The CPA Journal: Let's begin with an identification of a couple of the most important and significant events that occurred during your tenure at the AICPA.
Dan Guy: The most exhilarating set of standards I was involved with was the expectation gap standards, which were issued in 1988. We issued nine statements on auditing standards designed to reduce the gap between the public's expectations of what the independent auditor does and what the professional standards required of him or her. It was a highly focused time, with the ASB, at the end, meeting every four weeks. It was a hectic pace, but what a sense of accomplishment when we finished.
CPAJ: Those standards are still at the heart of what the auditor does.
Guy: The centerpiece document of those nine standards was the SAS on fraud. Although that was superceded last year by SAS 82, the basic articulation of auditor responsibilities for fraud carries over into the new standard. Trying to get the auditor squared away on what to do with fraud has been and will continue to be an ongoing process of the ASB. I thought after we issued SAS 53 in 1988, our work on fraud would be done. But I have learned that equipping the auditor to find fraud will never be finished. The standard on fraud must be kept evergreen--the ASB will be reviewing the new standard for its effectiveness after two busy seasons of implementation. It is a continuous process of developing authoritative and nonauthoritative material for the CPA to meet public expectations.
Plain Paper Statements
CPAJ: Where would the issue of plain paper statements fit on your list of mosts?
Guy: That would make my list as the most emotional topic of a professional nature that I have ever been involved in. It was a roller coaster ride--and a consumer of time. Any results so far have been far below the effort expended.
CPAJ: The hearings in Chicago last summer showed that the technical committees of state CPA societies are strongly opposed to plain paper statements. And these committees represent the local practitioner. Or do they?
Guy: In discussions by society technical and peer review committees, they always seem to be opposed to plain paper statements. These committee members tend to be the most knowledgeable about the issues and, quite frankly, part of the institution that "keeps" the standards. And yet when you speak to many practitioners in the street they seem to react favorably toward the idea of plain paper engagements.
CPAJ: Where do you stand on the issue? Do you have a point of view?
Guy: There are so many ways to satisfy client needs within the existing statements on standards for accounting and review services (SSARS) that, at first, I thought it was just a matter of educating CPAs as to those possibilities. The comment letters and public hearing supports this early conclusion about a lack of understanding by some CPAs of the flexibility of existing standards. But as the process has moved forward, it became clear there are some things that require fixing. One has to do with the CPA when he or she is acting in the capacity of a controller. Practice in this area is all over the place. Some CPAs issue a compilation report with a paragraph saying they are not independent. Others say the compilation report is not appropriate at all because it talks about the assertions of management of which the CPA in the controllership instance is really a part. It is now my view that the CPA acting as a controller should not issue a compilation report. There can be a transmittal letter, but it should not look, taste, or smell like a compilation report.
CPAJ: Can it be signed John Jones, CPA?
Guy: Yes, but good communication would have the CPA set forth a title or otherwise indicate he or she is acting as a controller. The Accounting and Review Services Committee is planning to expose an amendment to SSARS no. 1 to state that CPAs acting in a controllership capacity should not use the compilation report.
CPAJ: Might not that increase the CPA's liability risk in the event there was a problem with the financials?
Guy: It very well might. But the committee will have to go through an exposure to change the standards, and the issue of liability risk will no doubt be considered.
But getting back to what is my point of view. The major issue in trying to apply the compilation standards is when to apply them and when they don't apply. There is no bright line for the CPA. If the service was engagement driven, i.e., the CPA does a compilation only when engaged to do so, that bright line would be there. If not engaged to do a compilation, plain paper might be the end product. If we were doing SSARS no. 1 today, that might be the approach we would take.
There is, however, no reversing of direction at this time. We have done a good job of educating users--bankers and clients--so that it would take some serious reeducation to get users and clients to understand the engagement approach. The legal folks have advised us that staying with requirements to use a compilation report as opposed to an array of somewhat eclectic plain paper financials in the marketplace is probably best.
CPAJ: But if you had it to do over again, would there be plain paper statements out there?
