Melancon says profession's mission is to shape an accounting culture for the future that surpasses legacy of the past: speech delivered to business and accounting professionals at Yale Club on Sept. 4.Thank you. I'm grateful to the Yale Graduate School of Management for inviting me to speak. I especially want to thank Rick Antle, Senior Associate Dean and Professor of Accounting, for all his work in setting this up. A year ago, if I had been giving a speech on the culture of the accounting profession on a short-week after Labor Day Labor Day, holiday celebrated in the United States and Canada on the first Monday in September to honor the laborer. It was inaugurated by the Knights of Labor in 1882 and made a national holiday by the U.S. Congress in 1894. , I don't think many people would have shown up. Lately, it's a lot easier for accountants to draw a crowd. This is my first chance to speak to an audience outside the accounting profession since President Bush signed the Sarbanes-Oxley Act See SOX. . That law contains some of the most far-reaching changes that Congress has ever introduced to the business world. Its scope is large. It contains fundamental reforms. Many of its standards are high. And its penalties are stiff. It included many elements the profession supported--and yes, some that we opposed. Now that it has been signed into law, our position is unequivocal: We will work to implement it--and to rebuild the faith of investors who depend on us for information critical to the capital markets. But let's recognize the challenge ahead: Reestablishing the perception of the audited financial statement as a clear picture window into a publicly traded company publicly traded company A company whose shares of common stock are held by the public and are available for purchase by investors. The shares of publicly traded firms are bought and sold on the organized exchanges or in the over-the-counter market. will not be achieved purely by legislation or regulation. No, the lead role must be played by all members of the profession. We must reach back to our core roots which earned us enormous respect as trusted advisors. We must reassert reassert Verb 1. to state or declare again 2. reassert oneself to become significant or noticeable again: reality had reasserted itself Verb 1. the heritage that made the accountant the professional in whom Americans confide their most confidential financial information--and to whom they turn for honest advice. We must restore our most priceless price·less adj. 1. Of inestimable worth; invaluable. 2. Highly amusing, absurd, or odd: a priceless remark. asset--our reputation. All of us who are privileged to be leaders of our profession have the responsibility of preserving a legacy of honor and integrity for future generations of CPAs. We owe it to all who preceded us, and all who will follow us. We can afford no tolerance for those who strayed from the commitment to put the public interest first. We must do better and we will. What is needed is not just reform of the accounting laws, it is a rejuvenated re·ju·ve·nate tr.v. re·ju·ve·nat·ed, re·ju·ve·nat·ing, re·ju·ve·nates 1. To restore to youthful vigor or appearance; make young again. 2. accounting culture--both internally in corporate finance offices and externally in audit firms. The culture must build upon the profession's traditional values Traditional values refer to those beliefs, moral codes, and mores that are passed down from generation to generation within a culture, subculture or community. Since the late 1970s in the U.S. . Values like rigorous commitment to integrity. A passion for getting it right. A commitment to rules--not just to their letter, but their spirit--and zero tolerance The policy of applying laws or penalties to even minor infringements of a code in order to reinforce its overall importance and enhance deterrence. Since the 1980s the phrase zero tolerance has signified a philosophy toward illegal conduct that favors strict imposition of for those who break them. These values are the commitment of all of the 350,000 CPAs who are members of the AICPA AICPA See American Institute of Certified Public Accountants (AICPA). across this country. We are determined to restore the image of the accounting profession--and rebuild the legacy we will pass on to the next generation of accountants. We're committed to the same goals that Congress envisioned when it passed the Sarbanes-Oxley Act and that the President articulated when he signed it. We are committed to rebuilding confidence in the financial markets and their institutions. We're committed to dramatically reducing the risk that future investors will fall prey to the kind of financial malfeasance The commission of an act that is unequivocally illegal or completely wrongful. Malfeasance is a comprehensive term used in both civil and Criminal Law to describe any act that is wrongful. that characterized Enron and WorldCom. And we are committed to something else as well: Restoring pride in our profession. For us, it's personal. The revelations of financial abuse were a traumatic blow to everyone in the accounting profession. It has been painful to the nearly half of our members who are corporate employees, who serve as the financial conscience for thousands of corporations in America. It has been painful to the vast body of CPAs in public practice--CPAs who are not by and large involved in auditing publicly traded companies, but who concentrate on providing good advice and quality services to individuals and small businesses. Let's not Let's Not is a science fiction short story by Isaac Asimov. It was first published in Boston University Graduate Journal in December 1954. It was written for no payment as a favour to the