By James L. Craig, Jr.
The CPA Journal Millennium Series
Preparing the CPA for the Year 2000 and Beyond
Realize the Vision
This month the AICPA will install Robert K. Elliott as its chair for the 1999/2000 fiscal year. It is fitting and proper that Elliott be at the helm for the turn of the millennium; throughout the last ten to fifteen years he has been intimately involved with the issues and direction of the profession. He was a driving force in the profession's successful effort in obtaining Federal securities litigation reform. He served on the AICPA special committee on financial reporting. He chaired the AICPA special committee on assurance services. He served on the AICPA's board of directors and chaired its strategic planning committee. Elliott has not neglected specific professional issues; most recently, he has published, spoken, and debated the issue of auditor independence, making a strong case for independence in fact over the appearance of independence.
The CPA Journal Editor-in-Chief James L. Craig, Jr. recently spoke with Elliott to learn of his program at this very important juncture in time and for the profession. The Journal also took the opportunity to ask him about some of the important professional issues of the day and the controversial AICPA decision, effective with his taking office, to eliminate nearly 50 of the AICPA's standing committees.
CPAJ: Most chairs of the AICPA begin their year with a "ten-point program" as a means of setting their goals for the year. What are the major focal points for your year of service--the first chair of the new millennium?
Robert K. Elliott: The key issue is how we can help our members take advantage of the huge opportunities that exist in the marketplace as we shift to an information economy. Every analysis we've done shows the stakes are high. Without transformation, the profession will decline. The risk of decline is just as dramatic as the opportunities for prosperous renewal.
For several years now, the AICPA has been reorienting its programs to address this problem, and I've been part of the process as chair of the strategic planning committee and the assurance services special committee. We don't need to reinvent the Vision Process, or define a program for new assurance services, or shape a Center for Excellence in Financial Management. But we are far from the point of merely reaping what is already sown. There is a lot of hard work and thinking ahead. We have to take it all further.
What does that mean? It means renewing the CPA's heritage as the premier information expert in the country--skilled in every facet of getting information to decision makers, with a deep understanding of their needs and how to meet them. No one should know more than the CPA about how to create and deliver decision-useful information when and where it is
needed. I want CPAs to be more important to this country's economic growth than they are today, and I want them to be recognized for that contribution. I know they can do it by building on the traditions and skills they have used in the past, and I know the AICPA can help them do it. That is my mission.
Realizing the Vision
CPAJ: The AICPA has made a huge investment in the Vision Process. When will CPAs begin to see the effects of the program in their daily work activities? When are they going to start acting like they have a vision?
Elliott: The Vision Process identified core values--things we don't have to change--that are the continuation of things that made us a great profession. It also identified new competencies that members will have to cultivate to fully realize the vision--critical and strategic thinking, customer orientation--those types of skills. When they master these skills they will be able to take advantage of the opportunities in the market place. The most dramatic shift will come when members have these competencies.
The Vision Process also identified five core services that will be the foundation of the profession in the future: First on the list is assurance and information integrity services. A number of new programs have been developed on this, and others are under development. The second is information technology. Here, we are developing some strategic thrusts to position CPAs to dominate information integrity in cyberspace. In the case of management consulting and performance management, we have substantially upgraded our commitment to develop new products and services for our members. Financial planning is the fourth area: a major emphasis will be to expand more into corporate financial planning. The last area is international services. The U.S. has been less dependent on globalization than some other countries because we have such a mammoth domestic economy, but there are huge opportunities to be developed for our members on the international scene.
Just because we roll out these new opportunities doesn't mean instant success for our members. They have to do their part--develop the skills, market the new services, deliver the services, and get feedback from clients and employers as to what works. There is no magic pill that will transform them and produce new revenues.
There is huge amount of movement in the direction of the realization of the vision, but it is taking place on the ground where it may not be immediately observable.
