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July 1994

Public accounting - no longer a profession? (includes related article)

by Mason, Eli

    Abstract- Public accountancy has come to be regarded more as an industry than a profession because of its over-commercialization. The professionalism of the practice of public accounting has been diluted by a combination of the US Dept. of Justice, the Federal Trade Commission, some Big 6 accounting firms and the AICPA itself. The commercialization of the profession was encouraged by the Justice Dept.'s decision to repeal the rule prohibiting competitive bidding and also by the FTC's proposal to allow CPAs to receive commissions and contingent fees and CPA firms to use trade names. The AICPA was likewise working to relax the profession's long-standing ethical rules and even sought to lift the restriction prohibiting CPAs from engaging in incompatible occupations. This growing trend towards commercialization of public accountancy may eventually cost the profession the confidence of the very people it has set out to serve.

A number of institutions including the Department of Justice, the Federal Trade Commission, and the profession itself have helped change the nature of the practice of public accounting. Many feel the business aspects play too dominate a role. What happened?

There was a time when the practice of public accountancy was referred to as the accounting profession. In his book, Ethical Standards of the Accounting Profession, John L. Carey, long-time Executive Secretary of the AICPA wrote, "One way of avoiding the impression that money-making is the primary interest is to avoid behavior commonly associated with commercial activities--for example, advertising, solicitation, and the giving and receiving of commissions." Further he stated, "To undertake management services as a 'business' while simultaneously carrying on an accounting practice as a 'profession' would undoubtedly create confusion and would dilute the prestige of the certified public accountant in both fields."

Today, the financial press refers to the "accounting industry." Law and medicine are still called "professions," but public accountancy is an "industry." Why? Who is responsible?

It was perpetrated by a combination of the U.S. Dept. of Justice, the Federal Trade Commission (FTC), some Big 8 (now Big 6) accounting firms, and the AICPA itself. When, where and how did it happen?

The Department of Justice

For many years, the rules of professional conduct prohibited advertising, competitive bidding, and similar activities common to ordinary business enterprises. During the 1960s, the U.S. Dept. of Justice began a program of hounding various accounting organizations including the AICPA and state societies. The Dept. of Justice requested truckloads of correspondence, newsletters, board minutes, and a multitude of other documents. Did the Dept. of Justice intend to read all that material, or was it meant to bully various organizations into submission on the subject of advertising, solicitation, and competitive bidding?

The AICPA had a rule in its code of ethics that stated neither a member nor the firm could submit a competitive bid in connection with an engagement. When the agenda for the 1966 spring meeting of AICPA Council was distributed, it included a proposal to repeal and eliminate the rule that prohibited competitive bidding. Everyone knew the Dept. of Justice was tightening the screws.

I was a member of, and attended, that Council meeting and feared that if the rule were eliminated there would be rampant "lowballing" and cutting of auditing standards. I prepared an amendment to the motion that stated: "However, neither a member nor the firm may submit a bid which is so low that it could not conduct an audit in accordance with generally accepted auditing standards." Before the Council meeting, I showed my amendment to the President, Executive Secretary, and the Chairman of the AICPA Ethics Committee, all of whom liked the idea.

When the motion to repeal the rule prohibiting competitive bidding was introduced, I moved my amendment, which was duly seconded. However, an attorney from the law firm of Covington & Burling, an important Washington, D.C. law firm that was the AICPA's counsel at the time, went to the rostrum and stated that if my amendment were adopted, it would violate the anti-trust laws and place officials of the AICPA in criminal jeopardy. The amendment was put to a vote and defeated. I believe that was the beginning of the death of a learned profession.

The State Boards of Accountancy

The repeal of the "competitive bidding" rule had its effect on the state boards of accountancy. In many countries (Great Britain, for one), the equivalent of the CPA designation is granted by that country's "institute." For example, The Institute of Chartered Accountants in England and Wales issues "The Certificate of Membership" (ACA) and "The Certificate of Fellowship" (FCA), and has the power to revoke such certificates. However, in the U.S., the AICPA is a private membership organization with no official authority. Over the years, the percentage of practicing CPAs within the AICPA has decreased markedly, and currently only 41% of AICPA members are in public practice. The majority are in industry, government, education, etc. These non-practicing CPAs vote on bylaws and codes of ethics affecting the practice of public accountancy.

The real power within the practice of public accounting in the U.S. lies with 54 state boards of accountancy (including Puerto Rico, the Virgin Islands, Guam, and the District of Columbia). These boards created by acts of their state legislatures and vary from state to state as to size, authority, etc. Typically, a state board can discipline a CPA by censure, reprimand, or suspension or revocation of the license to practice. The AICPA cannot revoke a member's license to practice, but a state board can put a CPA out of business. When the rules on bidding, solicitation, and advertising were relaxed or voided, many state boards were confronted with legal challenges to their regulatory authority.