journal, and later appeared in the collection Buy Jupiter. forget that small businesses make up roughly half of our economy. They are America's engine of economic growth and job creation--and they depend upon their CPAs for expertise and trusted advice. In a business world that seems to grow more complex every day, small business people need to turn to a trusted advisor to put complicated issues in context. CPAs fulfill that role. The corporate scandals A corporate scandal is a scandal involving allegations of unethical behavior by people acting within or on behalf of a corporation. A corporate scandal sometimes involves accounting fraud of some sort. have also been painful to auditors who provide independent, objective judgments to public companies and insist upon full disclosure to investors. That includes nearly a thousand audit firms. The business scandals have been painful to members of our profession--because it is made up of honest people. But hundreds of thousands of good apples do not excuse the behavior of a few bad ones. Make no mistake about it, our profession was part of the problem. And it came to embody em·bod·y tr.v. em·bod·ied, em·bod·y·ing, em·bod·ies 1. To give a bodily form to; incarnate. 2. To represent in bodily or material form: the public's perception of the problem. But no matter how small a minority caused the problems, all of us in the accounting profession are working to solve them. To begin with, we were "present at the creation" of many of the reform ideas that were recently embraced by law. We helped develop the proposal for a board to oversee auditors of public companies--an idea that evolved into the Public Company Accounting Oversight Board The Public Company Accounting Oversight Board (or PCAOB) (sometimes called "Peekaboo") is a private-sector, non-profit corporation created by the Sarbanes-Oxley Act, a 2002 United States federal law, to oversee the auditors of public companies. . We called for a requirement that auditors be hired by the board's audit committee, not management. We agreed with a prohibition on those who audit public companies from consulting in two key areas--financial systems design and implementation, and internal audit outsourcing (1) Contracting with outside consultants, software houses or service bureaus to perform systems analysis, programming and datacenter operations. Contrast with insourcing. See netsourcing, ASP, SSP and facilities management. . And we created a public interest test against which all reforms could be measured. * Will it help investors make informed investment decisions? * Will it enhance audit quality and the quality of financial reporting? * Will it help restore confidence in the capital markets, our nation's financial reporting system, and the accounting profession? * Will it be good for America's financial markets and economic growth? But we've looked beyond legislation. We've engaged in a long and serious process of introspection introspection /in·tro·spec·tion/ (in?trah-spek´shun) contemplation or observation of one's own thoughts and feelings; self-analysis.introspec´tive in·tro·spec·tion n. at the AICPA--over what went wrong and what must be done to make it right. What went wrong? For executives of Enron, WorldCom, and yes, for some auditors, part of the problem was simple greed or arrogance. Part of the problem was the pressure of a market in which the difference of a penny or two in earnings could lead to the difference of a billion or two in market cap. Part of the problem was a failure of some auditors to step up to their own responsibility. As well, part of it is the financial reporting model itself: The proper treatment of many issues is not clear, such as off-balance-sheet activity. Financial statements are not written in plain English Plain English (sometimes known, more broadly, as plain language) is a communication style that focuses on considering the audience's needs when writing. It recommends avoiding unnecessary words and avoiding jargon, technical terms, and long and ambiguous sentences. . Disclosure is periodic, even though the Internet allows it to be provided in real-time. Part of the problem is a GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). model with too many rules that leaves too little room for principle-based judgment. And even where GAAP does allow for such judgment, far too many preparers don't exercise it--opting for a form of "connect-the-dots" accounting that doesn't necessarily draw a full and complete picture of a company. And part of it is the fact that institutional investors Institutional Investor A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. and other market professionals have not traditionally provided feedback to the AICPA's standard-setting process. In retrospect, we could and should have done more to solicit it. Now, we must demand it. Clearly, part of the problem was some inherent weaknesses in disciplinary and monitoring processes for the profession. And part of it is the threat--real or perceived--of auditor dependency on fees from major clients. Part of the problem is an inclination inclination, in astronomy, the angle of intersection between two planes, one of which is an orbital plane. The inclination of the plane of the moon's orbit is 5°9' with respect to the plane of the ecliptic (the plane of the earth's orbit around the sun). among many auditors to assume good intent. Most of those who make up the leadership of corporate America are honest, with the interests of their shareholders foremost in mind. But an auditor must carry a standard of professional skepticism into each and every audit. As President Reagan said of arms negotiations with the Soviets, "Trust, but verify Trust, but Verify was a signature phrase