The CPA Journal

These days, the best face of the CPA is what we see once a year on the Academy Awards telecast, when we’re told in no uncertain terms that until the famous envelopes are opened before hundreds of millions of viewers, only two partners of the national accounting firm that handles the tabulation know the actual results. This is a significant accounting job that has nothing to do with money (at least not directly); the significance is that the contents of the envelopes result from the true and accurate tabulation of the ballots: Truth with a capital T.

Now, as we continue to discuss how to restore public trust in the accounting profession’s financial reporting role, we need to directly address some common public beliefs about CPAs that aren’t completely accurate. For example, the public has the general impression that all CPAs in New York are required to take a certain number of hours of CPE every year, which of course isn’t correct, because New York CPAs in industry have no CPE requirement at all. If the public has any awareness of professional peer reviews, they probably think that the process is a government-regulated requirement for licensure, when in fact in New York and some other states peer review is not connected with licensure. Moreover, when peer review is required—for example, by the SEC, the GAO, or a state regulatory agency—another, private-sector entity sets the standards and conducts the actual peer review. The Sarbanes-Oxley Act requires peer reviews to be conducted by
the newly formed Public Company Accounting Oversight Board (PCAOB). Although the NYSSCPA would like peer review to be required for all New York CPAs to whom it applies, that’s another discussion.

Many people also believe that one significant objective of a CPA’s audit of a company is to discover fraud. The news coverage of accounting scandals during the last year, however, has helped disabuse people of that impression. I recall the first time I really focused on the opinion letter covering an auditor’s report, I realized that it reads like boilerplate and doesn’t really say anything at all. In discussing this with CPAs, I was surprised to learn that the opinion letter usually is boilerplate. I was also surprised that the reason the letter says nothing about whether the auditor actively looked for or found signs of fraud is that ferreting out fraud isn’t what financial statement audits are for.

But it was not always thus. In fact, in a slender volume published by the NYSSCPA titled the Bulletin, now The CPA Journal, all three articles in the inaugural issue concerned fraud. That was in October 1930. Obviously, fraud was a matter of significant concern and discussion in that year.

Nonetheless, the accounting profession had no authoritative standards setters until after World War II. At that time, audits continued to focus on locating accounting errors and irregularities, which was the euphemism for fraud. Until then, the profession wasn’t sufficiently organized nationally to create professional standards.

In the mid- to late 1970s, as a result of Congressional hearings triggered by public outcry regarding audit and financial failures connected with corporate fraud, the accounting profession developed a 10-point plan that on the surface reclaimed the CPA’s responsibility for ferreting out fraud, but in reality was mostly cosmetic, and little changed.

The audit risk model as we know it evolved during the 1980s, but those standards are incomplete, confusing, and sometimes inconsistent. For example, complying with the letter of SAS 47, Audit Risk and Materiality in Conducting an Audit, allows auditors to rationalize that they’re auditing representations of management, assessments of risk, and the impact of errors more effectively than might actually be the case. But adhering to the standard protects auditors from litigation, and indeed it was during the 1980s that our society’s mania for litigation really exploded.

Although the field of forensic accounting, which deals entirely with detecting fraud, has been getting considerable attention over the last year, this is a specialized, value-added service. The report issued in 2000 by the Panel on Audit Effectiveness talked about the importance of auditors adopting a “forensic” mindset, but nothing has changed, and the bottom line is that at present most members of the profession have no training in detecting fraud.

We saw the pattern repeated in the late 1980s, in the late 1990s, and again today: Public outrage over financial scandals spurred government intervention, resulting in meaningless reforms. To quote Shakespeare, “full of sound and fury, signifying nothing.”

The public’s full comprehension of this dismal state of affairs has the potential to create a genuine crisis for our country and its economy. We need to confront the fact that one major factor that inhibits real change is fear of liability. Most people, corporations, and institutions are highly averse to advancing a change that may create future liability for themselves or for interests they represent.

But to renew public trust, things must really change. We must get to the real issue of CPA involvement in preventing accounting fraud as well as in detecting it. Given how little has actually been done during the last several decades, no one is willing and able to take full responsibility for that difficult, unpopular, but increasingly necessary task.

This Month | About Us | Archives | Advertise| NYSSCPA

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.