the Accountants’ Coalition. Often these days the AICPA is referred to as just a lobbying arm instead of a membership organization. Does that bother you?
WILLIAM EZZELL: If it's in the context of that's all it is, yeah, that bothers me because we are a professional membership organization. We represent this profession and we represent it in many ways. Speaking out on behalf of this profession is clearly one of the ways in which we represent our members, whether it's at the federal level or assisting state societies at the state level. That's a very appropriate and very important function. But it's clearly not all we do.
TRACEY SEGARRA: Let's go back to Sarbanes-Oxley a little bit. How involved were you, when they were starting to craft the separate bills
WILLIAM EZZELL: Personally I was very involved.
TRACEY SEGARRA: You were lobbying and working on the first Oxley bill and then Worldcom came out. Tell me about the phone call you must have gotten from Oxley or his staff.
WILLIAM EZZELL: The first thing they said was, "How can this happen?" Enron was complicated; Enron had SPEs and it had shredding. But Worldcom was hard to understand because it didn't seem to be a complex accounting principle that no one understood. It seemed to be somebody just made a journal entry to change the numbers.
The tone shifted, I think, in the debate right then . That was perhaps the straw that broke the camel's back..
TRACEY SEGARRA: You've gone on record as saying in veiled terms that you're not all that happy with the make-up of the PCAOB Board, that it doesn't have people who are familiar, at least in recent times, with public audits. What are your fears about the PCAOB Board?
WILLIAM EZZELL: Well, first let me clearly state that I want the best for the PCAOB because it's important for the profession. I want it to work. I fear that they may underestimate the complexity of the resource commitment that they need to devote to get this done. Some of these things are just not easy things to get up and running from scratch and get them done and done well. So I worry that they may underestimate the complexity and breadth of the project they've taken on.
TRACEY SEGARRA: Do you also worry that they're not going to consult the AICPA or the profession?
WILLIAM EZZELL: No, because they have reached out a number of times to ask questions, to seek information. We have responded at every opportunity that they've requested to give them that information, to assist in appropriate transition, for instance, with peer review this year. I think they will seek input, no question about it.
Just the whole concept of getting that kind of an organization up and running in a short period of time, if they underestimate their own time requirements and the requirements of the staff, I think it can be harmful.
TRACEY SEGARRA: So you think the process is going to take a lot longer than they predict?
WILLIAM EZZELL: I think it will. A huge expectation has been put on that board by the public to do something quickly. And that may be a difficult expectation for any group of people.
TRACEY SEGARRA: Is it going to reflect badly on them or badly on the profession?
WILLIAM EZZELL: Well, we're going to support them any way we can. We're going to help all we can. We've already offered to do whatever they want us to do to keep the peer review process moving this year in a transitory period. They know they're not going to be able to examine every firm this year. So we offered to continue our processes with full access by the PCAOB and oversight and whatever they want to do as an example to make sure that there's no sort of slippage as we transition from the current process to the future process.
TRACEY SEGARRA: What about standard setting? General Accounting Office Comptroller David Walker said at a conference in November that the jury was still out on whether the PCAOB would invite the AICPA to take part in standard setting. He thought that they might want to take that entirely over themselves. What do you think will happen?
WILLIAM EZZELL: I've not met directly with the PCAOB members myself, so I don't have any direct knowledge. The jury still is out. I think unfortunately it's become a highly politicized issue . I think it's unfortunate we have people saying that if they don't take it away then they're not doing their job. I don't see it that way. I think that's an unfortunate pressure that's unnecessary on the PCAOB at this time.
The audit standards process has been wide open, there's no secret about it . And they can certainly participate. But they'll have to make that decision and if they choose to take it over, we'll support that.
TRACEY SEGARRA: Do you or the Institute have any preferences for Chairperson for the PCAOB or know who might be chosen?
WILLIAM EZZELL: I truly don't. We're not involved at all in the process, irrespective of what some of the press has reported. We did not get involved in the debates over Webster and Biggs and we’re not involved now, we're not going to be involved. They need five good people who are willing to work really, really hard.
BILL CARLINO: You have a lot of new faces coming into agencies that could have a particular impact on the profession. Donaldson at the SEC and Everson at the IRS. To a lesser extent Snow at Treasury. How do you think that's going to play out?
WILLIAM EZZELL: Well, I think in Donaldson, you've got somebody that understands that capital markets pretty well and certainly has sort of the stature and cumulative business acumen that will serve him well in that role.
I think he'll have a bit of a learning curve that Harvey (Pitt) did not have in terms of all the participants in the market place. It's a different challenge. I think good, bad or indifferent, it's a high publicized and politicized process now. Every one of his decisions, whatever they are, are going to be challenged and second guessed in the near term.
I think what we all need in the capital market system for the good of investors right now is we've got Sarbanes-Oxley, we've got the PCAOB. We need to get this thing up and running and have some clarity that these are the rules and they are going to be enforced. We're all going to live up to them, so that investors can get a sense of comfort that the process is taking shape.
That's why I think Congress is not going to be interested in doing any kind of revisit of Sarbanes-Oxley any time soon. I think they want to get it up and running. We need the time to implement now rather than to argue continuously or have any debate about what should or shouldn't be done. I think that's the same thing that needs to happen at the SEC. They need to get about doing the day-to-day stuff now with Donaldson.
TRACEY SEGARRA: The Institute has gone on the record as blaming a few disgruntled CPAs for all the bad press that accountants and the profession, and especially the Institute, has gotten over the past year. Do you agree with that or do you think there's something else going on?
