January 2003

What Happened? The Extraordinary Business of Restructuring the CPA Profession

By Robert J. Bricker

Roughly 65 million years ago, scientists believe, an asteroid smashed into what is now the Gulf of Mexico, forming the Chicxulub crater, resulting in the extinction of the dinosaurs and most of the species existing at that time. When the Sarbanes-Oxley Act of 2002 became law on July 31, 2002, the accounting profession faced an event with similarly catastrophic possibilities, and its desire and ability to adapt to the new environment is not yet fully known. The Sarbanes-Oxley Act dramatically redefines accounting’s scope of services, its influence over financial reporting and auditing, and the locus of professional self-regulation. Just as dramatically, the past year has seen the ghostly disappearance of Arthur Andersen and the spin-offs and sell-offs of CPA consulting divisions and other nonaudit services.

As a profession, accounting has borne the brunt of the legislative, regulatory, and policy backlash following $7 trillion in investment losses. Certainly, the accounting profession’s institutions have been shaken far more than those of lawyers, financial analysts, corporate executives, and investment bankers. And far more so than these other groups, accountants now face a new business landscape and a markedly attenuated marketplace, one with stricter laws pertaining specifically to them, and a strong likelihood of the effective end of much of their self-regulation. If the profession manages to remain influential in auditing, independence, or financial reporting standards setting, it will be in spite of the law, not because of it.

What happened? Government-mandated elimination of professional proscriptions against advertising and competition in the 1980s had the unintended consequence of moving accounting away from its “professional” model of service. Coupled with the growth in information technologies, firms expanded their scope of services and enjoyed incredible growth in consulting revenues. Many of the issues dealt with by the profession’s leadership during the 1990s pertained to this expanding scope of services. Following the collapse of Enron, there was a brief window of opportunity for the profession’s leadership to address conflict of interest and other problems. But the business-as-usual attitude and the desire to maintain the consulting status quo backfired when the WorldCom scandal made the passage of the Sarbanes-Oxley Act a political necessity.

The Sarbanes-Oxley Act gives the SEC oversight and enforcement powers over the new Public Company Accounting Oversight Board (PCAOB), which itself has broad powers in establishing rules relating to the conduct of audits, al-though it is obligated to consult with professional accounting organizations. CPA firms will be required to register with the PCOAB, and auditors must cooperate with investigations and examinations. Although applicable only to public company auditors, the ban on consulting and other nonaudit services could filter down to firms at all levels.

Surprisingly, the highest levels of the accounting profession scarcely recognize how much the nature of accountants’ business landscape has changed. It is surreal to watch the profession shrink and unravel while many professional publications, letters, and news releases convey an image of “business as usual.” But business is definitely not as usual. The profession of the future is more likely to look like it did in the 1960s than in the 1990s. Perhaps the profession’s odd response is because the largest firms have already absorbed the impact, while smaller firms may not yet comprehend whether or how they will be affected. Remarkably, there is limited interest and little questioning of how the profession reached such a calamitous state. Nor do clear ideas or convictions about appropriate strategies for the future abound.

Moving forward, our profession ought to carefully consider the future of our most important remaining service: the audit. Defending until the bitter end the current definition of an audit may be in neither the profession’s nor the public’s best interests. During the dramatic expansion of CPAs’ scope of services, some of the traditional audit-related services were unbundled from the audit and offered as value-added, consulting services. Now is the time for the profession to rethink the scope and nature of the audit, and to appropriately rebundle the right package of services: an audit package that provides clients with an economically efficient mix of services, and investors with information in which they can have confidence.

Whatever our ultimate conclusions, the profession must address strategic leadership now and at all levels. It should frankly recognize its mistakes, and the new economic and regulatory landscape—not as finger pointing, but rather as an assessment that enables productive and meaningful progress.

There is nothing inherently bad with being a smaller profession focused on auditing, but our direction as a profession must be carefully and seriously debated. It is the right time for hard thinking, reflection, and strategic redirection, and certainly the wrong time to don rose-colored glasses and pretend it has all happened just as we planned.

Robert J. Bricker, PhD, CPA, is a professor of accountancy at Case Western Reserve University’s Weatherhead School of Management, Cleveland, Ohio.

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