CPAJ: The AICPA is very focused then, on realizing
Elliott: Yes, it is. For more than a century, the AICPA has done a fabulous job of building a strong profession. This can be seen in the respect and prestige that the public accords to individual CPAs and to the profession. The high public standing was largely created through our self-regulatory structure. But sometimes, the AICPA has to get ahead of the curve of events and think strategically for its members--help them see further into the future so that they can prepare for it. Now is one of those times. With the information age transforming business from face-to-face dealings to commerce in cyberspace, there are huge changes and huge opportunities. We are at a watershed moment. It is not enough for the AICPA just to continue doing what it has done so well.
CPAJ: That is very nice to say, but how is it going to happen? What can you do this year to move it along?
Elliott: We're redirecting the profession toward services that deliver greater value. It is not going to happen in one year. The activities this year, and the past several years, are the beginnings of a sea change to help members profit from the information-age opportunities.
The AICPA is doing what it can at the national level--setting the vision, designing new services, developing new tool sets, reorienting its CPE function to be vision aligned, and changing the advertising program to let the public see the new and emerging role. The state societies can augment that. They are closest to the members. They can be the engines for change.
CPAJ: Do the state societies, some of which are quite small in terms of staff, have the resources to be much of a factor?
Elliott: Many of the state societies are not big enough to invent. But they can be very effective delivery vehicles, through conferences, CPE, and chapter activities. The same resources that are already used can be redeployed for vision-aligned conferences, courses, and chapter activities. Tom Hood, executive director of the Maryland society heads the state society implementation effort and is working with individual societies.
CPAJ: How are you going to help the CPAs in the one- or two-partner environment to transform? With the good economy, they may be doing better than they have done in years, just by doing the same things they have always done.
Elliott: Local practices have some advantages over big practices. They can be much more nimble in reacting to a changing marketplace. I see many smaller firms that have substantially changed their practices and are doing very well.
There are, however, a lot of local firms that are trying to compete and be successful by just cranking up the rpm's. The problem is they are in a cost-cutting game, and technology is driving down the prices. They'll work harder and harder, put in longer and longer hours, just to earn a decent living. Those firms have the choice of standing back and taking a fresh look to redesign themselves.
And by the way, although times are good, if you price-level adjusted what some practitioners are earning today, you would find that they are making less than their counterparts a generation ago.
I have seen a number of firms--usually with one sparkplug who takes on the burden to explore and develop the new skills and techniques--that have become strategic advisors to their clients. The result is a more profitable firm with happier clients and staff.
Promoting the Local CPA
CPAJ: Wherever we have a group of local practitioners gathered to discuss issues, the question sooner or later gets around to what the institutions--the AICPA and the state societies--are doing to promote small firm practitioners, to tell the public what a great group they are so that the public will beat a path to their doors.
Elliott: We are advertising to herd the market to CPA firms as a group, and small firms should get their share. Unfortunately, our budget is a drop in the ocean of advertising spending. But understand, our programs are having an effect.
Our advertising budget is too small to break up into member constituencies. We therefore are limited in our ability to promote how small firms uniquely can help a particular market segment. Our program promotes the CPA designation and tries to invest that with value. Individual CPAs and firms must go out and take advantage of the prestige that has accrued.
CPA Journal: The AICPA's decision, jointly announced by you and your predecessor Olivia Kirtley, to eliminate almost 50 of the AICPA's standing committees has not sat so well with many presently serving on those committees and the tax division, which is significantly affected by the change. Did you anticipate this reaction? And what is the objective of the change? AICPA committee service has been a badge of honor for many.
Elliott: We greatly appreciate members' desire to serve the profession. Their work is the single most distinctive quality of the Institute. It is in the truest sense a members' organization. But the committee structure had become unwieldy. It needed pruning for its own health the way a tree sometimes needs pruning for its health. A more efficient committee system will present better opportunities for members to make a difference through committee service, and that is exactly what members who want to serve
International Accounting Standards
CPAJ: International accounting standards setting is attracting a lot of attention at the moment. The international securities regulators are evaluating the set of core standards developed by the International Accounting Standards Board, which in the meantime is considering a proposal to restructure itself as the preeminent international standards setter. The AICPA's comment letter on the restructuring proposals, while critical, seemed to recognize the political setting with the suggestion that it move toward an ideal, completely independent body over a period of time.
