An Interview with Barry C. Melancon
By James L. Craig, Jr.
Putting Everything on the Line
Barry Melancon has a dream for the AICPA, and what he envisions is like nothing seen before. It is a dream of two organizations. The first is a not-for-profit membership organization that sets standards and codes of conduct and disciplines members that violate them. The organization's members are not just CPAs, and its name is not the AICPA. The majority of members are business advisors, consultants, planners, and the like, all possessing a new, as yet unnamed credential. For discussion purposes, the new breed is being called XYZ and the organization is being referred to as the AIXYZ.
The second organization is a public dot-com company that operates a business-to-business portal. In addition to being a major Internet entry point for CPAs and XYZs to conduct e-commerce, it carries out the business aspects of the AIXYZ. Members of the AIXYZ and state XYZ societies are part owners of the portal, as are their staffs. Initial funding for the portal will come primarily from commercial entities.
In this interview, Melancon describes the two missions of the "new AICPA" and discusses some of the other issues confronting the profession.
Barry C. Melancon has been president of the AICPA for almost five years. The organization today is very different than it was in 1995. Its staff has been organized into teams to make it more nimble and responsive. The organization's approach to member participation, to the chagrin of many, has shifted from standing committees to an ad hoc task-oriented structure designed to address specific member and professional needs. Greater emphasis is placed on the CPA outside of public practice, as can be seen in the pages of the Journal of Accountancy and the website of the Center for Excellence in Financial Reporting. Together with the National Association of State Boards of Public Accountancy, the AICPA is trying to overhaul accountancy regulation through the third edition of the Uniform Accountancy Act. And it has given the CPA a sight line into the future through its Vision Process.
But these changes pale in comparison to recent proposals discussed at the May AICPA Council meeting. Former Editor-in-Chief James L. Craig, Jr., spoke with Melancon about these proposals and other professional issues.
James L. Craig, Jr.: Two major initiatives dominated the agenda at the May Council meeting. Let's start with the new credential or business designation developed by a task force formed from seven national accounting institutes, including the AICPA.
Barry C. Melancon: We have been talking with the seven institutes of chartered accountants, and prior to that with the Canadian institute, for about a year and a half about how to address name recognition in the marketplace--the branding, if you will--of the CPA and chartered accountant [CA] in light of the broader business role that they are now playing.
An example of some of the problems we are trying to solve can be seen in the profession's entrance requirements. For regulatory and traditional reasons, today's applicants must demonstrate knowledge of GAAP and GAAS. Yet, in the large firms, less than 25% of the professionals are actually working with GAAP and GAAS. They are doing a whole myriad of things in a professional context, often on a global basis, but are not operating within a defined profession. Generally speaking, they do not perform their work within a set of professional standards, nor are they subject to ethical canons.
The professionals in the other 47,000 or so firms also perform a wide array of services: Some do audits, but a lot work in taxes, consulting, and general business consulting. Many are not heavily involved in GAAP and GAAS.
CPAs in business and industry that move up the corporate ladder tend to have less and less to do with GAAP and GAAS, and in fact, may disassociate themselves from that as they involve themselves in many decision-making activities.
Progress through the accounting profession can be thought of as an hourglass. At the entry level, the areas of involvement are broad and varied. But as they proceed, CPAs often narrow their focus and begin to specialize. Then, as they are given more responsibility, are recognized for their judgment, or even take on ownership roles, their fields of interest and influence tend to broaden once again. The CPA profession is concerned with GAAP and GAAS in the narrow center of the hourglass, yet we try to use that focus as the basis of the profession. There is a "disconnect" in the marketplace.
Ten to twenty years ago, those interested in entering the world of business saw the accounting program and field of study as the place to start, to get the fundamentals that would be useful in any area of business. Today, students see the CPA route as too narrow--they see the neck of the hourglass--and want a broader base upon which to build.
