Is the Public Accounting Profession in Decline?

How to answer the question: “Is the public accounting profession in decline?” Input from executives, financial analysts, underwriters, and others who have direct contact with CPAs who perform the attest function are helpful, but here I’m going to try a different perspective: focusing on the public comments of the regulatory agencies responsible for public accounting in the United States.

Early efforts. In an 1889 address, James Yalden, then president of the American Association of Public Accountants (an ancestor of the AICPA), noted:

On the occasion of this our first annual gathering since the organization of our association, I have to congratulate the members on the success it has so far attained … a success which has enabled us to bring the profession of accountancy prominently before the public.

President Yalden was putting a positive spin on the situation at that time, but he did go so far as to say, “[O]ur association is not stronger in numbers.” At the time of his address, the association had 25 fellows and seven associates. Five years later it had 48 fellows and 17 associates. Noted accounting historian Norman Webster’s early papers documenting the history of the American Institute of Accountants note that annual elections were not held in 1889, 1890, and 1891, and confirm that membership during those years did not increase.

Meanwhile, initial efforts to enact a CPA law in New York State were unsuccessful. Webster’s papers note that after the failure, the legislation committee sent each member of the state legislature a letter stating:

Our Bankers, Merchants, Railroad and other Corporations, in fact, all persons engaged in business operations, have become impressed with the necessity of the establishment of a body of competent Public Accountants, whose examinations and investigations can be relied on for impartiality, ability and thoroughness. At present there is no law whatsoever governing and restricting the members or this profession, anyone no matter how ignorant or incapable can arrogate to himself the title and pose before the public as a professional accountant.

The progress made between this time and the enactment of the Securities Exchange Act of 1934 reflects the success of the early accountants working for professional status, and the perception of the public accounting profession appeared to be highly positive. In The Rise of the Accounting Profession, John L. Carey notes: “There was a strong movement toward acceptance of responsibility for the promulgation of standards of general application.” Carey’s book includes testimony from Col. Arthur H. Carter, then NYSSCPA president, who spoke before a Senate committee in early 1933 and proposed that the law being drafted include an audit provision.

The SEC’s attitude. The first Securities and Exchange Commission concluded that the public accounting profession could be responsible for its own direction and deemed public accountants to be adhering to the responsibilities accepted by professionals. The SEC had authority to prescribe accounting principles and methods but, undoubtedly impressed with the profession’s progress in its self-improvement, self-regulation, and code of conduct, delegated this regulatory authority.

Carey notes reservations were expressed when the requirements of the 1934 Act were implemented. In a 1937 address, one of the early commissioners, George Mathews, stated:

I think that a governmental agency should frame rules to govern the exercise of professional functions only when the need for such rules has been shown to be of real public importance. Mere preference of the administrative agency for one method or form is not a sufficient reason for taking the formulation of principles and practices out of the hands of the members of a profession, and where the profession gives evidence of its capacity and willingness to develop and apply proper methods without evasion or undue delay, it should be encouraged to take on the responsibility. If the profession fails ... I believe the agency whose duty it is to administer laws ... must eventually move in.

Senate subcommittee study. In 1977, the U.S. Senate Subcommittee on Reports, Accounting, and Management of the Committee on Government Operation, completed its “study of the federal government’s role in establishing accounting practices, which are used by publicly-owned corporations in reporting financial and other information to the public.”

In a covering letter, Subcommittee Chair Lee Metcalf wrote:

I am disturbed by two of the study’s major findings. The first is the extraordinary manner in which the SEC has insisted upon delegating its public authority and responsibilities on accounting matters to private groups with obvious self-interests in the resolution of such matter. The second is the alarming lack of independence and lack of dedication to public protection shown by the large accounting firms, which perform the key function of independently certifying the financial information reported by major corporations to the public.

I find it significant that the study did not use the term “accounting profession” and that the thrust of the subcommittee’s recommendations was that the federal government should assume more responsibility. The study concluded that there were serious deficiencies in the existing accounting establishment:

• Congress should exercise stronger oversight of accounting practices promulgated or approved by the federal government, and provide more leadership in establishing goals and policies.
• The federal government should directly establish financial accounting standards for publicly-owned corporations; and
• The federal government should define the responsibilities of independent auditors to meet the expectations of Congress, the public, and courts of law.