Elliott: It is, obviously, in the interests of investors and creditors around the world for every country to have high-quality, uniform accounting standards. We take the position, however, that uniformity without high quality is not desirable. U.S. standards at the moment are superior to international standards, so financial statement users here would not benefit from the substitution of international standards for U.S. GAAP. There are countries where international standards are superior to local standards, and users in those countries would benefit if international standards became the national standards. The SEC is carefully considering whether international standards might be used in filings by non-U.S. filers, and I am confident that its conclusions will protect investors.
In the past, the IASC has been more like a harmonizer, picking and choosing the best practices among existing standards, while at the same time, trying to eliminate alternatives through its core standards project. With the core standards now complete, if the IASC plans to step out in new areas and become truly a global standards setter, its structure needs to be less political and more independent, with greater resources--much like the FASB model. The IASC is stuck between constituencies like the FASB and the SEC that would like a FASB-type standards setter and the European community, which is not ready to move so fast. The proposed IASC restructuring was a compromise between those two points of view. The AICPA response to the proposal acknowledged that the IASC is moving in the right direction but that the target is farther along the same course. Mechanisms need to be put in place to keep the structure moving toward the FASB-type model.
There is some professional jealousy at work here. The European practicing accountants foresee a loss of influence if an FASB-type model is adopted. Here in the United States, we gave up on that issue over 25 years ago. The Europeans will get there; the benefits are too evident for them not to.
Six-pack of Assurance Services
CPAJ: The AICPA Special Committee on Assurance Services, of which you were the chair, identified a six-pack of services that it felt were especially promising for the CPA profession to develop and offer to the public. The first of the six to market was WebTrustSM. A recent New York Times article showed that there are similar seals of approval from other organizations, such as the Better Business Bureau, that seem to be gaining a foothold in the market. There is no question about the idea of WebTrust. But how are we doing on the implementation?
Elliott: There is growing recognition in the marketplace that the other seals are not comparable to WebTrust in what they provide. The reason some web vendors like the alternatives is their nominal cost. But they are also nominal in value, and we must get the message of our superior value out in the marketplace. WebTrust seems to be playing better in Europe, where privacy concerns are more serious. Ultimately, I believe there will be a private sector service to give these kinds of assurances, and WebTrust has the best possibility of being that vehicle. But if it isn't the ultimate answer, I hope that whatever wins this game will be a service provided by CPAs. When we went into the development of these new services, we knew that the probability of any new product being a success is fairly low. The probability that all six would succeed was virtually zero.
There have been some enormous successes with the new services. Some of the large firms have reported that their new risk measurement services have been developed from zero several years ago to several hundred million dollars in annual revenue, just here in the United States. More and more firms are going into Eldercare. Performance measurement is about to be introduced, as is SysTrustSM/TM. Together with the Canadian Institute of Chartered Accountants, we have built a service development infrastructure. There is an international assurance services network with some of the foreign institutes. And this is just the tip of the iceberg.
If we have the imagination to figure out how to provide assurance and information integrity for all the new data and information, there will be a huge, huge demand for those services. There is absolutely no reason why CPAs should not dominate that business.
CPAJ: Wal-Mart and Procter & Gamble don't need WebTrust. Where will the demand come from?
Elliott: Even with such household names, it isn't clear that they wouldn't do more business if they had the WebTrust seal. And one of the WebTrust seals is on the Bell Telephone of Canada website. Our research tells us a large number of people use the Internet to find a product but end up buying it the old-fashioned way, because of concerns of doing business online. With a name brand, you may not be concerned about the company standing behind the product, but there are still privacy and procedural issues. For example, some worry about what a company might do with their consumer preferences and order histories.
