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By Eugene Flegm, CPA, former general auditor for General Motors Corporation

As I have practiced accounting over the past 49 years, first as a bookkeeper working my way through college, then as an auditor with Haskins & Sells, later as an assistant comptroller and general auditor of General Motors, and, finally, as an assistant professor of accounting at Walsh College, I have continually been struck by the many paradoxes which exist in the accounting field.

The first paradox was initially called to my attention by an article in the Journal of Accountancy over 35 years ago. Don Istvan, then a partner with Peat, Marwick wrote that while the accounting field initially attracts the more introvertive, number-oriented student, the profession promotes the more outgoing, articulate, people-oriented accountants. Throughout my career, I wrestled with this paradox. How to balance the need for those with good technical skills with the need for articulate managers. Certainly the universal complaint I have heard and experienced in the recruiting and training of people is the general lack of writing and speaking skills. It seems apparent that the 150-hour program initiative had its roots in that

The second paradox relates to the origin of the public practice of accounting itself. Although the CPA designation dates back to 1896 and public accountants practiced throughout the first 33 years of this century with little government regulation, the future of public accounting hung by a thread in 1933. A reading of John L. Carey's report of the testimony of the managing partner of Haskins & Sells, Colonel Arthur H. Carter, before the Senate Committee on Banking and Currency in 1933 illustrates how close Congress was to designating the General Accounting Office as the auditors to be used to audit the companies filing with what was to become the SEC. Colonel Carter's testimony and his exchange with then Senator Alben W. Barkley (later vice president under Harry Truman) is particularly interesting since it touched issues that are still sensitive: auditor independence, government versus private auditors, uniformity and comparability of financial statements, valuation of a company, the propriety of the one being audited paying the public accountant to do the audit, and how accounting standards should be established. As we know, Colonel Carter carried the day, and the number of CPAs grew from 14,060 in 1933 to 200,000 in the next 50 years. Nevertheless, the paradox of the auditee paying the auditor is still causing problems. As an example, just read SEC Chairman Arthur Levitt, Jr.'s speech given at the January 1997 AICPA annual conference. Chairman Levitt emphasized the need for auditors to meet public expectations as the profession moves into a new range of services. Chief Accountant Mike Sutton was even more forthright, commenting at the same meeting about picking accounting practices within the range of acceptable practices and best practices. "If this distance between 'within the range' and 'best practice' is not scrutinized...I fear that a new gap will develop this time--a credability gap."

The third paradox is related to the point made by Mr. Sutton, and perhaps the most troublesome since it runs through the entire field of accounting--whether education, public accounting, or business applications. The paradox is the precision of bookkeeping and the subjectivity of applied accounting theory. Many in the profession, including the writer, are convinced that the Industrial Revolution could not have been accomplished without the data organization and reliability that double-entry bookkeeping provides. Two hundred years ago, the German poet, Johann Wolfgang von Goethe rhapsodized on this: "Double entry bookkeeping is one of the most beautiful discoveries of the human spirit...It came from the same spirit which produced the systems of Galileo and Newton and the subject matter of modem physics and chemistry. By the same means, it organized perceptions into a system, and one can characterize it as the first Cosmos constructed purely on the basis of mechanistic thought...Without too much difficulty, we can recognize in double-entry bookkeeping the ideas of gravitation, or the circulation of the blood and of the conservation of matter." While von Goethe might have laid it on a little thick, there is no doubt in my mind that the discipline of the double-entry system did provide the structure needed by owners to manage the complex businesses that rose from the Industrial Revolution. However, the very precision of bookkeeping has also resulted in a massive misunderstanding by the general public of the published financial statements and the meaning of "presents fairly." As all accountants know (but some forget), the precision of the bookkeeping entries is preceded in many instances by significant, subjective decisions, e.g., the useful life of an asset, the future cost of product warranty, or the future costs of pensions and health care, to namejust a few.