We also spoke with branding specialists that told us that although the CPA brand is a powerful and positive brand, there are limits as to how far it can be stretched. Just as Japanese carmakers introduced new brands to compete with German luxury automobiles, so should we consider a new brand or credential for the services to be provided outside the marketplace's view of what the CPA does.
What the institutes will be exploring is the establishment of a broad-based business advisor credential that would more easily encompass the full range of services that accounting firms provide. The thought is also to make it a truly global brand that leverages the ethics and standards of a profession but can embrace people with broad business knowledge and proven competencies. There would be no reciprocity issues--the brand would be globally based and universally accepted. It would be the building block for adding on specialties--GAAP and GAAS would be the CPA, financial planning might be the PFP, and management accounting could be the CMA. The CPA would stay rooted in the regulatory environment, whereas the basic business advisory credential would be self-regulated and reflect changes in the marketplace.
Craig: The momentum for acceptance would come presumably from two groups: those wanting to obtain the designation and those seeking to employ, hire, or otherwise use those that possess it. Do you see a strong interest from both groups?
Melancon: Market surveys in 11 countries show that, from a user perspective, there is a strong interest in the "professionalization" of business advisors that would operate within a code of conduct. This conclusion was based on hour-long discussions with CEOs, CFOs, COOs, and CIOs on ways to help them make their buying decisions. And once the demand from users is evident, many will want to hold the credential. All active CPAs would be grandfathered in as the first wave.
Craig: Would specialists other than CPAs want to use the credential as a building block? What would they have to gain?
Melancon: CPAs would come in with an understanding of ethics and maintenance of competencies. But those from other fields could join, obtain the credential, never become a CPA, and go on to specialize in financial planning, information technology, or even tax. The process will start with a vote of the members of the eight organizations on how the credential will be constructed.
We are looking two decades into the future. How will professional services be delivered? In multidisciplinary organizations? If so, do we want to take the lead and provide a framework that will be valued in the marketplace?
Craig: Will only professionals offering services to the public want to hold this credential?
Melancon: No. The credential would be the way in which an individual can demonstrate a broad business competency within a professional context to the public and to internal users (employers and others). CPAs in business and industry are very attracted to the concept. With such a credential they could show competency beyond GAAP and GAAS.
Craig: How do you see this new platform helping the CPA in tax practice? To many, CPAs and taxes are synonymous.
Melancon: That is undecided. We could continue to position the CPA in the marketplace as the tax person of choice or create a specialty designation.
Craig: The goal here seems to be to create a whole new profession that encompasses all that CPAs and CPA firms commonly do, but without the baggage of the last two letters of CPA, public and accountant, and without government regulation. You seem to be echoing what Stuart Kessler tried to do in renaming the CPA the "certified professional advisor." This seems like a huge gamble. What if it doesn't work? What will happen to the value of the CPA designation?
Melancon: The responsibility of AICPA leadership is to bring strategic initiatives to its membership. It is our role to bring sound ideas that will position the membership for success in the future. The membership ultimately makes the decision.
This is not a spur-of-the-moment idea. A great deal of effort has been put toward understanding the changes taking place in the marketplace and positioning our members to take advantage of those changes.
The market demand for such a professional credential exists. The question is, can we embrace others that would benefit from such an approach, or do we let others do the developing without our input and influence?
Craig: The other major AICPA initiative under Council consideration is the development of a website portal. What is your vision here?
Melancon: Conceptually, there are two aspects to the portal. The first is the delivery of services that state societies and the AICPA have traditionally made available to their members: current developments, professional standards, CPE, sharing and networking among members, databases, and benchmarking. The most efficient way to deliver these services is jointly over the Internet.
The second part comes from the position of CPAs in the small business sector of the economy, both as practitioners and as managers. Major businesses are looking for ways to transact e-commerce with small businesses. Accounting professionals in firms and business and industry can become the conduit to those millions of small businesses.
CPAs working in privately held small and medium-sized businesses are often responsible for everything except the organization's principal business activity. Areas of responsibility might include insurance, banking, legal, accounting and finance, and even marketing. Small businesses and small firms do not have the true capability to do e-enablement of their own or their clients' business activities.
