November 1998 Issue

Opportunity and challenge for CPAs, their clients, and their companies HEADER/flat

By Walter M. Primoff

In Brief

Catching the Wave, a Good Ride, or a Wipeout?

Electronic commerce (the purchase of goods and services over the Internet's World Wide Web) is expected to explode over the next three to five years and profoundly change the way goods and services are bought and sold by consumers and business alike. This article addresses major e-commerce opportunities and challenges for CPAs in practice and industry and explores the dangers for CPAs, their clients, and companies who remain unprepared. The article also describes the exciting opportunity for CPAs to provide the new AICPA WebTrustSM service. To help get started, the sidebars identify educational resources and describe affordable approaches for even the smallest companies to establish a complete e-commerce presence.

he U.S. economy is poised for the geometric growth of electronic commerce to have a profound effect on the way business is transacted. For the purposes of this discussion, electronic commerce (or e-commerce) is defined as the purchase and sale of goods and services over the Internet's World Wide Web. According to private sector forecasts contained in a major U.S. Department of Commerce report entitled The Emerging Digital Economy, business-to-business e-commerce will reach $300 billion by 2002. The conservative estimate for retail sales is $7 billion by the year 2000, with some respected analysts predicting upwards of $100 billion over the next five to eight years (report pages 21 and 38). This revolutionary way of doing business will provide CPAs in practice and industry with major opportunities and technical challenges. For many companies of all sizes, utilizing e-commerce will become a matter of survival.

Most elements of e-commerce transactions, from ordering to fulfillment, are conducted electronically. CPAs whose clients and companies engage in e-commerce will need a working knowledge of related hardware, software, and communications technology. CPAs involved with financial statements must understand how transactions are processed and secured through electronic web-based systems, both to prepare and audit financial statements and to understand the financial control structure. The additional knowledge required by CPAs is a natural extension of existing competencies and can be readily learned.

CPAs who take the initiative have an important business consulting role to play, helping their clients and companies establish a successful e-commerce presence. There are also exciting opportunities for CPAs in public practice to become key players in the e-commerce infrastructure, by providing the new AICPA WebTrustSM assurance service and for those in industry to help their companies prepare for these engagements. The WebTrust seal is being adopted by CPAs and their Chartered Accountant counterparts around the world. It provides assurance that client websites meet high standards of business practice disclosure, transaction integrity, privacy, and security. CPAs whose clients and companies are not yet contemplating e-commerce have a vital role to play in alerting management to the competitive implications.

The Risk of Ignorance

Those who ignore e-commerce may find themselves overwhelmed. This author's interest in the broad impact of business technology began in the 1960s when a successful client, who was highly dependent on long-distance phone lines, went bankrupt following AT&T's introduction of toll-free (800) numbers. The bankruptcy was solely due to the owner's failure to understand and prepare for this new technology. For many companies, especially small businesses, e-commerce has the potential to be their 800 number. Though some do not believe that e-commerce will gain widespread acceptance, this is an increasingly risky point of view. If the geometric near-term (two to five years) growth predictions fail to materialize, the cost of getting ready will be relatively small. However, if they come to fruition as expected, unprepared companies may find it difficult or even impossible to catch-up.

Telecommunications companies--wireless, satellite and land-based, cable-TV providers, electric utilities, and others--are racing to build the e-commerce communications infrastructure. Along with computer hardware manufacturers, software developers, and merchants who want to sell over the Web, hundreds of billions of dollars are being invested to develop a secure and profitable overall e-commerce infrastructure, often referred to as the "information superhighway."

Even at the current stage of development, Dell Computer, Cisco Systems, GE, and a variety of other large and small companies are finding gold on the Internet. Amazon Books & Music ( is well positioned to become a major consumer force on the web, moving well beyond its base as a retailer of books. Auto-by-Tel ( is receiving over 100,000 purchase requests per month, resulting in $500 million of monthly sales. Between 1996 and 1997, the online purchase of airline tickets and other travel services has tripled from $276 million to $827 million and, according to the Department of Commerce report, could reach $5 billion by the year 2000.

Other popular items bought on the Web include music (, securities (, gardening needs (, and groceries ( Athletes are successfully selling affinity merchandise over the web. [Baseball star Roger Clemens' site ( is the first of these with a WebTrust seal.] Many small businesses have a successful e-commerce presence. Lacrosse enthusiasts buy equipment from Laxland (, wine lovers reach small California wineries through Virtual Vineyards (, and dude ranch vacationers plan and reserve their adventures through Ranchweb (

On the business-to-business front, the auto, aircraft manufacturing, and other industries are implementing e-commerce solutions throughout all or major portions of their supply chains.