Plain Paper Statements
CPAJ: Local practitioners are once again expressing the desirability of being able to give financial information to clients without having to attach some form of accountant's report. The client knows the reliability and integrity of the information. The client just wants the CPA to put the information into a meaningful format. On the other hand, the accounting and auditing gurus feel strongly that if a CPA submits information that in any way hints at being a financial statement, at least a compilation report must be attached. Where are we headed?
Elliott: Our members should be able to help their clients manage their businesses with useful information. On the other hand, we have this long-standing public-interest commitment that users of CPA-submitted information be well-informed of the degree of responsibility the CPA is taking.
Changing technology and changing relationships with clients may have resulted in our existing rules being out-of-date. We have asked the Accounting and Review Services Committee to take a look to see how the rules can be modernized so we can both serve our clients and not risk misleading members of the public.
The problem might be solved in a different way if CPAs provided clients with more relevant information sets that did not purport to be GAAP financial statements. Most businesses would be better served if for internal accounting purposes they had a different, more relevant set of information. To the extent that our members can design a set of indicators that would help clients run their operations without looking like a set of GAAP financial statements, the problem would go away.
CPAJ: Modernizing the rules seems like a better answer than having to avoid a set of information that might be mistaken for GAAP financial statements.
Elliott: One of the new assurance services is performance measurements. It may not be cost-effective to tailor a set of reports for each small client. But if the AICPA can roll out a broader set of performance measures that CPAs could install in a cost-effective way without the need to develop them from scratch, that would be a viable alternative. Using a GAAP financial statement to help a small client run its business is a far cry from what sophisticated managers use. We need to give CPAs the tools to provide the meaningful information, and that is not always GAAP financial statements.
CPAJ: It has been almost a year since Chairman Levitt announced his campaign against earnings management. Are the securities markets the better for it?
Elliott: The quality of financial reporting in the United States has never been higher. The standards are better. Alternative choices have been significantly narrowed. The standards of practice are as high as they have ever been or higher.
Is there room for improvement? Of course, there is always more that can be done. The SEC and the accounting profession are on the same side on this issue. Both are interested in information integrity for public users. The SEC is right to point out problems when they see them.
The SEC has a difficult balancing act because it is responsible for investor protection and credibility in the financial markets, and it is responsible for pointing out problems. If it becomes too aggressive in describing the problem areas, it may harm investor confidence in the markets. As I said, it is a very difficult balancing act.
The AICPA has been cooperating with Chairman Levitt, as I'm sure you know. A big part of his program was to call on the self-regulatory bodies to take steps that might improve financial reporting. That shows an underlying confidence in the system that should have gotten more attention than it did.
CPAJ: Will the recommendations of the Blue Ribbon Panel on audit committee effectiveness improve the financial reporting process and improve corporate governance?
Elliott: The AICPA has supported independent audit committees for a long time and was very happy that the blue ribbon panel endorsed our position. We must be careful, however, not to set the expectations of what audit committees can do above what can realistically be delivered. Audit committees are made up of a few people who meet a few times a year for a few hours. Their appropriate role is oversight and asking tough questions. But it is completely unrealistic to give them ultimate responsibility for the financial statements of a complex enterprise.
The Number One Problem
CPAJ: The number one practice problem for the last few years or so has been a lack of people. What
are the immediate and long-term solutions?
Elliott: Economists say there is no such thing as a shortage, only a pricing error. Sustained growth in the economy traditionally increases the demand for those who possess CPA-type skills--investment bankers, MIS people, and consultants. We are all drawing from the same pool. This creates "shortages." Typically, if we raise the price, more people come into the field. Through adjustments in the pricing--the salaries we offer to those who join the profession--a balance between supply and demand will occur.
