An Interview with AICPA past president Philip Chenok
By James L. Craig, Jr.In Brief

The Institute and the Profession According to Chenok

Philip Chenok, CPA, was the president of the AICPA for 15 years, after having been in public practice since 1957. He retired in 1995 to pursue yet a third career in education. Chenok was a behind-the-scenes leader, seeking to create consensus on the tough issues while keeping his disagreements and disappointments within the confines of 1211 Avenue of the Americas.

Managing Editor James L. Craig, Jr., met with Chenok to obtain his views on some of the important professional issues of the day and the role of the AICPA in facing these issues and to recall some of the important events that occurred while he served as president.

The CPA Journal: In looking back over the 15 years, is there one particular item of note on which you would like to comment?

Philip Chenok: If I had to identify the most important development I would say it was the shift in emphasis or focus of the institute to become a more future-oriented organization. The AICPA at the time I first became president tended to be somewhat of a reactive organization. A development would occur; a group would be appointed to respond; and, at some future date, recommendations for change would be made. Sometimes they were adopted--sometimes not. Early in my tenure, a future issues committee was appointed to begin to identify matters that appeared to require current attention to head off future problems. Eventually, a strategic planning program was implemented, which ultimately enabled the institute to take advantage of positive developments and to anticipate and head off potential problems.

A good example of that process was the formation of the AICPA Special Committee on Financial Reporting. The future issues committee raised the concern that financial reporting was beginning to be less significant and that other kinds of information were becoming more important. A high-powered special committee chaired by Ed Jenkins was asked to study the issue in greater depth and make appropriate recommendations. That has now been done, and implementation is under active consideration.

CPAJ: Your successor, Barry Melancon, seems to be continuing this process. The major vision process underway is an example from his agenda. Another example is the recent joint activities of the AICPA and the National Association of State Boards of Accountancy (NASBA) in looking at the basic structure of the profession. What do you think of the suggested changes?

Chenok: Good intentions notwithstanding, I have some misgivings about the likelihood of the major recommendations ultimately happening. We have been trying for a number of years through the Model Bill and the Uniform Accountancy Act to bring uniformity to state practices, without great success. Each state seems to have its own approach. In some respects, the whole concept of state regulation and licensing may have passed its time. We might be more successful in selling self-regulation at the national and state levels than achieving uniformity in state legislation and regulation. Auditing and financial reporting are national in scope--some argue that they are becoming international. The AICPA and the state societies through the peer review program and the ethics process are probably the main enforcement arm in many jurisdictions in any event.

CPAJ: Returning to the special committee on financial reporting, we have seen that so far no organization or group has stepped up to bat to attempt to implement its recommendations for an expanded financial (or business) reporting model.

Chenok: There are three groups in the private sector that should be looked to to push for change. First there are the auditors--the accounting firms, second are the financial analysts, and third are the preparers. Each of these groups seems to be comfortable with the information that is presently prepared. Analysts have adapted to what is available and developed models and approaches that enable them to work their magic even without structured or formalized forward-looking information.

The major accounting firms seem to be less than enthusiastic about the recommendations. Moreover, preparers appear to want maximum flexibility in their ability to tell their story. They don't seem to be interested in an expanded reporting model. The multiplicity of all these interests and the lack of enthusiasm for change will make implementation a slow process.

CPAJ: You would think auditors would like to expand their work to include nonfinancial information?

Chenok: If nonfinancial information should become part of the reporting package, if standards are set for the development and presentation of that information, and if there is a perceived need for independent assurances about the information, auditors will be involved. But, that's a lot of ifs!

CPAJ: There has to be a groundswell from the users of the information--regulators and the analysts--before anything will happen. The preparer community is not going to ask for it.

Chenok: Looking at history--the crash of 1929 resulted in expanded reporting and greater auditor involvement. It took a crisis. It might take a major crisis involving the accuracy or reliability of nonfinancial information before much will happen.