Most CPA business clients or employers, including CPA firms, already face competition from someone, somewhere on the web, whether a major corporation or small entrepreneur. At a minimum, CPAs should take the initiative by holding serious discussions with clients and employers about the importance of e-commerce readiness. This service alone may be one of the most important that CPAs will render over the next several years.

The Web's Increasing Ease of Use

One reason that some question e-commerce growth predictions is the perceived complexity that remains for many consumers to hook up to the Internet and many merchants to install e-commerce technology. However, this dismisses both the incredible growth in the number of Internet users and increasing ease of use that is occurring as the infrastructure comes online.

According to Morgan Stanley estimates used in the Department of Commerce report (page 8), the number of U.S. Internet users has steadily grown from five million in 1993 to some 62 million in 1997. Even in its current state, the Internet has achieved faster acceptance by Americans than previous major technologies (See Exhibit).

While construction of the e-commerce infrastructure lacks the visibility of interstate highways, the effort is comparable. As the infrastructure develops over the next several years, new interaction will be possible between consumers and businesses, and businesses with each other.

Convergence of Technologies. Just as the once separate technologies of computers, photocopiers, typewriters, and cash registers have converged in the wake of computer network technology, the e-commerce infrastructure will enable the convergence of the computer, telephone, and home entertainment system (TV, stereo, and video). Many easy-to-use e-commerce products, services, and delivery methods have already been developed, waiting for various segments of the infrastructure to be completed.

ecommercechart1 For example, a consumer buying clothing online will be able to simultaneously hold a phone conversation with a company stylist while looking at three-dimensional color-accurate clothing for sale on a video monitor. The stylist and consumer will be able to see each other on the screen while discussing colors and styles. This is not the stuff of Star Trek; it is ready now, waiting for the infrastructure to come online.

Internet Transmission Speed. The key missing element is increased bandwith. Most Internet users know the frustration of waiting for even simple graphics to reach them over telephone lines. The above example needs video, voice, and data to simultaneously move between the consumer and stylist with, at minimum, the speed and quality of present telephone and cable TV transmission. This requires more bandwith for the multifold speed increase that the vast investment in the Internet's infrastructure is intended to accomplish. AT&T and MCI are providing a glimpse of this infrastructure with their respective "Internet answers" and "Click 'n Connect" business-call services.

Online Commodities. One of the primary impacts of e-commerce, and the most important to many businesses, is the turning of existing products and services into online commodities. The web enables and even encourages the instant comparison of prices and specifications for virtually any product or service. For example, a consumer buying a video camera can, in a matter of minutes on the web, easily compare models of major manufacturers, read product reviews, choose the lowest-cost provider who offers a "no questions asked money back guaranty," and purchase the item for overnight delivery with a credit card. There are even automated agents to assist in this task. The web can virtually eliminate any retailer's advantage from the consumers' lack of knowledge about competitive prices. It forces companies to differentiate themselves by creating new services. Nearly any business that sells products or services over the Internet expecting to compete on price alone will be in serious trouble.

The Challenge to Small Businesses

Because e-commerce so effectively eliminates middlemen and uncompetitive prices, some believe small business will be seriously harmed. However, business owners who embrace e-commerce technology are likely to develop creative new ways of combining the technology with effective customer service to enhance their growth and profitability.

The probable impact of e-commerce can be analogized to the paradigm shift that occurred when local businesses throughout the U.S. were confronted with competition from malls or gigantic retailers such as Wal-Mart. Many local businesses suffered serious reversals; some, due to local economic conditions, were unavoidable. However, many small businesses and local business districts remained competitive by strategically pricing their goods and making their sites more attractive and accessible.

Similarly, e-commerce will harm some existing businesses and industries. For example, once the infrastructure is in place, it may be difficult for local video stores to compete with technology enabling consumers to order almost any commercial movie ever produced from their cable or telephone company and have it instantly delivered to their living rooms. However, because of the web, the smallest businesses can appear to be much larger enterprises, while retaining the ability to react quickly.