Guy: It remains a complex and emotionally charged area. But, the answer to your question is yes. The bottom line is that the time is not right to move away from the compilation reporting obligation trigger as it exists. But there are things that need fixing. The ARSC will propose carving out some types of services from SSARS. And many CPAs and non-CPA staff of CPA firms who act in a consulting capacity have nagging questions as to when and how SSARS apply.
CPAJ: You have not mentioned the word "assembly" of financial statements.
Guy: The timing for the introduction of the concept of assembly was all wrong. It was designed based upon the idea of "internal use only" statements. But we know financial statements after coming in the front door as internal use, quickly go out the back door headed to a governmental organization or creditor. Internal use is a fiction. It doesn't exist. It never did.
CPAJ: Are there some things that you wanted to get done during your 18 years that you couldn't finish.
Guy: I would liked to have seen a greater integration and interweaving of the authoritative and nonauthoritative guidance that the AICPA issues. An example of doing that can be seen with our latest SAS on fraud. We issued self-study material and other user-friendly practice aids to get the practitioner off and running. For other pronouncements, there is a disconnect between the standards and the nonauthoritative material. To bring the two together requires a conscious effort and may even take some organizational changes. I think the same staff that shepherds the standard to completion should be responsible for the nonauthoritative material that the publications team prepares to help in implementation.
Another thing that remains undone for me is the elimination of the explanatory paragraph in the auditor's report for a change in accounting principles--the old consistency paragraph. With so many changes in standards going on these days, that paragraph has been cluttering up reports for years. But this will take a buy in from the SEC. Treatment of accounting changes are well covered in accounting standards and do not need to be highlighted in the auditor's report.
CPAJ: One of the major developments over your 18 years at the AICPA has been the emergence of vendors, such as Practitioners Publishing Company, to step in and provide practice aids to help CPAs implement standards set by the AICPA. Do you agree?
Guy: That is very true. The AICPA attempted to do that, but entered the market far too late. There is no question that such materials have helped the local practitioner and significantly contributed to overall improved performance by the profession.
CPAJ: Has the quality of work being done by CPAs in the attest area improved over your 18 years?
Guy: I think so. Also don't forget quality review--now peer review--came in during that period. Expectations keep changing and transactions continue to get more complex. Standard setting and other self-regulatory activities must be dynamic, part of a continuous improvement institution.
CPAJ: How do you see the mergers of the large firms affecting the standard setting process?
Guy: The AICPA will have to look at the structure of the ASB. When we moved from eight to six large firms, we went from a 21-member board to, I think, 17 members. If we move to five large firms, we may have to rethink the structure--there is the potential for a loss in resources. It may be time to revisit the recommendations of some of the earlier commissions that talked about a small full-time board, or at least a board with a full-time chair and vice chair. In the past, I have favored our existing structure and size. But with the abandonment of the KPMG/Ernst & Young merger, the need for a drastic overhaul may be postponed for a while.
CPAJ: Is there any mechanism to see that the fresh look you are suggesting takes place?
Guy: Not that I know of. The ASB, through its Audit Issues Task Force, just produced a horizons document that looks at the ASB three to five years into the future. The possibility of a reduced number of large firms came to the limelight at the end of that project. The document acknowledges the possibility, but does not focus on any structural reform because of it.
CPAJ: Speaking of the horizons document, what would you say is its most important message?
Guy: More resources in the audit and attest area--more resources in the international arena. More resources to be on top of the tough practice issues. For example, the effort to keep SAS 82 on fraud evergreen beginning with the conference after two busy seasons should be in the planning phases now. There are four or five projects that are identified in the horizons document that will take significantly more resources to accomplish.
CPAJ: One of the biggest challenges facing the auditor of the future is dealing with real-time, online, Internet type issues. Is that dealt with in the horizons document?
Guy: You bet. Real-time assurance will be and should be one of the ASB's major efforts in the next two to three years.
CPAJ: There are a number of recent developments--the formation of the Independence Standards Board and the Assurance Services Executive Committee and the issuance of practice alerts by the SEC Practice Section--that seem to be fragmenting the standard setting in the attest area. Is this viewed as a problem?
