Seven voices from the profession: the state of the accountability profession.
The State of the Accountability Profession.
BY DAVID M. WALKER
Recent accountability failures in the United States and other countries have led to bankruptcies and restatements that harmed countless shareholders, employees and retirees. People lost their investments, their jobs and their pensions. Not surprisingly, public confidence in the integrity of the financial reporting process and auditors took a big hit. In fact, one of the world's largest and most respected accounting firms, and one that I worked at for many years--Arthur Andersen LLP--paid the ultimate price.
These failures involved not merely marginal companies with questionable reputations but prominent businesses and acclaimed executives. In some cases, corporate officers allegedly pressured their auditors to help cook the books. Although most auditors did not participate in such schemes, all too often the result was audited financial statements that inappropriately accelerated revenues, deferred expenses, artificially smoothed earnings and boosted earnings per share.
The accounting profession is not solely responsible for the scandals at Enron, WorldCom and other companies, but it does bear some blame--partly because of its reluctance to adopt long-overdue reforms. The silver lining to this sad situation is the opportunity to repair our profession's tarnished image and better position ourselves to meet the challenges and opportunities of the 21st century.
Concerns about truth and transparency in financial reporting, however, are not limited to the private sector. Washington recently got an unpleasant wake-up call when two government-sponsored enterprises, Fannie Mae and Freddie Mac, announced earnings restatements. My agency, the U.S. Government Accountability Office, is committed to ensuring that such accountability failures do not occur in the federal government.
In the long run, the accounting profession needs to help modernize and expand financial and performance reporting models as well as attest and assurance practices, including the use of continuous auditing practices. More immediately, accountants and auditors must integrate best practices into their daily routines. They must also put the public interest before personal interest; do what is ethically right and not just legally permissible; be concerned about both fact and appearance, especially when it comes to independence issues; and recognize that continuous improvement is essential.
Maintaining public trust will require every participant in the chain of corporate reporting to put into practice the values of transparency, accountability and integrity. The public's expectations are high, and rightfully so. In this case, it will take actions, not words, to repair the damage that has been done. On each and every assignment, accountability professionals need to be thinking about how to maximize value and manage risk for their most important client--the public. After all, that is what the "P" in CPA stands for.
David M. Walker, CPA, Comptroller General of the United States, heads the U.S. Government Accountability Office and holds a number of leadership positions in the profession, both domestically and internationally. His previous experience includes serving as Assistant Secretary of Labor for Pension and Welfare Benefit Programs and as Public Trustee for Social Security and Medicare, as well as in various audit, consulting and leadership positions at Arthur Andersen, Price Waterhouse and Coopers & Lybrand.
Leadership in the Corporate World
BY OLIVIA F. KIRTLEY
CPAs are going places. Fast. In recent years, the acceleration of transformation from supporting and information roles to leadership roles has been tremendous. CPAs are moving to the top of organizations and into the boardroom in increasing numbers. Demand for CPA leadership has never been greater.
Throughout history, the CPA profession has always held to its core values of competence, integrity and objectivity. Now, CPAs have emerged as thought leaders who embrace change and provide solutions for emerging challenges. CPAs have been the stimulus for fresh initiatives to address needs in a rapidly changing business world.
As we entered the 21st century, the profession recognized the emergence of expanding business needs and initiated a completely new and computerized Uniform CPA Examination that tests not only candidates' knowledge, but also their skills in areas such as research, technology and communications. Employers--whether in companies or in firms--demand those skills today, and the profession acted to ensure that those who hold the CPA credential will continue to display the competence and excellence that we have come to stand for.
CPAs are moving into leadership roles on all business fronts. In years past, CPAs were viewed primarily in financial leadership roles, but rarely as full-scope business leaders. That has changed. As business complexity has increased, we have gained the respect of both management and investors who understand that our financial acumen and core values have much broader application that can greatly benefit corporate America. CPAs are being sought after as valuable partners in leadership alongside boards and CEOs. Our leadership roles have been widely embraced as essential to the success and future viability of businesses.