CPAJ: The GAO report on the profession that was issued last year addressed the recommendations made to the profession during the last 20 years or so, 15 of which were during your presidency. Up until the announcement of the formation of the new Independence Standards Board, the report didn't seem to attract any attention. Perhaps that's attention enough.

Chenok: The GAO report fairly indicates that the profession has responded to concerns. The strategic planning efforts I mentioned earlier served to anticipate problems. If you recall, we established the Committee on Standards of Professional Conduct, the Anderson Committee, which ultimately led to quality review of all firms with AICPA members, the 150-hour requirement, and enhanced continuing education. Earlier, the SEC practice section was created and began operating under the watchful eye of the Public Oversight Board. The GAO report gave us good grades for improved audit quality as reflected in the peer review results. The report was reasonably supportive of the initiatives the profession has taken. Here we have the watchdog of Congress taking a long and careful look and giving reasonably good grades. As for the establishment of the Independence Board, the GAO report focused a great deal of attention on independence issues. The creation of the board was a cooperative undertaking of the profession and the SEC, as I understand it. The SEC may have reacted to some of the developments in the profession--expansion into investment banking, the proliferation of nonaudit services, and other developments raising concerns about the objectivity of the audit process.

CPAJ: Those very issues were also raised in the GAO's report.

Chenok: The independent auditor must always put the public interest ahead of the relationship with his or her client. When that does not happen, trouble can ensue. There are relatively few instances where auditors have gotten into trouble. Generally, they do the right thing. When they don't, there are many safeguards to protect the public. The system is basically sound.

CPAJ: One of the issues in the GAO report is the lack of user involvement in the standard setting process. That seems to be especially true of the standard setting activities of the AICPA--the Accounting Standards Executive Committee and the Auditing Standards Board.

Chenok: Not for the want of trying. I think it was the Commission on Auditors' Responsibilities--the Cohen Commission that made a recommendation for more user involvement in audit standard setting. When I was chair of the Auditing Standards Board--this was prior to becoming AICPA president--an auditing standards advisory committee was established that periodically interacted with us to give us a user's perspective. The auditing process is fairly arcane and it was difficult for the advisory committee to understand what the issues were all about. As a result, the committee was discontinued. We tried but it was not effective.

CPAJ: Are there financial analysts on AcSEC?

Chenok: I don't think so, but whatever AcSEC does is subject to yea or nay by FASB, which has an analyst as a member. Also AcSEC gets a user perspective through the exposure process. But we need to keep trying to reach out and gain more input on the part of users.

CPAJ: What is the overall state of financial reporting in your mind? Is the public being properly served?

Chenok: I think as a whole--all the various players to the process--need to do a better job in moving financial reporting to the heights it must reach to serve today's needs. There are ongoing needs to improve the financial reporting model. As examples, we pretend that inflation doesn't exist and accept the mixed bag of historical cost and current value measurements. Also there has got to be a better way to account for intangibles. Charging costs of research and development to expense as incurred is the easy way out, I think. The biggest assets that the software giants of this world have are not shown on their balance sheets. I don't think that we should give up on trying to make the accounting measurements in financial reporting more relevant. Yes, we should look at nonfinancial reporting, future oriented information, and risks and uncertainties. But we shouldn't give up on looking at innovative ways to improve financial statements themselves.

CPAJ: Do you view the AICPA as a trade organization or a professional organization? An article late last year in Accounting Today said the AICPA was a trade organization and that's how it can best serve its members.

Chenok: That's nonsense! Don't get me wrong. There is nothing wrong with the AICPA serving its members' interests and speaking out on behalf of its members as long as it also serves the public interest. If there is a conflict--members' interest and the public interest--and the institute acts solely on behalf of its members, its stature will diminish. In the long run the members' interests are best served if they, in turn, serve the public interest in all services provided. The institute should be no different.

CPAJ: Why is this message becoming blurred and in question?