The key will be the use of e-commerce to enhance customer service and create new business opportunities. For example, local stores will retain an advantage that most large companies lack, the ability to provide same-day delivery for an e-commerce order. A successful craft shop in a summer resort can create an online catalog enabling customers to purchase holiday gifts. Customers can check on the status of their orders or accounts after business hours. In short, small business owners will bring the same creativity to e-commerce that they have always brought to the business landscape.

Until recently, a valid reason to remain on the sidelines was the cost of the hardware, software, and related consulting necessary to get started. The cost is now coming down sharply. Both private computer consultants and Internet Service Providers (ISPs--the entities providing the basic connection to the Internet) are offering "turnkey" e-commerce products (solutions that combine all hardware, software, payment processing, and communications elements in a single, ready-to-use package). The private consultants generally provide packages that run internally at the small business, while the ISPs are providing outsourced solutions that run on their computers. Using the ISP approach, the smallest mom-and-pop stores can have an e-commerce presence for as little as $50 per month (See the sidebar--E-Commerce Solutions).

Small business owners also need to keep abreast of the likely movement of Electronic Data Interchange (EDI) from private, value-added networks to the Internet. EDI is a computer technology used by major corporations to electronically purchase, receive, and pay for inventory and supplies. EDI materially shrinks their delivery time and related paper processing, thereby slashing inventory costs and transaction expenses.

Traditional EDI has been too costly and complex for most small businesses to implement. Internet EDI changes the picture. Companies that entirely or partially convert (such as GE) from traditional EDI to the Internet will likely require more small suppliers to use it. Also, Internet EDI is a strategic technology that can now enable many small businesses to reap its transaction and inventory-cost savings. Business owners who ignore EDI may find themselves at a major disadvantage against competitors who effectively deploy it with their suppliers. Other new types of software tools that automate the purchasing transaction process are also available for small business. One promising package is "Buying Chain" from Trilogy Software (

The first step for small business owners is to seriously consider the impact that e-commerce will have if their competitors get there first. They need to begin learning about e-commerce and analyzing its costs, benefits, and potential for marketing existing goods and services and even creating new ones. Entering the e-commerce arena is not a panacea; however, sitting on the sidelines may be an unacceptable risk. Once engaged, many small business owners will find that there are effective ways of using e-commerce to remain competitive by enhancing their relationships with existing customers and exploiting global opportunities that were previously impossible.

At a minimum, small business owners need to stay informed about e-commerce issues. In this period of unprecedented technological change, even more important than the problems that keep business owners up at 2:00 a.m. are those that they don't know about but should be keeping them up at 2:00 a.m. For many small businesses, e-commerce is one of those problems. It is vital for CPAs to keep their small business clients and employers cognizant of e-commerce issues. For many small businesses, there simply is no one else!

The Challenge to CPAs

CPAs avoiding the Internet may find their relevance diminished. One of our profession's unique strengths has long been an ingrained understanding of clients' and employers' business and transaction systems. Until now, many CPAs have been able to avoid dealing head-on with the need to understand computers from a systems point of view. A strong understanding of manual processes and the ability to deal with computer-based paper output have been enough.

With e-commerce, the entire transaction, fulfillment, and control processes are both computer-based and interrelated. Once a material portion of a client's or employer's business is electronic, it is impossible to audit around the system. Electronic payment and other aspects of e-commerce severely impact inventory turnover, cash flow, receivable and payable cycles, customer list security--in short, the entire business.

If e-commerce grows as predicted, companies of all sizes will need to establish a robust presence on the web. CPAs who cannot assist their clients in this area face a serious risk of being displaced by CPAs who have gained the necessary competence. For many CPAs, gaining this competence will require some meaningful but reasonable time and effort. However, CPAs are generally well equipped for this task.

Gaining E-Commerce Competence

CPAs already possess the most important underlying competencies. Key among these is broad business expertise and a strong grasp of accounting systems and business processes. However, to successfully provide e-commerce consulting and assurance services, it is necessary to gain a functional understanding of the technology. CPAs need not become hands-on computer experts. But, they do need the ability to communicate with them and learn the broad functionality of e-commerce systems. The following example demonstrates why this is necessary.

The first requirement to establish an e-commerce presence is to be connected to the Internet through an ISP, which can be a phone company (e.g., AT&T), a data network provider (e.g., IBM), an online information service (e.g., AOL), or a small, local independent. If the ISP is only providing an Internet connection, the primary business issues involved are the connection's availability to customers, speed, and reliability. However, as noted, many ISPs now offer a range of e-commerce services, including turnkey solutions that provide the connection, catalog maintenance, order and credit card processing, and other services.