A bigger issue is the skills and competencies of those we should be attracting to the profession. Traditionally, the profession has hired graduates with a B.S. in accounting. The number of those candidates being hired by the large firms is declining. These firms are looking for people--including recruits for the assurance services side of the practice--with other skills and backgrounds.
CPAJ: Will all these new entrants into the firms become CPAs?
Elliott: While for statutory purposes it is not necessary for all of them to become CPAs, the credential does have great value, and firms, I think, will continue to expect those in the assurance services practice to become CPAs.
CPAJ: No conversation with Bob Elliott would be complete without at least touching on auditor independence and the line drawn in the sand separating the SEC and the profession as practiced by the large firms. That line has to do with the fact of independence versus the appearance of independence. How is this difference in point of view going to be resolved?
Elliott: All the individual auditor can do in order to assure objective financial statements is to be independent in fact. The appearance that the system works depends on much more than just individual auditor behavior. Investor confidence depends on the whole regulatory system, the way the rules are set and enforced, what regulators say, what the press writes, and more. No individual auditor doing an audit can affect the appearance of the system. And the faulty appearance of an auditor independent in fact cannot affect the auditor's objectivity or the quality of the audit. My conclusion therefore is that individual auditors must be independent in fact, and the regulatory system must create the conditions under which the public will have confidence that independence-in-fact exists.
Threats to the Profession
CPAJ: What are the next challenges for the profession?
Elliott: We have talked about the opportunities that are on the horizon. CPAs who take advantage of the opportunities have a bright future. But there are some risks. On the technology front, we must realize that more and more of what CPAs have traditionally done will be taken over by software. We have to move up the value chain, to do what the software can't do.
Technology will also enable non-CPAs to compete for these same opportunities. CPAs' only statutory franchise is giving assurances about financial statements. Whether that franchise would hold up to a technology challenge is not obvious. Assume Microsoft created software that could do audits that were ten times as effective at one-tenth the price. Would the statutory franchise stand up to that kind of assault? What would happen if the annual financial statement was replaced by online, real-time access to company information? There would be no three-paragraph report, just a seal on the company's website. Will that be covered by the existing statutes?
In order for the profession to remain the preeminent player in the assurance services market, we must pounce on the opportunities quicker and more effectively. The public is giving us the right of first refusal for the new services. The public trusts us and is not ready to transfer that trust to some new, untested player. But if we lag, we could lose the game.
There is another, more mundane risk. Because the CPA license is a license to audit financial statements, and more and more of what we do is not directly related to auditing financial statements, the relevance of the credential is eroding. In large firms there is no demand that consultants, and now to some extent tax people, become CPAs. To the extent that audit experience is required to become a CPA--or with the UAA changes, just the knowledge of auditing needed to pass the CPA exam--fewer and fewer people are finding auditing relevant for their careers, and there will be fewer seeking the credential. We have to take a close look at broadening the requirements to be a CPA or supplementing them with other credentials that are more relevant.
CPAJ: Our best wishes to you for a successful year as chair.
ABOUT ROBERT K. ELLIOTT
Robert K. Elliott, CPA, will assume the office of chair of the American
Institute of Public Accountants on October 19, 1999. He is a partner of KPMG LLP in New York City and assistant to the chair. Elliott was recently chair of the AICPA Strategic Planning Committee and previously chaired the AICPA Special Committee on Assurance Services. He was previously a member of the AICPA's Special Committee on Financial Reporting and Auditing Standards Board, as well as the SEC's Advisory Committee on Capital Formation and Regulatory Processes.
Elliott has received a number of awards, including the AICPA Gold Medal Award for Distinguished Service, the Journal of Accountancy Literary Award, and the American Accounting Association Auditing Section's Distinguished Service in Auditing Award.
Elliott has been named one of the "100 Most Influential People in Accounting" by Accounting Today each year since the inception of the list. He has an AB from Harvard and an MBA from Rutgers. His publications, as author or
co-author, include more than eighty books and articles. *
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