Public accounting: the times they are a changin'.by Martin, D. Edward
With deference to the words of Bob Dylan's song, the practice of public accounting is changing more rapidly, than ever. Some say the changes are for the worse. Author Martin thinks they are for the better, and if they are ignored, the viability of the profession could be in jeopardy.
After a newspaper jumped the gun and published his obituary, Mark Twain responded that "(t)he report of my death was an exaggeration." So it may also be said of public accounting that the reports of its demise as a distinguished profession are also vastly overstated. Indeed, those who mourn its passing simply have not recognized the remarkable acuity and flexibility that many of its practitioners have demonstrated in recent years, as they have strived to adapt to a constantly evolving and ever- more-complicated business environment.
And let's not be shy about it. The purpose of public accounting is--and has always been--the furtherance of business goals, not to provide ethereal benefits from on high. Indeed, there have always been at least two principal aims (regardless of whether the focal entity is a commercial enterprise, a not-for-profit organization, or a governmental body):
* To help financial and economic systems and processes function as efficiently and profitably as possible; and
* To provide useful and reliable financial information to the broad spectrum of parties who need it.
That CPAs are able to accomplish these ends through such diverse means as accounting and write-up support, the application of the assurance function (e.g., audits and attestation services), tax advice and tax return preparation, and a variety of management consulting services, only illustrates how resourceful and broad-based our profession can be.
Today's Competitive Environment
We operate today within the confines of a tremendously complex, often international marketplace. The demands on companies to address a host of challenges and continue to prosper are enormous, and support from CPAs and other accomplished professional advisors is an essential clement of today's corporate strategy. Businesses of all sizes, from the corner convenience store to the multinational conglomerate, frequently need the storehouse of skills that many of today's accounting firms and practitioners can make available. The ability to analyze existing systems objectively--or to assess current operating and production capabilities--or to determine whether acquiring that new subsidiary in Europe is the wisest course of action--requires a pool of talented professionals. Even sophisticated entities may not have the luxury of, or the interest in, maintaining such a pool as a part of their full-time staffs.
Thus, the public accountant becomes a financial specialist who can be engaged on an as needed basis to provide a valuable benefit, at what many companies find to be a reasonable price.
Competition is a fact of life in a free-market system, even though for decades we denied such economic realities through various ethical bans, including limitations on solicitation and advertising. Those restrictions were artificial barriers, however, and by the 1960s there were inquiries into the profession's restrictive activities by the U. S. Department of Justice. In 1990, the Federal Trade Commission issued its final consent order with the AICPA, which, among other changes, permitted CPAs to accept commissions and contingent fees (under the AICPA's membership rules, at least). These were neither vendettas nor the capricious acts of overzealous bureaucrats; instead, they were a logical offshoot of the basic American premise that providers of services are generally free to value and market their wares, based on their unique business assessments. The public at large is then able to pick and choose as it would for any service or commodity.
It may be natural to feel nostalgic for the way in which public accounting used to be practiced, but it is just too far a stretch to claim the quality of our work has deteriorated because we can now sell our services more openly. If CPAs do not hold the same exalted position in the public's mind that they once did, it is largely attributable to the fact that these days people tend to look at most professions and institutions with a bit of a jaundiced eye. Rhetoric aside, there really is no support for the contention that the ability to compete more freely has resulted in a decline in professionalism, integrity, or the quality of accounting and assurance standards.
It is the nature of competition that prices may be cut to attract potential clients, or to hold existing ones, and it has been feared by some that a practitioner might do less-than-competent work to justify a lower fee. A few states have even required, or are considering requiring, that a CPA charge a fee for an audit that is at least as much as the cost to perform the work. (Good luck to all concerned in making the necessary supporting calculations and in seeing that the rule is enforced!) No doubt there are those CPAs who do shoddy work, regardless of the fees they charge. Ultimately, however, one has to have faith that the users of accountants' services are capable of sorting through the various levels of expertise made available to them and of judging the quality of that which they receive.
What Does the Future Hold for Compliance-Based Services?
There was a time when auditing and tax-related services were the bread and butter of a CPA's practice. That time has passed. From a legal and economic vantage point, the U.S. is not the same place it was even a quarter of a century ago. The ways in which commerce is transacted have likewise changed and evolved--sometimes for the better, sometimes not. The advent of the computer has had an enormous impact on the ways we conduct our business affairs and on the ways we record and document them. There is no going back to a "simpler" time, and we either conform public accounting to those changes or we stand by and watch others (perhaps less qualified) serve our clients.