On this 100th anniversary of the Journal of Accountancy, much of the CPA world has changed. However, CPAs from a century ago would easily recognize us as we continue to hold to the core values they established for this great profession. They would also see that we have not settled for a little piece of land in the business arena but have recognized our territory to be far reaching, and are constantly looking for ways to expand our impact and contribution as the business world and public expectations continue to evolve.
Olivia F. Kirtley, CPA, is a former chair of the AICPA board of directors, the first woman and first CPA in business and industry to hold the title. She also chaired the AICPA board of examiners during the development of the computerized CPA exam. She is a consultant on strategic and governance issues and a corporate director of several public companies.
Responsibility to Embrace Diversity
BY BERT N. MITCHELL
In his inaugural address in October 1968, AICPA chair Ralph Kent noted that the time had come to integrate the CPA profession in fact and not merely in ideal. This challenge came well after the AICPA had celebrated its 70th anniversary, and still there were less than 150 black CPAs in the entire country. Until then, there had been almost no consciousness on the part of the profession of a social responsibility to embrace diversity. Now that we are well into our second century, we must evaluate how well we have risen to the challenge and to what extent we are committed to diversity as a social responsibility.
Today, more than 50% of the new entrants to our profession are women, a reality that not even the most visionary pre-World War II practitioner would have forecast. However, the norms of our society changed during the baby boom era. Now we face new realities with a more practical and less fearful stance. If our profession had not dropped the artificial barriers that impeded women, it would not be possible to meet its present staffing demands.
Most of our progress has been made as a result of economic necessity and much less so because of ideals. However, if we are to fulfill our public trust, we must seriously commit ourselves to the social responsibility of diversity in our profession--not only at the entry level but at the leadership levels as well. We must become much more proactive in increasing the participation of ethnic minorities, thereby making our profession more representative of our population overall.
The CPA profession, like the corporate community, has become concentrated over the last quarter of a century; this is evident in the fact that the four largest firms represent more than 75% of the revenues derived by the entire profession. Moreover, there is only a slight representation of ethnic minorities in the leadership ranks of these firms. Of the more than 8,000 partners in the Big Four combined in the United States, less than 100 are African Americans and even fewer are Latinos, at a time when these two ethnic groups represent more than 25% of our population.
Yes, one can point out that the CPA profession is not alone in such paucity of diversity, but it certainly has not been a champion of diversity either. Ralph Kent challenged the profession to de facto integration, but there is an apparent lack of commitment to the ideal.
As we celebrate the centennial of the Journal of Accountancy and cope with the many new realities required of us as professionals--especially the responsibilities under the law we accept as we provide services to our clients--let's remember that a profession that does not commit itself to full opportunity for all the major segments of our society denies itself the full potential of that most precious resource that fuels its engine--human capital.
Bert N. Mitchell, CPA, is chairman & CEO of Mitchell O Titus LLP, the nation's largest African American CPA firm. Mr. Mitchell has been active in the accounting profession and has served on the AICPA board of directors. He has been a frequent contributor to the JofA over the past 35 years.
BY DON KIRK
In 1978 Jacques Barzun, then a University Professor Emeritus at Columbia University, wrote an article entitled "The Professions Under Siege" (excerpted in the March 1984 JofA). Barzun's clarion call was for the leadership needed to restore professions, including our own, to a respected place in our society. In 1980 William R. Gregory, then chairman of the AICPA, warned that competitive pressures in the profession "have created in some CPAs attitudes that are intensely commercial and nearly devoid of the high-principled conduct that we have come to expect of a true professional." Both men's writings were often quoted but seldom seriously considered. Much of what they feared has happened.