A company may host some or all of its e-commerce functions internally or outsource most of them to the ISP. CPAs need to know what information is on the company's computers and what resides with the ISP. Even with a turnkey approach, the client is likely to have unfettered access to its own customer and other information within the host computers. CPAs need to understand where and how that information is controlled, secured, and protected and by whom. They need to know if company and ISP personnel have the skills necessary to deal with these issues and the general methodologies they apply. Especially important are issues related to potential misuse of the company's customer lists. On the operational side, as e-commerce becomes increasingly material, what happens if there is a need for the company to switch ISPs? These and many other issues require CPAs to gain the functional understanding of knowledge of company and ISP-based e-commerce systems.

Fortunately, there are numerous resources available to enable CPAs to gain and maintain the necessary competence. These include books, periodicals, CPE courses, trade shows, and a variety of Internet-based resources. (See the sidebar--E-Commerce Resources.)

As CPAs gain the necessary competence, they will be able to provide a variety of business technology consulting services, along with the new WebTrust assurance service. In fact, for many companies, bringing their websites up to WebTrust standards will require collateral consulting.

The Consulting Opportunity

E-commerce consulting has two major components--a technology component involving hardware, software, and communications and a business advice component that concerns analyzing the competitive impact of e-commerce and developing effective business strategies.

While most CPAs lack the ability to perform the computer technology component, they are far better qualified to perform the business advice component than many of the so-called experts retained by their clients and companies, whether large or small. A vital qualification here is an understanding of the company's business, which CPAs have more of than almost any other professional.

Once CPAs gain a fundamental understanding about e-commerce functionality, they will be able to provide valuable advice in a number of related areas. These include the development of realistic business expectations, the choice of competent computer experts or ISPs, and the prevention of overspending on technology that is more complex than warranted. Much as they did in the old days of tax shelters, CPAs can help their clients cut through the claims of fast-talking salespersons who, in this case, would recommend comprehensive and expensive technology approaches where something simple might be appropriate. CPAs can also organize client e-commerce seminars as a marketing tool.

CPAs who take the time to gain e-commerce expertise will find themselves in increasing demand, at rates higher than those for most audit and tax compliance services, as companies scramble to prepare for this revolutionary new way of doing business. In short, providing e-commerce business advice is the natural role of an informed CPA.

Trust--The Missing Factor

A major impediment to e-commerce growth is public concern over Internet security. For many years, Yankelovich Partners and its sister company, Cyber Dialogue, have been studying online behavior in a series of "cybercitizen" and follow-up studies. Their results indicate that a large majority of online users are reluctant to provide credit card and other private information over the web. However, the studies also show that the public's concern can be alleviated if a "trusted" mechanism is put in place, providing assurance that web transactions are secure. This mechanism is vital to the completion of the e-commerce infrastructure and is the portion that CPAs are best positioned to provide.

Under the umbrella of security, potential online buyers are seeking assurance of the following:

* They are dealing with a real company, legitimately offering the merchandise it claims, rather than a potential imposter seeking to obtain and sell credit card numbers, addresses, and other private information.

* They will receive the exact goods and services requested, when promised, at the agreed-upon price.

* At a minimum, they have the option to request that web merchants not sell or otherwise disseminate to third parties any of the private information they provide for an online transaction and that this request is honored.

* Private information cannot be technologically intercepted while being transmitted.

The provision of such assurance is a natural extension of CPAs' attestation competencies. Recognizing the public need and opportunity, the AICPA and the Canadian Institute of Chartered Accountants (CICA) joined to create WebTrust, one of six new services identified by the AICPA's Special Committee on Assurance Services, chaired by Robert K. Elliott. In addition to creating broad public trust in e-commerce, WebTrust has the potential of expanding CPAs' horizons and enhancing the profession's image.

WebTrust--A Defining Opportunity for CPAs

WebTrust was designed to be provided by firms of all sizes and was created by a joint AICPA/CICA task force, chaired by Everett C. Johnson, Jr., of Deloitte & Touche. The task force has developed WebTrust Principles and Criteria covering the above four concerns. Independent CPAs or Chartered Accountants (CAs) examine and test client Websites against the criteria, to determine if they qualify to display the WebTrust seal.