Guy: Practitioners are confused about the various publications and pronouncements--authoritative and nonauthoritative--that flow from the AICPA. There are practice bulletins, alerts, aids, and what have you. And this is before we have any pronouncements from the ISB. The horizons paper addresses the issue by suggesting they be made more user friendly. This is part of the perceived standards overload that practitioners complain of.
Part of the solution rests in making available a comprehensive retrievable database for practitioners for all AICPA publications--authoritative and nonauthoritative.
CPAJ: Are we likely to see a comprehensive data base available on the Internet as a likely solution?
Guy: The AICPA/Practitioners Publishing Company's CD ROM product for authoritative guidance is very helpful. But when you get to auditing procedures studies, alerts, and the like, the availability falls off.
CPAJ: Is subscribing to PPC the only way a CPA can get at this?
Guy: PPC does an exceptional job. However, everything the AICPA produces for the practitioner needs to be accessible to practitioners independent of what a third-party vendor might do.
CPAJ: Practitioners continuously face the prospect of spending more time on engagements every time there is a new pronouncement. SAS 82 is a good example of that. Yet when we speak with practitioners, they say that clients are not willing to pay for the additional time. Does the ASB think about these things when they write the standards?
Guy: There is a learning curve with new standards and an investment of time usually in the first year of implementation. But fees are marketplace driven. They are not cost plus. I don't know what the standard setter can do. Firms have to look for efficiency as an offset. But they should attempt to move the fees up by discussing the value of the work at the right level of management and ownership. The ASB does talk about the cost of implementation versus the benefits to the users and the public.
International Auditing Standards
CPAJ: Many of our readers are not conversant about international auditing standards. International accounting standards are in the news, but not international auditing standards. Why should they care?
Guy: As background, I have been involved in international auditing standards setting since 1982, primarily as advisor to the U.S. representative and, for a short period, as a member of the international auditing practices committee. Up until about three years ago, the ASB had little or no interest in what the IAPC was up to. It was hard to get U.S. firms to commit resources to support its work.
It is inevitable that international auditing standards will subsume national standards. The global marketplace will demand that we have international standards that are seamless. In an international strategy paper, there is the recommendation that a high-level position at the AICPA be created for international matters to lead the AICPA in educating and involving members about and for interaction with international standard setters and other bodies. It is inevitable that we will have international auditing standards, codes of conduct and ethics, and peer review.
CPAJ: On the international accounting standards side, the International Organization of Securities Commissions (IOSCO) seems to be a major factor in moving accounting standards forward. What about the auditing side? What will be the market force to elevate them?
Guy: IOSCO will be a major force here as well. In five to ten years, success in the world economy will demand full participation by the U.S. Technology and the Internet will blur the borders and narrow the oceans and make it in the best interests of U.S. companies, large and small, to be international players. It is inevitable. The question is not "if?" but "when?"
CPAJ: But auditing standards as practiced today by the large firms are international, market driven standards. When KPMG gives its report on Daimler Benz, the source and nationality of the auditing standards are not an issue.
Guy: Eventually more than just the largest firms will be active internationally. International standards will become more and more important. One of the major projects of the AICPA staff will be a comparison of international auditing standards to U.S. GAAS. In some cases U.S. GAAS goes further than international GAAS and in other cases it is the reverse. We need a two-way analysis. Mark my words, you will find U.S. firms of all sizes in the near future saying that they have conducted their audits in accordance with international auditing standards.
CPAJ: The auditing standard setting process in the U.S. has been criticized over the years for not involving nonpractitioners--those representing the public interest, other users, and preparers--in the standard setting process. Is that criticism valid? If so, what can be done to change this?
Guy: Over the years we have attempted to have advisory groups of various kinds that included "public interest" members. But they never seemed to work because we spent most of the time educating them on the nuances and technical aspects of GAAS. The route we have taken is to have ad hoc groups, such as the expectation gap conference of a few years ago, to examine specific issues from a public interest perspective. This will be true of our SAS 82 review two years from now. Also, remember we have observers from a number of groups, including the SEC, that help keep us on track. The SEC feels quite comfortable that it is representing the investing public. The new ISB has public members--we will be able to see how that works out. On the international side, we have other parts of the process to refine before we can even think of public members. For example, the IAPC meetings are not open to the public, and in general the due process that we follow is not fully there yet.