WILLIAM EZZELL: I'm not sure we've done the best job we could have in the past of explaining the role of the institute and the role of some of its other functions like our standard setting function and the separateness it really has from the Institute, the separateness of our professional ethics process. I was surprised at one point in this process several reporters asked about the Auditing Standards Board getting the approval of the Board of the Directors of the AICPA to issue audit standards. And I said, "We don't ever even see them." We may get informed that they're in process but that's separate.
So I think there's been a misunderstanding of the AICPA, it's role vis-a-vis the other bodies, the audit standards, even the FASB. I even have some of our own members sometimes write and say, you should have caused the FASB to do this, that or the other. Well, we have a process for the FASB to be separate and to function separately. We don't control that. We don't tell them what to do. That's the right process. So I think we have a communications challenge for people to understand our role.
BILL CARLINO: How do you go about rectifying that?
WILLIAM EZZELL: I don't know. I don't know why, for instance, there was not more attention paid to the analysts and to the attorneys and to other capital market participants in all of the issues surrounding the business failures of Enron and Worldcom and others. It seemed like we were sort of first up in the barrel and I'm at a loss to understand that.
TRACEY SEGARRA: There's also a lot of people saying that they're not happy with the way the Institute is being run. They understand the Institute and how it's being run more so than the consumer on the street. And you understand that there's some dissention.
WILLIAM EZZELL: Sure. There always will be -- any organization will have people who disagree.
TRACEY SEGARRA: You've got this organized group called CPAs Reforming Our Profession (CROP).They're small but they're loud. How do you feel is the best way to respond to the dissention within the ranks?
WILLIAM EZZELL: Well, a couple of things. I am desperately trying to respond individually to every inquiry that I receive from a member. So any member that writes and has a legitimate concern and question I am trying to give them information.
After the CPA letter comes out every month, I'll get a handful, six or eight. And then a couple more come into the Journal of Accountancy which they forward to me.
Many times there are a lot of factual things that need to be explained. It may not change their position, but at least address the factual underpinning for whatever question is being raised. As to this organization, I don't know the specific members of that organization, although I've communicated, I understand, with a few of them.
Jim O'Malley, our new Vice President in the communications area actually went out and met with them. He listened to their concerns. We're all out and about more this year than we have been. We have the Board Outreach Program in which our Board members are each going out to at least three states, not to give speeches but to do more of a town hall setting and to listen to what the issues are.
I have not said "No" to any speaking opportunity yet unless I already had another speaking opportunity committed for the same date.. Barry's doing the same thing as are our Board members. We are doing everything we can to be out there, to listen and to provide information.
BILL CARLINO: You come from one of the largest firms in the country (Deloitte & Touche). What do you say to the members who write in and contend that the Institute is not really sensitive to the issues of smaller firms.
WILLIAM EZZELL: I don't see that. The changes that will impact the Big Four firms and other firms that do public company audits, the die is already cast in that arena.
My biggest concern, then, is that we get the right set of changes, to the extent there are changes, for the smaller CPA firms and the small businesses they serve. Several states want to do a parallel state version of Sarbanes-Oxley. And in so doing they might limit, for instance, all tax services for any company.
I don't think that's the right answer for the small business being served by small CPA firms. I think the ability to do tax services, the ability to do other kinds of consulting, giving answers to business questions like "Should I buy or lease this piece of equipment?" is a non-audit service. I can't imagine that it would be a good thing for that small business to have to get an answer to that question from someone other than the firm that does its review or compilation.
I'm very concerned about the cascade issue. I'm very concerned for our small members that we not get a knee jerk reaction at a state level that produces unintended consequences and consequences that are not good for the businesses they serve in the small business environment in this country.
TRACEY SEGARRA: Do you think it's possible if Sarbanes-Oxley is implemented as strictly as some may fear that a lot of small firms might just die?
WILLIAM EZZELL: I don't think they'll die but I think we'll have more compartmentalization. I think if Sarbanes-Oxley were paralleled at the state level for non-public companies we'd end up with audit firms or review firms, tax firms.
I think it would cause an increase in cost to the small business because there's no synergies of knowledge and understanding that can be shared about the business by the service providers. So I think inevitably that would cause the cost to small business go up.
TRACEY SEGARRA: How about the whole tax shelter issue that keeps rearing it's head?
WILLIAM EZZELL: We have been working with Congress, we have been working with the IRS, our own people in the AICPA committees, our professionals, everyone that has ever been involved in this has struggled mightily to come up with a good definition -- and that's what this issue is about -- a good definition of when something is an inappropriate tax strategy versus a legitimate and appropriate tax minimization service for a client.
That is, and continues to be, the nexus of this problem. It's trying to draw that line. The AICPA in its comment letter to the SEC recently suggested as one possible answer to consider the business purpose of the transaction. Now that did not make it into the final rule but the SEC did, in the rule, encourage audit committees to consider business purpose when audit committees approve a non-audit service related to a tax transaction.
If there were a clear cut answer on where to draw that line and how to distinguish something that is inappropriate from something that is totally legitimate and should be utilized by tax payers to minimize tax, we would have all found it before now. And maybe we'll eventually find it. And we're all working to that end because none of us condone anybody doing anything that's illegal or inappropriate. It's just, how do you draw that line without taking away the ability for me to advise you to deduct your mortgage interest on your personal income tax return? That's a tax shelter too.
We've got a complex tax code that's put together to drive certain social outcomes. And sometimes there are unintended consequences and that's one of the problems of a complex system. Something put in for one reason gets used for another reason. If that's inappropriate it ought to be stopped. But it's a really tough, tough thing to figure out where that line is.
The SEC struggled with it in the rule making, the IRS has struggled with it, Congress has struggled with. We're going to cooperate. We're part of the dialogue that's going on. There's just not a silver bullet on that one yet.
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