Even with the exclusive right to conduct audits that the individual states have bestowed on the public accounting profession, the economic reality is that auditing itself is no longer sufficiently profitable to sustain many firms or to attract the necessary talent required by today's complex business demands, though individual practitioners or firms may very well maintain successful practices with auditing as a principal service. That is not to say that audits of financial statements have become less important. On the contrary, the confidence that the worldwide investing and financial communities have in corporate financial statements is essential to the stability of capital markets, and that confidence depends in turn on the ability to rely on the CPA's "seal of approval." But there has too long been a difference between the beliefs of most CPAs as to their auditing responsibilities and the perceptions of the public-at-large (and, increasingly, the courts) as to what those responsibilities should be. While the term "expectation gap" has become a cliche, the underlying problem is very real.
Even those with concerns about the direction public accounting has taken concur that one of the most significant issues currently confronting the profession is the liability CPAs face in alleged malpractice actions. Some may argue that accountants find themselves to be the subject of lawsuits because they have lost their way, that the quality of the work performed is simply not what it used to be. More compelling answers, however, are found in the litigious nature of our society, the way in which damage awards are apportioned among defendants under our legal system, and the traditional partnership (with its inherent liability) as a means of doing business. Moreover, even as our abilities to provide meaningful guidance to clients have grown more sophisticated and the quality of our collective work has improved over the years, CPAs have nonetheless been increasingly targeted in lawsuits, particularly securities class-action cases, principally because we have the ability to pay damages awards.
Before deciding that today's audits do not measure up to prior years' work, it is a valuable exercise to compare today's auditing approaches with those of the past few decades. The audit has evolved into a risk- based, often quantitative process that focuses on client activities that have grown ever more numerous and more complicated. The advent of an increasingly paperless approach to transacting business and the emergence of any number of complex financial strategies and products have required auditors to restructure their techniques accordingly. The auditing process is stronger than ever, but the playing field is not the same as it once was.
At the same time, some critics believe the rather significant amount of standard-setting by the AICPA over the past several decades has been lacking in that it has not prepared practitioners to be "better auditors," particularly in the area of detecting impending business failures or even outright fraud. Others believe, on the contrary, that the profession has accomplished a great deal in defining assurance concepts and providing guidance to auditors.
Another area of concern is the determination of going-concern status. Because it involves so many judgments--with the stakes so high--the CPA is constantly in a "lose-lose" situation. If the practitioner makes the determination that an entity has a going-concern problem, for example, he or she may become part of a self-fulfilling prophecy. If, however, the best judgment in the circumstances is that the enterprise will continue--and it subsequently fails to do so-- then batten down the hatches, because the process-servers are on the way!
As for fraud, in many cases it is neither practicable nor financially feasible--perhaps not even possible--to perform the level of audit work necessary to unearth a cleverly conceived financial crime. While the profession has labored to explain to the marketplace the problems inherent fraud detection, many CPAs think it is probably too late to "educate" the fault-finders. We may never be able to explain why audits are not guarantees. The alternatives seem to be either to turn auditors into fiscal bloodhounds or to continue with the status quo. The former option means a significant change of direction for the audit process and a concurrent rise in the cost for American business. The latter choice brings with it the continual risk of loss for practitioners, even when their work is performed in accordance with existing standards.
No doubt the best solution lies in finding some middle ground. The underlying causes of any prominent business failure or financial fraud-- particularly when made all the more complicated by management reticence or outright deception--are usually beyond the discovery capabilities of the current audit process. The profession's best hope seems to be convincing lawmakers and regulators that audits never have been and never will be the complete financial watchdog we would all like to have. Then our job will be twofold:
* To craft standards that will make the auditing process more responsive to users' needs (which will include auditor involvement with client information other than financial statements, such as is recommended in the September 1994 document from the AICPA Special Committee on Financial Reporting, Improving Business Reporting--A Customer Focus, Meeting the Information Needs of Investors and Creditors); and
* To help impress upon the corporate community the realities of the additional costs that such a change in the auditing concept will entail.
But, even as we address the problems of making the audit a better understood process, we must also recognize our responsibility to help shape public accounting into a multi-faceted profession--one that can offer challenges and rewards sufficient to draw the best people into its fold. Indeed, how do we continent to convince the brightest and most capable business students in our colleges universities to pursue a career in public accounting?
Consider for a moment the current state of affairs. We are in the process of mandating that potential CPAs complete 150 credit-hours of college study, followed by a rigorous certifying examination and thereafter by a career-long, formalized process of continuing education. They can then expect to spend many long hours building their careers, only to be at risk in the current litigious environment for CPAs (even with the advent of the limited liability company/partnership). It is natural for young people on the brink of entering public accounting to have some doubts about making the sizable commitment the profession requires, particularly while a liability-forged sword of Damocles hangs over their heads. This is all the more true when the client problem is one in which they may have had no participation and over which they had no control.