What we are proposing is the development of a strategic partnership with major e-commerce businesses that would bring access to purchasing power to small businesses through the CPA delivery agent. The CPA would be rewarded economically based upon the volume of business her clients or company did through the portal and could also participate in the ownership of the dot-com venture. The CPA would also benefit by being in the e-commerce loop of her clients or employer. This is where the action will be, and failure to be in the loop could mean a decline in the value of the CPA's services.
We estimate the potential market of goods and services purchased by small businesses over the Internet at about $4 trillion.
Right now the AICPA and state societies do not have the resources to embark on this kind of venture. What is needed is a partnership with major Internet businesses that have the resources to build the portal.
Craig: What kind of competencies must the CPA possess to act in this capacity? And would this new activity as trading company detract from the CPA's ability to deliver traditional services?
Melancon: We see the need for some competency enhancement. We are building the cost of skill development and training for CPAs into the business plan for the portal. But the beauty of the Internet is that most of this can be acquired on a turnkey basis. The biggest issue will be the CPA's willingness to get involved and sign up clients or employers to participate.
Craig: One of the arguments against CPAs selling financial products for a commission is that the CPA would be required to spend considerable time learning the investment business. Would this not also be true for the CPA seeking to act as agent for Internet transactions?
Melancon: First, the CPA firm would receive a commission for e-enabling a client. Second, to the extent there are commission opportunities, the CPA could elect to accept or not accept depending on the regulatory environment in her state. Third, as I mentioned, the business plan builds in a support system to provide the technical competencies or salesmanship competencies that a CPA may need to take advantage of the opportunities.
Craig: The SEC feels the large firms are being distracted from their main role as auditors because of the success of their consulting practices. Might not state regulators also feel the same about the local CPA involved in e-commerce services?
Melancon: CPAs are already heavily involved in business consulting. This will provide them with the tools at the e-commerce level. Not every CPA will choose to participate. From a regulatory point of view, many CPA firms provide limited or no audit services and therefore their participation should raise little concern.
For the larger local firms, involvement in e-commerce would fit quite nicely in their technology consulting practices. For some firms, the new revenue stream created by the portal would give them the opportunity to bring in talent to help deliver the service. But participation should be fairly simple. The most significant challenge for small firms will be explaining the benefits to their clients and convincing them that it is worthwhile to participate.
Craig: What is the size of this revenue stream likely to be? How does the opportunity for financial gain arise?
Melancon: There is a consulting fee the portal would pay for each participating client or business--in excess of $1,000 per user. This might mean up to $25,000 to $30,000 in revenue for the sole proprietor who is able to enroll 25 to 30 small business clients into the program. On top of that there is a potential for additional revenue depending upon the activity of the client or company through the portal, subject of course to the ethics rules and regulations of the licensing jurisdiction.
There will also be an opportunity for equity participation by the CPA. The equity piece for an individual CPA would be quite small but would be calculated using a formula that gives credit for the number of membership years in both the AICPA and the state society. The AICPA would split the total residual ownership--after the interests of the e-commerce partners--50/50 with the members, and the state societies would hold the other 50%. Members would be given options to acquire the interest, which would be payable through visits to the portal, measured by the number of "clicks." There would be no cash requirement.
Most of the capital for the formation of the portal will come from the commercial partners. The commercial activities of the Institute will be transferred into the portal entity, which will allow the AICPA to focus on self-regulation and standards setting. The AICPA's share of ownership will be sufficiently large enough to exercise significant influence over what the portal does.
Once the portal is operating, the plan is to raise additional capital through a public offering. If and when that happens, there will be an extended friends and family phase, which would permit members and staffs of the AICPA and the state societies to buy pre-public offering stock. This would require a cash payment and involve some risk.
Craig: There was some discussion at the May Council meeting about the ownership interest you and other AICPA staff would hold in the portal entity. What will that be?