of Ronald Reagan. He used it in public, although he was not the first person known to use it. When Reagan used this phrase, he was usually discussing relations with the Soviet Union and he almost always presented it as a translation of the ." That's our obligation to shareholders. These are explanations--but they are not excuses. They remind us that there is no one simple answer to the question: what went wrong? And there will be no one simple answer to the question: what must we do to make it right? The accounting profession must start with a basic commitment. A commitment that has governed the AICPA and its members since the organization was founded over a century ago. Let me illustrate that commitment with a story about an auditor named Al Bows, who this summer was the subject of a profile in the Wall Street Journal. Al went to work for an audit firm in the depths of the Depression. Public companies had just been mandated to have their financial statements certified See certification. . There were no nationally recognized standards in place, no history to draw upon. Bows took pride in helping to reform capitalism. He took pride in something else too--his integrity. One day he discovered that the CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. of one of his client companies was secretly running a competing business on the side to siphon off Verb 1. siphon off - convey, draw off, or empty by or as if by a siphon siphon, syphon draw, take out - take liquid out of a container or well; "She drew water from the barrel" profits. The client controlled a major account for Bows. But Bows told him to cut the con game con game n. Slang A confidence game. Noun 1. con game - a swindle in which you cheat at gambling or persuade a person to buy worthless property out--or he'd turn him in. The client was angry--but he stopped cheating his shareholders. Al Bows possessed a characteristic crucial to the profession. He had the guts to say no--even when he had a lot to lose. That is exactly what investors deserve--auditors who say "No." Let there be no doubt: Hundreds of thousands of members of the CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. profession say no every day. "No" means protecting the public interest by rejecting unsound unsound said of an animal, usually a horse, which has been examined for soundness and found to be unsatisfactory. corporate accounting practices. "No" means reducing the risk of deceit Deceit Aimwell pretends to be titled to wed into wealth. [Br. Lit.: The Beaux’ Stratagem] Ananias lies about amount of money received for land. [N.T.: Acts 5:1–6] Ananias Club all its members are liars. [Am. and fraud. "No" means ensuring that audited statements are not just accurate, but illuminating il·lu·mi·nate v. il·lu·mi·nat·ed, il·lu·mi·nat·ing, il·lu·mi·nates v.tr. 1. To provide or brighten with light. 2. To decorate or hang with lights. 3. . "No" means questioning and challenging management. When justified, it means rejecting management's accounting decisions. Saying "no" means saying "yes" to protecting the public interest. Only if auditors are fully prepared to say "no" will investors be fully prepared to say "yes." "No" is not always easy to say. But obscured by the recent focus on our profession is the fact that auditors say it every day. These stories rarely come to light--because an auditor prevails on clients to do the right thing. Every day, an auditor is telling a corporate executive what must be disclosed, why an item can't be treated in a certain manner, or why a certain activity must be shown on the balance sheet. Every year, members of the AICPA collectively conduct almost 17,000 audits of public companies--audits that are unblemished by restatements or allegations of impropriety. That doesn't even include hundreds of thousands of audits of privately held companies privately held company A firm whose shares are held within a relatively small circle of owners and are not traded publicly. , and government and not-for-profit institutions--audits that exemplify ex·em·pli·fy tr.v. ex·em·pli·fied, ex·em·pli·fy·ing, ex·em·pli·fies 1. a. To illustrate by example: exemplify an argument. b. the highest standards of integrity. That's the true spirit of the accounting profession--a spirit we must marshal in pursuit of a fair investment climate. We must strive for zero audit defects, knowing full well that a combination of factors will prevent us from ever achieving perfection. But when a failure occurs, we must be unrelenting in ensuring that its weaknesses are not repeated. The President and Congress have taken a significant step. The accounting profession is determined to carry the cause forward. We realize that no single initiative will rebuild investor confidence; no single magic bullet (jargon) magic bullet - (Or "silver bullet" from vampire legends) A term widely used in software engineering for a supposed quick, simple cure for some problem. E.g. "There's no silver bullet for this problem". will put fraud or malfeasance to rest. Months of introspection at the AICPA have brought us to the conclusion that we have six leadership roles to fulfill. All of them require cooperation with other important players, who have jurisdiction in many vital areas. First, the AICPA has a role as a standard setter setter: see sporting dog. setter Any of three breeds derived from a medieval hunting dog that would set (lie down) when it found birds so that it and the birds could be covered with a net. Setters have long hair on the ears, chest, legs, and tail. . While the new Public Company Accounting Oversight Board has broad responsibilities, CPAs have a responsibility to set standards for their own profession--just as professionals do in medicine, engineering