The seal is well positioned to become the universally recognized symbol of global e-commerce integrity. At this writing, Institutes of Chartered Accountants in the United Kingdom, Australia, and New Zealand are set to join the AICPA and CICA in this effort, with more organizations on the way. No other profession has either the ability or the global reach of CPAs and CAs necessary to accomplish this goal. Unique CPA/CA attributes supporting this endeavor include independence, objectivity, public trust, and an unparalleled understanding of clients' businesses.

The WebTrust principles concern three broad areas--business practices, transaction integrity, and privacy and security--which are summarized below:

Business Practices Disclosure. The audit objective of this principle is to provide reasonable assurance that consumers are dealing with an actual business that performs in accordance with its business practice promises. For small businesses, this is especially important. While the web gives them the ability to appear much larger, it doesn't provide them a brand name engendering trust. However, CPAs have the ability to create that trust through business practices assurance. The criteria call for disclosure of a variety of business practices, such as fulfillment time frames, product return policy, and warranty information. A web business is not required to follow any specific practices; however, auditors test to determine that disclosed practices are followed. The site must include the company's postal address and telephone number.

Transaction Integrity. Under this principle, auditors seek to provide reasonable assurance that effective controls are in place at client websites so that customer orders are entered, fulfilled, and billed as agreed. In a WebTrust engagement, auditors are concerned with customer-oriented controls rather than those related to financial statements.

Privacy and Information Protection. This principle's criteria have two functions, one to provide reasonable assurance that private customer information is not improperly disseminated by company insiders and secondly to provide reasonable assurance that
controls are in place to keep information electronically secure from
unauthorized parties during and after transmission.

To earn a seal, a website must meet the WebTrust criteria in all three areas. Several interested companies, both large and small, have discovered their sites do not qualify. CPAs in industry will naturally help their companies meet the criteria. CPAs in practice may find this a rewarding consulting opportunity as well.

Many CPAs already possess the primary competencies necessary to perform WebTrust engagements. Those without experience will need to learn e-commerce functionality along with WebTrust principles. CPAs also require an understanding of principles for maintaining information privacy, an area that has entered the international political arena since many countries and citizens are increasingly concerned with real and possible privacy abuses over the web, especially where children are concerned.

The area where most CPAs are likely to need help involves information security. To meet relevant criteria, websites need hardware, software, and other controls to combat hackers, viruses, and other types of electronic attack. Dealing with these issues requires a level of computer expertise generally beyond that of a CPA. The majority of firms without internal expertise will need to partner with another qualified CPA or consulting firm for this part of the engagement. Today, there are cost-effective tools that enable computer experts to test many of a website's security elements externally.

WebTrust is one of the first CPA services that is sold to a company's marketing department rather than to its finance arm. Clients will engage the service based on its ability to enhance e-commerce sales. Though it is a new service, owners of WebTrusted sites are extremely pleased. According to Chris Swainhart, president of Resource Marketing, an ISP and supplier of Web banner ads, his company's sales have increased substantially due to WebTrust. A pleasant surprise has been found on the expense side; e-mail and telephone calls regarding the company's business practices have dwindled, creating major customer support savings. According to Swainhart, the seal has far more than paid for itself.

To provide WebTrust services, CPA and CA practices must be licensed, either by the AICPA or CICA, respectively. The license agreement requires practitioners to follow the WebTrust Principles and Criteria, participate in a quality assurance process, take required training, and meet certain other requirements to protect the integrity of the seal.

At present, the first step toward licensure is attending a one-day training session that covers the principles and criteria, the methodology that prevents the seal from being fraudulently copied, and other practice aspects of WebTrust. The course is offered throughout the U.S. by state societies and throughout Canada by the CICA.

The WebTrust Principles and Criteria, practice aids, and other educational materials are available at no cost from the AICPA and CICA websites ( and, respectively).

The entire e-commerce arena is one of unlimited opportunity for CPAs who step up to the plate. With foresight and intelligence, this 800 number will ring out new levels of prestige, growth, and prosperity for all CPAs. *

Walter M. Primoff, CPA, is deputy executive director of the NYSSCPA and consulting editor of The CPA Journal. He is a member of the AICPA task force that developed WebTrust Principles and Criteria.

The author wishes to thank Eric
E. Cohen, CPA,
for reviewing the article and providing his thoughtful suggestions.

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