Melancon: Members in the Institute and state societies would be awarded the chance to acquire options in the venture based on their years of membership. The AICPA itself would retain a controlling interest of at least 20%. Outside investors and strategic partners would receive an as yet undetermined share in the portal, and I and other Institute personnel instrumental in the portal would receive less than 2% total.
Craig: What is the SEC likely to say about the portal going public? It raised objections to the Big Five firms taking their consulting practices public.
Melancon: The self-regulatory aspects would remain in the not-for-profit AICPA, and the commercial operations would be in the portal. One of the SEC's comments in regard to the New York Stock Exchange's plan to go public had to do with keeping the self-disciplinary aspects of the exchange in a not-for-profit entity. That's exactly what we're proposing. And because the portal will create financial gain opportunities for the staffs of the AICPA and the state societies, it will be easier for them to attract and retain talented people.
Craig: Is there a ballpark number to get the portal started?
Melancon: It will probably take around $40 million to get it off the ground, but a good deal of that will come from the commercial partners.
Craig: Will the products and services being offered through the portal include the professional standards now sold to members?
Melancon: Yes, as well as all the other products, services, and publications of the AICPA and the state societies that join our shared services program. Right now all 51 jurisdictions have stated their intent to join this program, which will be a feeder organization to the portal.
Craig: Local firms seem reluctant to take on new services and expand into new service areas. In many cases, firms have a tough battle just to meet immediate staff levels and client demands. For example, look at the few firms that are active with WebTrust, or even the number of CPAs that have become PFSs.
Melancon: The No. 1 hindrance to success in establishing new services in the marketplace has been resources. When the AICPA has launched new credentials or new service lines, it has not been that the concepts have been wrong. The execution has been hindered by a lack of resources. The new portal will give us additional resources to effectively promote new services and create market demand. For example, there is a huge market for ElderCare services, but we probably need $20 or $30 million a year to properly advertise and drive the market to the CPA. When we rolled out WebTrust, we would have needed $50 million in resources to properly establish the service in the marketplace; we had only $2 or $3 million.
Craig: The portal's success seems to depend upon CPAs driving business to the portal's commercial partners. Whether enough of them participate will be a major factor. There is also the risk that the public will be turned off by the emphasis on economic gain.
Melancon: As long as the CPA offers sound professional advice and provides value-added opportunities to clients and employers that they would not otherwise have, the portal should be a success.
The SEC's View on Effective Self-Regulation
Craig: Turning to other current professional issues, there are rumblings that the SEC is thinking of requiring some kind of super self-regulatory agency to oversee the profession, that it is not happy with the present multitude of regulatory bodies [e.g., ASB, AcSEC, POB, FASB, Peer Review Board]. Are you hearing any of that?
Melancon: The recent report of the Public Oversight Board's Panel on Audit Effectiveness, which was organized at the request of SEC Chair Arthur Levitt, did not make that recommendation. The panel's report suggests strengthening oversight, basically through the existing institutions: an expanded peer review, some SEC rule making, and a greater role for the POB. This position is also consistent with Levitt's May 10 speech at New York University, in which he spoke of a greater role for the POB.
The profession has a history of being responsive to criticisms of its role as public watchdog. When the PricewaterhouseCoopers report of violations in independence occurred, within 30 days we had a set of rules in place that required the most comprehensive stock ownership tracking system that could be devised, which will cost the large firms collectively more than $25 million to implement.
But the rules relating to independence need to be modernized. Levitt's May speech acknowledged this need for modernization. As a profession we have to follow the rules, but the regulators are responsible for keeping the rules current.
Craig: The report of independence violations at PricewaterhouseCoopers was the shot heard round the world. Just how much damage was done to the profession?
Melancon: The complexity of the rules and the fact that they have not been updated means that there are technical violations in many corners of this profession. For example, the rules do not reflect the working couple world, where each spouse has their own investments. They don't reflect the way businesses and corporations venture together and conduct business cooperatively. The rules need to be modernized and followed.