In one case, the Louisiana State Board of CPAs was sued by the U.S. Dept. of Justice on the board's rules that include the prohibition of personal direct solicitation by CPAs. The Louisiana State Board fought back vigorously, and, in a landmark decision, a Federal district judge held that the Dept. of Justice could not dictate to the Louisiana Board. The battle at the state board level continues, and the Florida State Board of Accountancy was recently involved in a lawsuit relating to solicitation by a Florida CPA. The power of the various state boards of accountancy cannot be overlooked because enforcement of their rules and decisions is usually conducted by the states' attorneys general.

The Federal Trade Commission

The next assault on the accounting profession's ethical rules came from the FTC. On September 8, 1988, a proposed consent order drastically affecting the practice of public accounting was signed by members of the staff of the FTC's Bureau of Competition and by the President and the attorney for the AICPA. The proposal would permit CPAs to receive commissions and contingent fees and CPA firms to use fictitious or "trade" names. For years, the accounting profession's code of ethics required CPA firms bear the names of past or current partners. The idea for "trade" names may have been desirable for accounting firms acquiring and forming auxiliary companies with names other than their own. The FTC proposal for "trade" names went so far as to suggest specific names, such as "Suburban Tax Services" and "Suburban Computer Services." In a telephone conference with a FTC lawyer who had an important role in drafting the proposed consent order, I stated that the terms "Suburban Tax Services" and "Suburban Computer Services" could be used by itinerant individuals who did not possess the education, training and experience of CPAs and that the public could, therefore, be misled. The FTC lawyer was not impressed with this point of view. The FTC proposal also provided that CPAs should be entitled to commissions for services that might even include arranging for a bank loan and receiving contingent fees in connection with tax services. The proposed consent order contained everything but the required signatures and approval of the five FTC commissioners. One commissioner, Mary L. Azcuenaga, made it clear that she would neither agree to nor sign the proposed consent order when she wrote:

I dissent from the decision to accept for public comment the proposed consent agreement with the American Institute of Certified Public Accountants. To the extent that this matter presents legally cognizable efficiency justifications that are unique to the accounting profession, the case breaks new ground. In addressing whether a violation of law has occurred, however, we have explored the theoretical costs of the challenged ethical rules far more rigorously than their benefits. It would be useful and responsible to devote at least as much effort to understanding the value of longstanding tenets of professionalism as to understanding their costs before changing those tenets by fiat.

During the next two years, the staff of the FTC, various sectors of the AICPA, and local CPA practitioners were engaged in a tug-of-war concerning the FTC staff proposal. In April 1990, a group of local CPAs who opposed the proposal met with legal counsel and staff for the five FTC commissioners. In a subsequent letter to Commissioner Deborah Owen commenting on the specifics of the FTC proposal, one of the visiting CPAs from Ft. Wayne, Indiana wrote, "inclusion of these items in the purview of a learned profession does nothing to enhance the benefit to the general public and does much to whittle away at the confidence and status that the public has traditionally bestowed upon the Certified Public Accountant."

After some jockeying between the FTC and the AICPA, a final consent order was executed during July 1990 with two of the five commissioners dissenting in part. In her dissent, Commissioner Azcuenaga stated:

Although there may be value in allowing CPAs to work on commission and to accept referral fees, the argument that the Federal Trade Commission is the appropriate institution to rewrite AICPA's restrictions is substantially less than compelling, particularly in the face of AICPA's concern with maintaining the fact and appearance of independence and objectivity for its members. The Commission does not have the expertise to make that judgment, and the better and wiser course is to let the market sort it out.

Commissioner Owen submitted a detailed commentary on her dissent.


At about the same time the FTC was maneuvering to permit CPAs to receive commissions, contingent fees, and use fictitious names, the AICPA was fully engaged in pursuing the dilution of ethical rules that had been on the books for years--and the AICPA added further eliminations of long- standing rules that forbad CPAs from engaging in incompatible occupations and the use of fictitious names.

In a lengthy report entitled, "Plan to Restructure Professional Standards," the AICPA recommended the repeal of many rules including Rule 504 that reads, "A member who is engaged in the practice of public accounting shall not concurrently engage in any business or occupation which would create a conflict of interest in rendering professional services." In Rule 504's place, the AICPA recommended a new Rule 102 stating, "In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others." The rationale that had existed for many years for the proscription against CPAs engaging in incompatible occupations was that a CPA should not use another business such as selling insurance, selling stocks and bonds, etc., as a "feeder" to obtain accounting clients. The substitution of Rule 102 for the much stronger Rule 504 was a dilution of a meaningful ethical standard.

The report also would amend Ethics Rule 505, "Form of Practice and Name," that included, "A member shall not practice under a firm name which includes any fictitious name, indicates specialization, or is misleading as to the type of organization." However, the proposed new Rule 505 included an explanatory note, as follows: "The proposed rule revises the current rule so as to permit a firm name that includes a fictitious name or that indicates specialization, provided that the firm name or specialization is not misleading. In its present form, the prohibition against all fictitious names is sensitive to antitrust attacks."