The practice of auditing compounds the preceding paradox. Although the AICPA has recently restated the accountant's responsibility to uncover material frauds, it is a belated response to what has long been the perception of an auditor's work by the general public. To the nonaccountant, the nature of auditing seems to imply that the financial data has beenverified and that they are free of fraudulent transactions.

All of the preceding brings me to the final paradox--the education of accountants. Accounting is a broad, diverse, unique field. Contrary to law, medicine, or engineering, a broad sector of accounting is responsible to the public rather than a client or a patient. That public trust is a franchise given by the Congress in 1933 and could be taken away by the them. On the other hand, a person doesn't even need a college degree to practice accounting, at least at the bookkeeping level, although today, knowledge of the computer would be essential. Nor is a professional certification to practice applied accounting theory needed at its highest levels. I had the privilege of working for three chairmen of General Motors--Frederic Donner, Thomas Murphy, and Roger Smith--who received their undergraduate degrees in accounting but were not CPAs, having spent their entire careers with General Motors. However, all were outstanding accountants. Even in the public sector of the field, those in the taxation area can practice without a CPA designation, although a JD would probably be helpful. The same is true in the greatest growth sector--consulting.

How do we educate all of these accountants? Brigham Young University, as a part of the initial study group
for the "150-hour program" funded by the AICPA has developed a five-year masters program containing six basic competencies which I believe meet the future needs of the profession.

The six groups are communication skills; information development; decision making skills; knowledge of accounting, auditing, and tax; leadership development; and professionalism.

I believe a program of that type would meet the needs of public accounting, consulting, taxation, and those who choose to practice at a high level within business. I would only
add that we should continue to meet the demand from undergraduate accountants for those who don't choose or aren't able to move on to an advanced degree.

We all agree that we don't want narrow, numeric-oriented, rigid accountants, but our education system is forced to teach rules at the expense of general theory and judgment. I regularly stun my masters-in-accounting class in theory when I tell them at the start of the term that I will ask questions for which there are no correct answers, only pointsof- view, e.g., historic cost versus current value.

A Possible Solution

While I don't have answers to solving these paradoxes, I do have some opinions as to what might help. First of all, we should keep in mind that we have the SEC and rules because of fraud. The gigantic swindle perpetrated by Otto Krueger, the "Swedish Match King," in the late 1920s is generally cited as leading to the formation of the SEC and the beginning of the formal establishment of accounting standards. Each subsequent major fraud results in a surge of interest by Congress for more controls. Furthermore, we have auditing standards because of fraud, also. The shock resulting from discovery of the vast McKesson-Robbins fraud in the late 1930s resulted in the SEC "urging" the AICPA to set standards as to what constituted an adequate audit. We should also keep in mind that rules cannot prevent frauds although we seem to think they will. Only good internal control systems coupled with competent audits can curtail (but never stop) frauds.

What can be done to strengthen the internal control system then? First of all, the SEC should do everything in its considerable powers to strengthen the hand of both the internal auditor as well as the public accountant. For one thing, they should mandate that all companies that file with the SEC have independent audit committees of the board of directors and that the internal audit staff head report to that committee. In addition, both the public accountant and the internal auditor should attend all meetings of the committee. Another step would be to have all changes in public accountants be approved by the Chief Accountant individually, not by a Form 8K.

Finally, we should keep Goethe's thoughts in mind as we establish new accounting rules. Accounting's roots are in transaction-based data which, although there are many subjective decisions involved in analyzing the data, gives owners, managers, and investors reasonably reliable information for use in their decision-making process. We should also remember that the most significant factors involved in an investment deal not with the financial data but with such things as new product/services development, competency of management, macro-economics, and government policy. Broad-based accountants can become CEOs, and CFOs and assist in all phases of business. But they should keep in mind the discipline of their field. Regulators too should keep that in mind and avoid attempting to make financial reporting a value-based system subject to abuse. *

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