By the time of Barzun's writing, the AICPA had lost its responsibility for the establishment of accounting standards to the independent Financial Accounting Standards Board and was, in response to congressional criticism, in the process of establishing a governance structure--the SEC practice section and the Public Oversight Board--for carrying out and overseeing peer reviews. That governance structure has since been swept away in a wave of accounting frauds, audit failures and governmental reforms. The crowning blow was the loss of the profession's responsibility for establishing generally accepted auditing standards for publicly owned companies.
The lessons we learned from these experiences, it is hoped, will lessen the chances of repeating missteps because, without a doubt, our profession will remain under siege.
In my 45 years of association with the profession I have had several vantage points from which to influence or observe professional behavior. What disappointed me most were professionals convincing themselves that doing anything other than what was specifically prohibited was fair game because our professional objectivity and integrity were enough to protect the public and prevent jeopardizing our professional reputation. The resulting rationalizations led to attempts to downplay or dismiss the long-held notion that appearances should be considered in assessing independence; they led to flirtation with public ownership of firms; and they led to the belief that practically no service--even the aggressive marketing of what have proven to be abusive tax shelters--would call into question the objectivity and integrity of the profession. Cap all that with the years of effort to minimize the profession's responsibility for the detection of fraud, and you have some of the reasons why regaining trust will take a gigantic effort of, in Barzun's words, "moral and intellectual leadership."
So, what should be done? For those activities and practices still in the control of the profession, let's act on Barzun's advice: Let's never forget that our franchise is "a privilege given in exchange for a public benefit." Let's have the will to police ourselves in an open and transparent way "with no fraternal hand, with no thought of public relations." Let's instill in our members, member firms and professional associations the conviction that "ethical behavior is desirable, widely practiced, approved, and admired." Let's remember that we are licensed to use our accounting and auditing skills for the public good and that our code of ethics calls for us to do that with objectivity, independence and integrity. Let's keep reminding ourselves that audited financial statements are for the benefit of shareholders and that services performed for audit clients that are not closely related to the audit or our accounting and auditing skills will call into question the objectivity of the auditor. Believe me, appearances do matter, especially now in the effort to regain public trust.
Don Kirk, CPA, is a former chairman of the Financial Accounting Standards Board and has been a partner of Price Waterhouse, a professor at the Columbia University Graduate School of Business, vice-chairman of the Public Oversight Board and a corporate director and audit committee chair. He is a member of the Accounting Hall of Fame at The Ohio State University and a recipient of the AICPA's Gold Medal for Distinguished Service.
Education With Purpose
BY GARY JOHN PREVITS
In 1905 when the Journal of Accountancy made its debut, a high school education was the common expectation among the few states that had passed CPA legislation. Experience in practical skills was a CPA's key feature. It would be 20 years before all states had passed comparable CPA statutes, and decades before a bachelor's degree would become the norm for CPA qualification, along with the emphasis on technical (CPA-exam-driven) skills. Then, in 1967, the landmark study Horizons for a Profession introduced a more complete view of formal accounting education. Today, a majority of new CPAs have achieved the postgraduate educational level and CPAs are being better prepared for an "ownership" society, serving more sophisticated clients who demand greater accountability.
Education is a key to fulfilling what we can do as CPAs. Because much has to be understood for someone to become technically proficient, we often focus our educational efforts on competency alone, while viewing social responsibility as an add-on rather than a built-in curriculum feature. Technical skills are significant in today's educational environment, in which we are adjusting to a new psychometrically validated computerized testing process and new mandates from recent legislation and regulation. As important as technical competence is to satisfying the market's demand for efficiency, however, it is but one aspect of the purpose of a CPA's education.
Our 21st century world features instant change, global connectivity and perpetually perplexing pressures, so our responsibilities require more than an average educational experience. They demand an education worthy of a learned profession, not merely a technically credentialed one. Despite recent turmoil, we remain a profession so long as we seek first to serve one of the most important rights of our free enterprise system-the constitutional right of an individual to own private productive property. This right is at the core of our economic system, with its opportunities and its promise of prosperity and liberty. It is now exercised commonly in equity and security investments and begets a right to reliable information. Without this information, individuals are less able to control their investments--their private productive property--and end up forfeiting them to capital market intermediaries or agents.