The liability issue aside, however, today's upcoming accountants want to seek their fortunes in a profession that offers a full range of opportunities and rewards. For some, the challenge may lie in the auditing process; for others it may be the intricacies of our systems of taxation. But, for an increasing number, it is knowing that there are all kinds of career doors that wait to be opened. For example, they may want to help clients to solve accounting and reporting problems or to design new systems for operations or record keeping--or they may see themselves providing assistance in any number of business decisions or transactions. Compliance-related services will remain an important element of the profession, but not the only one, and, by themselves, such services cannot generate the income levels--or the interest of future generations--that are necessary to maintain the profession.
Meeting Client Needs
Our profession is in a unique position to serve the financial sector of our economy. Many CPA firms have among their members and employees a vast range of experience that can assist a client not only in what may be viewed as "traditional" services--accounting, auditing, tax assistance, and management systems advice--but in a whole range of consulting areas the limits of which probably cannot even be envisioned at this point. With proper training, CPAs may help their clients take advantage of technological advances that will enhance long-term competitiveness and assist in the development of whole new infrastructures of people and systems to support products and services.
This does not have to mean abandoning the traditional accounting know- how and analytical capabilities that have always permitted CPAs to stand apart. Instead, it means augmenting them with a whole new set of skills. Then, aligned with other professionals who are knowledgeable and experienced in a wide range of management and systems-oriented fields, CPAs can assist their clients in streamlining organizational structures and re-engineering critical business processes, with an eye toward improving operating effectiveness.
Other than the intimidation factor understandably associated with facing new horizons, it is quite frankly hard to see why there is an objection to a CPA's either developing such skills or acquiring them through association with other financial specialists. Granted, care must be taken to see that independence, the underpinning of the audit process, is not compromised by the introduction of other services to an audit client. Independence in appearance is indeed a concern, but not one that cannot be overcome. If one considers the rather persuasive argument that true independence cannot exist when there is a fee-based relationship between a CPA and his or her client, we seem to have been relatively successful so far in using our integrity as the most convincing evidence that we remain independent of our audit clients. Moreover, the more a practitioner knows about his or her client, the more effective an audit of the financial statements will be. Although a firm must be careful to see that a consulting engagement does not intrude on independence, the insights and understanding of the client that comes from such an engagement are extremely valuable to the auditing process.
In the end, we simply must have the confidence that our profession is composed of dedicated, ethical, highly skilled individuals, capable of maintaining the competence and objectivity necessary to deliver a wide range of support services to clients. We already have in place a comprehensive code of professional conduct and significant levels of state oversight for breaches in applications of standards or ethics. Admittedly, every profession has its ill-prepared members and its occasional "bad apples," but it is ultimately counter-productive to try to impose restrictions on the assistance a qualified provider of services can provide to a willing consumer.
Combining CPA and Non-CPA Skills
To build the arsenal of tools necessary to aid their clients, many CPAs and their firms have engaged men and women who are not CPAs, but who are nonetheless highly skilled in computer sciences, systems analysis, and specialized industry applications. There is nothing unusual about hiring quality people to provide quality service. However, commensurate compensation and opportunities for growth and control are essential to attracting and holding the right caliber of person. Thus has arisen the issue of non-CPA participation--even ownership--in public accounting firms. There are, of course, numerous legal and ethical concerns to address. Ultimately, however, resolution of issues arising from non-CPA prominence in the public accounting arena will depend on the integrity of CPAs who are 'affiliated with non-CPAs to see that the profession's standards are upheld. Quite honestly, if members of our profession are not sufficiently ethical or professionally responsible in matters involving the non-CPAs with whom they affiliate, then we have bigger problems than non-CPA ownership to be concerned with.
Where Do We Go From Here?
Accounting, auditing and tax services will always form the cornerstone of our profession. Some CPAs will find they can build a successful and satisfying practice solely around those key services. Other practitioners, however, have or will seek clients with needs that transcend the traditional. Simply stated, our profession must either find a way to be involved in the process of delivering comprehensive financial and management advisory services or be left behind.
Some have argued that expanding the CPA's role, perhaps joining with non-CPAs in the bargain, is "giving away the franchise." But we CPAs have not given away our profession; instead, we have made it flourish by recognizing opportunities and challenges and adapting to them. To do otherwise--to isolate ourselves in a fortress where services provided 40 years ago are the principal focal point--is to guarantee a profession with no hope for growth or innovation in a dynamic and changing world. Our clients are looking to us--and if not to us, then to others--for answers to a wide variety of questions and problems. CPAs cannot be of value in the marketplace if they are not prepared to look ahead and develop the necessary talents.
Rather than bemoaning the passing of a professional image that has too frequently focused on the dull and unimaginative, on "bean-counting" and green eyeshades, we should be embracing the tremendous opportunities that await both CPAs and their clients as a result of the wide range of skills that professional accountants and consultants--both CPAs and non- CPAs alike--can now bring to the table.
D. Edward Martin, CPA, is a partner of Richard A. Eisner & Company, LLP, and a former member of the Auditing Standards Board of the AICPA.
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