Chenok: In the press of daily activities and the drive for revenue and profits, it's easy to lose sight of the role we play. CPAs are licensed to audit financial statements for the benefit of clients... yes...but, of utmost importance, for the benefit of all users and the public. In all areas of service, whether it is tax returns or providing consulting services, there is the element of the public good--it is not just merely earning a profit. If we give up our concern for the public interest and put our own interests in front, the value of CPA services will take a nosedive, in my opinion.

CPAJ: When you were president of the AICPA, we did not see you making statements of this kind. Someone from the AICPA needs to be making statements like this.

Chenok: Well, the "public interest" emphasis was a part of the institute's mission statement, so I wasn't concerned until recently. I did address the need to continue to be concerned about the public interest in the talk I gave when I was awarded the institute's Gold Medal. As to other matters, my views are expressed today as an individual CPA who is a member of the institute and active in the profession. As president and CEO of the institute I always made my views known during the debate over issues and in exploring solutions. But I also strongly believe in the process. After appropriate debate and conclusions were reached, my role was to act as a spokesperson, not to continue to publicly debate the issues.

CPAJ: The way the AICPA has
been reorganized, we seem to see
less emphasis on the technical activities of the institute and more on
the business, marketing aspects.
Any comment?

Chenok: There has been an evolution of the role of the institute. At one time a relatively more significant role was standard setting--ethics, accounting, auditing. Over the years, the emphasis on service delivery has increased. A lot of changes have taken place over these years. There is greater competition, and the members need more support and assistance in areas that go beyond technical expertise. The institute has responded to those needs, in a balanced way. These are changes in response to changes in the environment.

CPAJ: Services that CPA firms have traditionally performed are basically not growing. More and more firms are turning to other services--primarily consulting--for growth opportunities. Do you see any problem here? The SEC has expressed the view that firms need to be careful not to have these services detract from the importance of audit services.

Chenok: While the CPAs are licensed to provide certain services to the public, the CPA designation also connotes a level of education and training that enables us to provide a whole range of services for which we are not licensed. The efforts of firms to expand into other, perhaps nontraditional, services and bring the acumen of the CPA to bear are quite appropriate. I see no benefit to trying to constrain CPA firms from applying their knowledge and skills wherever there is a market for those skills.

CPAJ: How do you feel about nonCPA ownership of firms holding themselves out as CPA firms?

Chenok: If someone in the public
marketplace wants to put up money to finance an accounting service organization, good luck to him or her. What the public has to be concerned about is that the activities of the firm are in compliance with professional standards. I don't see a great groundswell of criticism simply because doctors work for commercially operated health maintenance organizations. Consumers are concerned about the service the doctor provides and his or her professional responsibilities, not who finances them. If, on the other hand, owners seek to influence the quality of service--that's a problem.

CPAJ: Do you then think that
American Express Tax and Business services should be able to do audits?

Chenok: The independent auditor/CPA who does the audit is the person bound by professional standards, and as long as he or she adheres to the professional standards in delivering the services, it does not make one iota of difference who owns the organization. It could be American Express or Joe Doaks, CPA. In the technologically driven environment that we are becoming more and more a part of, the cost of that technology will continue to grow--and partners' capital accounts may no longer be able to finance that cost.

CPAJ: The vibrations we get from local practitioners are that they are suspicious and fearful of American Express Tax and Business Services. They fear that it competes unfairly with them.

Chenok: That fear is misplaced. What American Express is doing is attempting to satisfy a perceived market need. What the local CPA firm has to do is respond to the same market need. After all, American Express is acquiring accounting firms to achieve its goals. The firms ought to be smart enough to see this as an opportunity rather than a threat. As the world changes and becomes more complex, there are ever increasing needs for professional help. Retirement planning, estate planning, complex financial transactions... What CPAs have to do is shed themselves of old ways and look at marketplace needs. That's what being a CPA is all about, reacting to change and being proactive to new opportunities. To do otherwise is to just eke out a living, barely getting by.