Professional or Trade Organization
CPAJ: We have noted what appears to be more of an emphasis in the last few years on the trade association aspects of the AICPA than on its professional, self-regulatory aspects. Manifestations of this have been the consolidation of all technical activities under one vice-president and a strong emphasis on publications. Do you see any troublesome developments along these lines?
Guy: It is extremely important that the AICPA maintain a proper balance among the business interests of maintaining a financially viable organization, its member service aspects, and its role as a self-regulator (i.e., standards setter) and professional society. Care has to be exercised that programs that give a short-term jolt to member interests are consistent with the public interest. In the long-term, member and public interests should dovetail. For example, the new standard on fraud is intended to elevate the effectiveness of auditors in response to public expectations. In the long run, this should make the services of the auditor more valuable and benefit members. In the short run, you can get grief from members. We have to restrain ourselves in catering to the member reaction. Sometimes the three forces--business interest, member interest, and public interest--can get out of whack.
CPAJ: Are they out of whack now?
Guy: I'm not sure. At times I do sense a lack of "respect" and "understanding" on the part of some of our leaders--staff and members--for the technical, professional aspects of the AICPA. It shows in the amount of resources that are made available to those activities and the appreciation expressed for what is accomplished. In fairness, the AICPA has a lot going on right now, not the least of which is the formation of the Independence Standards Board. I hope that its leaders can bring the three forces into sync as it moves forward in these very demanding times. And I think that they will!
CPAJ: As observers of the AICPA and strong supporters of its professional aspects, we are concerned that the self-regulatory aspects be maintained at a high level and that the image of the CPA as an independent, objective professional in no way be compromised.
Guy: I am confident that that notion will prevail at the AICPA in the long run.
CPAJ: Some recent structural changes as agreed to by the AICPA and the National Association for State Boards of Public Accountancy (NASBA) as now exist in the Uniform Accountancy Act could lead to further erosion in the perceived professionalism of CPAs and CPA firms. In mind are the reduction in ownership of CPA firms to require only a simple majority of licensee ownership and a watering down of the experience requirement to become a CPA. On top of this, we have American Express Tax and Business Services (TBS) practicing public accounting. Phil Chenok, the immediate past president of the AICPA sees no problem with TBS doing audits. Any comment?
Guy: Is there a lot of difference between TBS doing audits and one of the large "professional service" firms? The key is the professional that is doing the work. Is he or she properly licensed and subject to regulation? That becomes the paramount question.
But the idea of commercial organizations such as TBS becoming full-service public accounting firms is still very troublesome to many CPAs. It is an emotional situation. One CPA at a TBS-acquired firm shared with me that some CPA friends refused to speak to CPAs employed by TBS. That's unfortunate.
If anything, these developments, which incidentally are marketplace and judicially driven and beyond the control of the AICPA, point out the need for a very strong self-regulatory system to preserve the core values of the CPA.
CPAJ: Our thanks Dan, for a job well done, and best wishes for success and good fun as you pursue your other interests. *
Will the Flame Be Extinguished?
Dan Guy resigned as vice president, professional services at the AICPA as of January 6, 1998, to pursue other interests. He served on the staff of the AICPA for almost 18 years, during which time his primary role was in the auditing, attestation, accounting, and review services areas.
He was there when the expectation gap auditing standards were issued. He was there when compilation and review replaced the ambiguous "unaudited" label on financial statements of nonpublic companies. He was there for the creation of the attestation standards, which have led to a wide array of new services for the CPA to perform.
The CPA as attestor, auditor, reviewer, and compiler and the standards in support of them were his passion. He truly sought to be the keeper of the flame of the professional values and core competencies needed to provide those services to the public.
CPA Journal editors Douglas R. Carmichael and James L. Craig, Jr., interviewed Dan Guy to reflect on those important events during his leadership and on the future of the profession as it moves forward into new areas.
Guy also warns of the importance of the AICPA keeping a proper balance between its business aspects, the interests of its members, and the public interest.