and architecture. * To ensure that our standard-setting capacity is as robust as possible, the AICPA will make it a priority to obtain greater involvement of the users of financial statements in setting auditing standards. * We are developing new guidance regarding an auditor's potential dependency on fees from large clients, including discussion with audit committees about potential dependency and expanded rotation requirements for key personnel. The guidance would also consider compensation policies that reward partners primarily based on auditing proficiencies and policies that prevent a firm from penalizing a partner who says "No" at the risk of losing a client. Second, the AICPA has a role as a liaison between market institutions and corporations, jointly shaping programs and policies to guard the interests of investors. Reducing the incidence of financial fraud will require a partnership among auditors, corporate management and all financial professionals--with the goal of achieving an environment of fraud-free financial reporting. * We will design anti-fraud criteria and controls intended for public corporations, targeted for introduction next June. We invite corporate America to work with us. * We are calling on the Auditing Standards Board In the United States, the Auditing Standards Board (ASB) is the senior technical committee designated by the American Institute of Certified Public Accountants (AICPA) to issue auditing, attestation, and quality control statements, standards and guidance to certified public to enhance our existing attestation The act of attending the execution of a document and bearing witness to its authenticity, by signing one's name to it to affirm that it is genuine. The certification by a custodian of records that a copy of an original document is a true copy that is demonstrated by his or her standard for CPAs to test and report on client anti-fraud controls and programs--and to develop ways to communicate the results to the public. * We will be sponsoring a summit--before the end of this year--of financial executives, corporate directors, audit committees, stock exchanges, analysts, and regulators to identify new anti-fraud initiatives and collaborate in implementing them. Third, the AICPA has a research role. Academic research can provide new insights into the who, what, when, where, and why of corporate fraud. These insights will improve corporate fraud prevention controls, strengthen undergraduate education undergraduate education Medtalk In the US, a 4+ yr college or university education leading to a baccalaureate degree, the minimum education level required for medical school admission; undergraduate medical education refers to the 4 yrs of medical school. Cf CME. , and enhance audit procedures to detect fraud. * Today, I am pleased to announce that the AICPA, the University of Texas at Austin “University of Texas” redirects here. For other system schools, see University of Texas System. The University of Texas at Austin (often referred to as The University of Texas, UT Austin, UT, or Texas and the Association of Certified Fraud Examiners Established in 1988 the Association of Certified Fraud Examiners is the professional organization that governs professional fraud examiners. Its activities include producing fraud information, tools and training. are jointly establishing an Institute for Fraud Studies. We call upon leaders in corporate America and CPA firms to participate in this initiative. We are committed to incorporating the research results into the task of standard setting. One of the outcomes must be improved investor education. For that reason, one of the first research projects will be to study how investors can help protect themselves against fraud. Fourth, the AICPA has an educational role. We are developing training programs aimed at combating fraud. * We will initiate discussions with the American Accounting Association, the Federation of Schools of Accountancy, chairs of university accounting programs and college textbook publishers aimed at promptly incorporating fraud prevention materials into the accounting curriculum and university textbooks. This will give students the knowledge and skills to understand the fundamental characteristics of fraud, identify factors that may indicate it exists, and acquire enhanced interviewing techniques. The AICPA will work with academic institutions to develop appropriate materials, targeted for inclusion in college courses in the fall of next year. * We further believe all members of the AICPA should commit more time to continuing education continuing education: see adult education. continuing education or adult education Any form of learning provided for adults. In the U.S. the University of Wisconsin was the first academic institution to offer such programs (1904). in the area of fraud detection. While considerable ongoing professional education is required to maintain professional standards, we are calling on audit and finance professionals dealing with public companies to commit at least 10% of their continuing education to the area of fraud detection. * We are urging stock exchanges to mandate effective anti-fraud training for all members of management, boards of directors and audit committees. As a public service, by the end of this year we will develop and make available, free of charge, training programs focusing on the roles and responsibilities of management and those in corporate governance Corporate Governance The relationship between all the stakeholders in a company. This includes the shareholders, directors, and management of a company, as defined by the corporate charter, bylaws, formal policy, and rule of law. . Fifth, the AICPA has a role to play in advancing