CPAJ: American Express features in its advertising the fact that it has CPAs on staff to help advise and deliver services. On the other hand, we have large CPA firms that don't even include CPA on their letterhead--they think that holding out as a CPA firm limits the public's perception of the kinds of services they provide. The issue seems to be turned upside down.

Chenok: The institute, on my watch, instituted an advertising, public relations program to convince the public that CPAs are skilled in a wide array of areas--that the public should not think of us as just auditors and tax return preparers. If that is a good message--it's one our members continue to support--and as the public begins to understand the benefits of having a CPA provide these other services because of the self-regulatory framework in which they are provided, who knows--maybe the large firms will once again find it beneficial to use the CPA tag!

CPAJ: You would hope that
they might.

What about the role of the AICPA versus the state societies of CPAs? Sometimes they seem to be competing with one another. Sometimes, we sense the AICPA is uptight about what a particular society is doing. Would the AICPA prefer that the state societies not challenge the AICPA, that they act more like chapters, or perhaps even become chapters of the AICPA?

Chenok: There is a place and a need for a national organization. And there is a place and a need for local, grass roots type, state organizations. The perfect example is the way legislative and governmental issues are dealt with. The AICPA responds to and seeks to influence legislative and governmental goings-on in Washington. The state societies deal with this at the state and local level. The AICPA could not possibly properly deal with the local issues. It is here, however, that the two roles are most clearly defined and separated. I see the waters getting a little muddy in other areas. For example, it used to be that the AICPA was the major developer of CPE courses which state societies delivered. Over the years, as societies sought to be competitive in the marketplace, they developed their own courses or obtained them from lower-cost third parties. Somehow in my own mind, I think the AICPA, working with the societies, should have been able to continue in its role as the major developer of high-quality programs that would have been delivered to professionals at competitive prices. I was not able to accomplish that.

But back to the main point, I think we have been forging a closer relationship with state societies. That was one of my objectives. Barry Melancon, as a past ED of a state society, should be able to do even more in creating a spirit of cooperation and a strong working relationship.

CPAJ: Some have the impression that the AICPA is the spokesperson/ representative of the large firms, whereas the state societies are closer to the local practitioners.

Chenok: Nobody who knows the facts would take that position. The large firms speak for themselves; they have enormous resources. Most things that they seek to do they can do on their own. The large firms do not use the AICPA, nor for that matter state societies, for technical or informational needs. The large firms are very involved in some aspects of the AICPA--its standard setting activities, SECPS self-regulatory aspects, and its political activities. But they have no interest in things like our CPE offerings or our technical information service. The large firms are very proactive in areas of concern to them. But those areas are by no means the full breadth of what the AICPA does. Most of the institute's programs and services benefit local practitioners rather than large firms. The AICPA would benefit if the large firms were more involved in other areas because of the talent in their organizations and the resources they have.

CPAJ: How do the members
from local and regional firms benefit from their participation in
the AICPA?

Chenok: It may sound corny, but I am told that they see it as professional obligation. They also enjoy the interaction with their colleagues. I also hope they see the involvement as broadening their own horizons.

CPAJ: Other publications, such as the Journal of Accountancy in June 1995, have written of your accomplishments over the past 15 years. But I would like to make note of the growth of the profession during your leadership years.

Chenok: I wish I could take credit for the fact that membership of the AICPA more than doubled over the 15 years, from in the neighborhood of 150,000 to about 320,000 when I left. But demographics had a lot more to do with growth than any actions we took. We were a young profession just 30 or 40 years ago--more people were entering than were retiring. Now we are a mature profession with the number of entrants stable or even declining and about the same as those that are leaving the profession. Growth in the future will be a much more difficult challenge.

CPAJ: Thank you for speaking with us. I think more than a few of our readers will be surprised and challenged by what you have said here today. *

About Philip Chenok