The recommendations of the special committee that authored the report were submitted to the membership of the AICPA in a mail ballot that became the subject of a lawsuit brought by several AICPA members who contended that the ballot and ballot material were false, misleading and deceptive. The plaintiffs unsuccessfully sought a temporary injunction on the vote, but the new rules were nonetheless adopted. However, the case concerning the propriety of the ballot and the ballot material dragged on for several years, and in a settlement approved by the court, the AICPA agreed to procedural changes in future ballots as well as the funding of an "Ethics In Business Research Fund" that is currently being implemented by a group of university professors.

The Rush to Advertise

The combined efforts of the FTC and AICPA provided the impetus to a rash of advertising mainly by the major accounting firms that included large ads in The Wall Street Journal, The New York Times, and other publications. The ads praise the firms, extol their services, and could not be described as modest. Amusingly, some of the ads proclaim the firms expertise in "litigation support," which meant, among other things, they were proficient in criticizing work performed by other major firms.

Advertising has now become pervasive amongst accountants. A local practitioner in Indianapolis told of being seated at his favorite coffee shop. On the table were paper place mats advertising the services of a medium-sized accounting firm in the area. He did not enjoy his lunch and sent the folded place mat to me that, appropriately, had a grease stain on the name of the firm.

The Effect on Independence

The most important characteristic of a CPA firm is its independence from the clients it serves. Rule 101 of the AICPA code of professional conduct is entitled "Independence" and reads, "A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council." The SEC, banks and credit grantors must at all times be reassured that accountants who sign audit reports are in fact independent of their clients. In a recent speech to an AICPA group, Chief Accountant of the SEC Walter P. Schuetze warned, "To me, auditors giving way to their clients, subordinating their views to their clients, raises a nasty issue about independence both in appearance and in fact." He also stated, "If public companies are pressuring their outside auditors, and the Accounting Standards Executive Committee of the AICPA, to take particular positions on financial accounting and reporting issues, and outside auditors are subordinating their views to their clients' views, can the outside auditor community continue to claim to be independent?"

Non-CPA Ownership

Rendering management services is an important profit center and CPA firms will not relinquish that lucrative facet of their operation. The new combination of permissive ethical behavior and unbridled competition has diluted the professionalism of the practice of public accounting to the point where the marketers of services are as important as the technicians rendering services. Perhaps the final "nail in the coffin" of the CPA certificate is the current drive to permit non-CPAs to participate in the ownership of CPA firms. For years, there was a rule that accounting firms could call themselves "Certified Public Accountants" only if all partners were, in fact, CPAs. However, with the strong influence of non-CPA management consultants in large firms, there has developed a vocal force at the highest levels of the accounting establishment to allow non-CPAs to function as owners in CPA firms. One proposal is to permit 49% of ownership in CPA firms by non-CPAs (how close is 49% to 50%). No longer will the public have the right to believe CPA firms are owned exclusively by CPAs.

The Profession Is Now Big Business

So there it is with full-page newspaper ads, a reported $500,000 TV commercial by a major accounting firm during the Super Bowl, "lowballing" of fees to obtain new clients, and potential non-CPA ownership. Today, public accounting is big business with big gross revenues, but it is no longer the learned profession that John L. Carey envisioned.

Accountants Are Not Alone

Some may say there has been a diminution of standards in other areas such as law and medicine, but public accounting is different because the public relies on CPAs for financial representation and disclosure. Investors, bankers, credit grantors, public agencies, and others depend on the work products of public accountants. For without such representations, to whom could they turn? If the public loses confidence in those who practice public accounting because of over- commercialization, then that loss of confidence--which is the very foundation of any profession--will ultimately pull down the structure of an institution that for decades proclaimed its dedication to public service.

The potential loss of professional recognition should be resisted by those who may suffer the greatest harm, namely, those who practice public accountancy. The challenge is clear and must be met!


Eli Mason is not alone in lamenting the decline of a profession. Sol M. Linowitz, retired from a senior partnership at Coudert Brothers, has written a book, The Betrayed Profession, which chronicles the decline of the legal profession. According to a Wall Street Journal article about the book, Linowitz feels the profession was betrayed from within. "We inherited a noble profession and we've made it into a business."

Some of the very same areas of criticism of the accounting profession are found wanting by Linowitz in the legal profession. He feels lawyers have relinquished their independent judgment in favor of giving clients what they want.

His intention is not to engage in lawyer bashing, as evidenced by the extent to which his book makes suggestions on how the system can be improved. He makes suggestions for improvements in law school curriculums and calls for a more active role for bar associations and judges in monitoring the practice of law.

Both Mason and Linowitz make the presumption that profitability and business motives are inappropriately dominating and influencing the behavior of accounting and legal professionals to the detriment of users of their services. There are however, events and forces at work, at least in the accounting profession, to counterbalance those tendencies. One is self-regulatory activities such as peer review, mandatory continuing education, and ethics enforcement. An important other force is the civil justice system. But regardless, both Mason and Linowitz serve their fields well by emphasizing the importance of a high level of professionalism by all those holding themselves out to the public as accountants and lawyers.

Eli Mason, CPA, is senior partner of Mason & Company. He is a Past President of the NYSSCPAs, Past Chairman of the New York State Board for Public Accountancy, and former vice president of the AICPA.

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