the level of financial reporting. Achieving more transparent financial reporting is central to ensuring fair markets and restoring investor confidence. We are eager to pursue this goal in concert with the Financial Accounting Standards Board Financial Accounting Standards Board (FASB) Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP). and with leading corporate organizations. We seek to work with all interested parties--but we are prepared to move forward on our own if necessary. * One of our first steps is to initiate a debate within the accounting community on how to differentiate between the needs of widely held and privately held businesses--and how to reform GAAP to reflect this reality. Given the media focus on public companies, it's easy to lose sight of both the importance of small business and its unique reporting needs. As a first step in addressing this, the AICPA is asking all of our committees and those of state societies that deal with small-company issues to put this high on their agendas. Feedback is due by the first quarter of next year. * We will work with the Financial Accounting Standards Board to ensure an improved reporting model is built that will provide investors with higher-quality information--addressing such issues as off-balance-sheet activity, liquidity, financial performance indicators and unreported intangibles. * In addition, we're working with the Canadian Institute of Chartered Accountants The Canadian Institute of Chartered Accountants (CICA) is the umbrella body for the Chartered Accountant profession in Canada and Bermuda. Membership of the CICA totals 70,000 Chartered Accountants and 8,500 students. to lead the way in updating the reporting model. We've jointly developed the Value Measurement and Reporting Collaborative, which brings together stakeholders Stakeholders All parties that have an interest, financial or otherwise, in a firm-stockholders, creditors, bondholders, employees, customers, management, the community, and the government. in the financial reporting process from around the world to determine the best methodologies for value measurements and reporting. This will enable investors to see more information about what makes a company successful. It will also help boards of directors and senior management to make better strategic decisions. * We fully support the SEC's current proposal to expand and enhance the disclosure of estimates and accounting policies. When the new rules are finalized See finalization. , we will provide our members with tools to implement it. The additional disclosures should either be included as part of the financial statement disclosures or as part of Management's Discussion and Analysis Management's discussion and analysis (MD&A) A report from management to shareholders that accompanies the firm's financial statements in the annual report. It explains the period's financial results and enables management to discuss topics that may not be apparent in the financial . And we fully support the auditor's examination of MD&A. As well, the Auditing Standards Board is seeking input from users of financial information as to other types of information that should be communicated by the auditor. Sixth, the AICPA has a role in promoting strong corporate governance and internal control systems. A public company's ability to withstand pressures to provide false information to the public depends largely on those factors. * For that reason, we are calling on the Auditing Standards Board to revise existing internal controls and reporting standards so that the public will be put on notice when the auditor communicates internal control weaknesses to the audit committee. Situations that will be considered as constituting reportable conditions will include one individual holding the dual positions of Chairman of the Board and CEO, or an audit committee that is not fulfilling its mission. It may include lack of mandatory anti-fraud education, or lack of a Code of Conduct. In fulfilling all of these roles, the AICPA has an overriding mission: to shape an accounting culture for the future that surpasses the legacy of our past. Over the past few months, certainly one good thing has occurred: the importance of the audit has been reaffirmed--loud and clear. Now, we must build on its core value. The AICPA will be both a watchdog and a source of leadership. We pledge to be a force for raising new issues and examining issues that are raised by others. We will serve as common ground for all in the profession and those involved in the financial reporting process to bring their concerns and proposals. To be certain, none of us--auditors, corporations or investors--will look back fondly on this year. But the 350,000 members of the AICPA are concentrating on looking forward. We're looking forward to implementing the fundamental reforms enacted by Congress. We' re looking forward to working with lawmakers, corporations and the public to implement new reforms as necessary. Forward to rebuilding the faith of investors in the audited financial statement as an open window into publicly traded companies. Forward to reclaiming
And continuing our historic role as trusted advisors to businesses of all sizes and protectors For the 1970s television series made by Gerry Anderson, see The Protectors Protectors was a team of fictional superheroes that starred in the eponymous title published by Malibu Comics. of the public interest. It will not be easy. But we are committed to it. We are committed to moving forward. We will rebuild trust in our profession - brick by brick. I thank you for joining me today, and we look forward to working with you in the months and years ahead. |
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