Yes, independence needs fixing and the new systems the large firms are putting in place will go a long way in improving compliance with the existing rules. But will the effort improve the quality of audits and therefore the quality of our financial reporting system? In some respects, the money might be better spent on standards setting, the modernization of financial reporting, and professional education.
Independence Standards Board
Craig: The Independence Standards Board, on which you serve as one of four members representing the profession, seems to have gotten off to a slow start. The SEC is looking to the board for answers to some very tough questions. What's happening?
Melancon: I think we have made a lot of progress. We have issued two standards, we are trying to simplify the family relationship rules, we are near an exposure draft on valuations, and we have an exposure draft on our conceptual framework. We had to get up to speed on the issues.
Craig: What do you think of the conceptual framework?
Melancon: We await comments on the ED. We need to move to a principles-based approach, and this is the start. It is a bit long, and I hope that won't scare people from responding.
Elimination of Committees
Craig: The AICPA's elimination of a large number of committees last year did not sit all that well, especially with members serving on those committees. Has the dust settled yet?
Melancon: Hopefully our reasons for eliminating the committees have been persuasive. We found that committee service, which tended to be a three-year commitment, was too much for some, especially those from smaller firms. We saw committees meeting that had no real issues
Craig: How is the group of 100 doing? It is their job to identify areas for task forces to step up and fill the gap.
Melancon: It had a very good first meeting in 1999. At its recent May meeting we asked for input on the credential and portal projects. These two initiatives are very much on point with what the group discussed at its first meeting last year. We need to use the group better at the micro level to identify issues that can benefit from member involvement using task forces.
Craig: Some members feel that committee service was a badge of honor, a measure of recognition. How does a member get appointed to a task force? Can members apply?
Melancon: It is an appointment process, and the vice chair is very much involved. But a lot of committees are still functioning. And task force service should be recognized much the same as committee appointment.
The Vision Process
Craig: Implementation of the Vision Process was the theme of AICPA Chair Robert K. Elliott this year. How are members benefiting?
Melancon: The Vision Process is driving the new credential and portal projects. We have also tried to make our advertising more vision related. When allocating our resources, we have kept the vision in mind. It is difficult to free up new resources to apply to the process because there are so many ongoing activities, such as ethics and standards setting, that require resources. The states have been very supportive. I think the significant changes that occur in the profession over the next few years will be directly linked to what came out of the process. I think the profession can take great pride in what it has done. I don't see a similar program in any of the other professions.
Craig: Has it affected individual CPAs, who are at best keeping their heads above water?
Melancon: It has affected some more than others. Some have applied the output of the Vision Process into their own strategic thinking. I have been to firm retreats and seen the vision thinking at work as strategic plans were being developed. It is a continuing process; it won't happen on Day 1 or Day 2.
Craig: CPAs in business and industry are the single largest membership group. What motivates a CPA no longer in public practice to remain an active member of the AICPA?
Melancon: First, CPAs in business and industry will want to remain because membership will be a leverage point into the new credential and the portal. We are a prime information source for them. Our Center for Excellence in Financial Reporting has been well received. The Journal of Accountancy has a new, very strong focus for them. Whatever we have done, however, is not enough. We need to stop thinking in terms of public versus private. We need to think more in terms of the industry our members serve and the issues they face. What side of the fence they face the issues from is not as important as helping them address the issues. Our work on XBRL will benefit both worlds, as will assurance services such as SysTrust. We have moved the needle, but the job is not done.
Craig: Thank you for sharing your thoughts. You and the AICPA are biting off a great deal, in a time when the profession is being pressured to perform at higher levels of competency, independence, and objectivity.
Melancon: I look forward to the dialogue that will be forthcoming on the major proposals now on the table. The profession will succeed by moving in new directions--as it always has. *
Barry C. Melancon, CPA, has been president of the AICPA since 1995. Prior to assuming that position, he was the executive director of the Society of Louisiana CPAs.
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