The June 17, 1977, testimony of then–SEC Chair Harold M. Williams before the subcommittee reflects a reasoned, wise assessment of the situation:

The crux of the Commission testimony this morning has several dimensions … the need for substantive progress is great … It is desirable that the establishment of accounting and auditing standards continue to be primarily a private sector responsibility with active SEC oversight. No one knows the problems better than the profession, or is as able to deal with them if it is motivated to do so … The Commission has not always been diligent in pressing to secure timely address and resolution of accounting issues. It intends to pursue a vigorous program in the future as it has for the past period of years.

Part of the follow-up to this intense scrutiny of the public accounting profession was the institution of a new oversight strategy that included the Public Oversight Board (POB) and peer reviews for public accounting firms.

“A Profession at the Crossroads.” In a September 18, 2000, speech before the National Association for the State Boards of Accountancy (NASBA), then–SEC Chairman Arthur Levitt, said:

I am proud of, and respect deeply, this great profession. The high-quality work of this country’s accountants weaves together the very fabric of our financial reporting system ... [I]t baffles and sorrows me to see an apparent willingness by some to discount the very ideals that give the profession its credibility—a willingness to reap the benefits of this public-mandated franchise but largely ignore the premise of its responsibilities.

Later that same week, during the public hearings on the SEC’s proposed rules on auditor independence, in an exchange with AICPA CEO and President Barry Melancon and AICPA Chair Robert Elliott, Levitt commented:

It was the Commission, not the profession, that pushed for the creation of the ISB [Independence Standards Board] and the O’Malley Panel, the Garten Panel and the Blue Ribbon Committee on audit committees, the whole use of EDGAR, our Internet fraud unit, our use of exemptive authority that was given to us in recent congressional action. Where are we lacking?

There is a powerful indictment of the professional status of public accountants in Levitt’s assertion that the profession did not provide the initiative in key areas where change was perceived to be necessary.

Is professionalism waning? Obviously, a brief discussion of only one facet—the perceptions of the SEC and Congress—of the debate over the professionalism of public accountants is insufficient to answer the question.

Professions have been significant in U.S. society for more than a century. Abraham Flexner, an influential leader in early–twentieth century education reform, proposed six criteria for defining a profession:

• Intellectual operations coupled with large individual responsibilities
• Raw materials drawn from science and learning
• Practical application
• An educationally communicable technique
• Tendency toward self-organization
• Increasingly altruistic motivation.

In 1955, prominent philosophy scholar Morris L. Cogan noted that “Promulgation of a satisfactory definition [of a profession] has progressed but little beyond the six criteria proposed by Flexner.”

The SEC’s delegation of responsibility to the public accounting profession in 1934 reflected positive assessment of the profession in relation to every one of Flexner’s criteria. Today, however, the viability of public accounting as a profession is being seriously challenged. Many questions exist: Is a new model needed for the profession? Can the profession generate a vision and structure that ensures the level of integrity and public trust needed for public accountants? Can the profession transform itself?

As of the beginning of this year, I think that the SEC’s perception of the profession is that it is discontented. A cursory review of the public accounting profession’s behavior of the last quarter of the twentieth century would support that position. Nevertheless, the SEC has a new chairman and new commissioners will be named. The new SEC may have a different philosophy than the old SEC, even though there have been statements about the ultimate responsibility of the SEC to ensure the quality of financial reporting by publicly-owned companies. In the meantime, the public accounting leadership may respond with designs for an innovative new style of professionalism.

There are, of course, other factors and other groups whose perceptions are relevant to an objective review of whether the accounting profession is in decline. These other factors warrant exploration, too. Additionally, the concerns of the public accounting profession should be studied within the context of U.S. professions in general. In an Age of Experts, Steven Brint points out, “Powerful social and economic forces have brought the older idea of professionalism linking social purposes and knowledge-based authority close to an end.” The final question is: Where are the accounting theorists that can add valuable insight into the problems that public accounting faces?