The CPA profession's role in our society is to satisfactorily serve this right to information. Our educational programs--those at entry level, those that maintain our competency and those that reach out to improve the financial literacy of our communities--are incomplete without a strong sense of commitment to this information right. Both technical competence and our commitment to this information right, therefore, are the necessary components of education for CPAs in the 21st century. Our challenge is to address this simple but powerful purpose.
Gary John Previts, CPA, PhD, is professor of accountancy at Case Western Reserve University in Cleveland. An advocate of professional education, he has worked to advance research about, and the study of, the history of accounting thought and regulation.
The JofA wishes to thank Gary Previts, professor of accountancy at Case Western Reserve University, Cleveland, for his many contributions to our centennial issue. His efforts were crucial to its success.
Advocate, Regulator, Network and Conscience
BY J. CLARKE PRICE
Just as the CPA profession has evolved over the past hundred-plus years, so too have the organizations that represent the collective interests of those who have earned the CPA credential. The AICPA, the state societies and the various firm associations play a special role in helping CPAs enter new practice areas, expand competencies and more effectively serve the public interest. While the roots of these organizations are in serving CPAs and representing their interests, all have evolved into unique entities that act as advocate, regulator, network provider and conscience.
Occasionally characterized by some as being internally focused and looking out solely for their own or their members' interests, the organizations serving the profession have grown from purely networking forums to fulfill a dual purpose of serving member interests while also holding members to high performance standards.
The profession's organizations have driven changes that benefit the public interest, ranging from adopting the most rigorous continuing education requirements of any profession to implementing comprehensive peer review requirements. These actions represent the CPA profession's commitment to police itself through its professional organizations.
The events that led to the Sarbanes-Oxley legislation challenged the CPA profession's image in a way that was unlike anything we had faced in the recent past. The profession's organizations responded on two fronts--implementing communications and public relations strategies to help restore trust and confidence in CPAs and the profession, and working to stop a flood of mostly overreaching state legislation.
While dismissed by some as ineffective, ethics enforcement is at the heart of the profession's self-regulatory activities and has recently been the subject of much attention. Unfortunately, the ethics program is complaint-based and works only when a complaint is registered. CPAs themselves are often loath to report the substandard work or unethical behavior they encounter. Others assert that ethics enforcement is superficial since the ultimate sanction is only to "throw the offenders out of the club." That kind of thinking and behavior doesn't do the profession or the public any good.
The organizations serving the profession are only as good and as effective as the members make them. They can become more effective only if the members expect more. We need to walk the fine line that allows us to serve member interests while helping the profession to remain at the pinnacle of quality.
J. Clarke Price, CAE, is president and CEO of the Ohio Society of CPAs, with which he's been affiliated for 33 years in a variety off roles.
Happy People, Happy Clients.
J. Michael Cook
Can these four words adequately convey the mission of a global professional services firm? While we had fancier mission statements for external communications, this simple expression worked well for me in guiding a firm for almost 15 years. The words are simple. The challenges to achieve them were much greater.
People. They are our intellectual property and, along with our clients, the only asset of our firm that really mattered. What did it take to make them happy? The changes in their needs and expectations over the years led us to discover the difference we could make for our people and how important this could be for us when we got it right. In about a generation we changed from an all-male group to a fully diversifed firm. When large numbers of talented women became a key factor for our success, we changed how, when and where we worked through our initiative for the retention and advancement of women. The best practices we learned from that experience spread to all of our human resources policies and practices, for the benefit of all of our people. This propelled us to no. 8 on Fortune's "100 Best Companies to Work for in America" list in the year I retired from Deloitte. These results were clearly demonstrated to me in 2003 when I attended the 10th anniversary of the initiative's launch as the guest of more than 500 women partners--a tenfold growth from the fewer than 50 (3% of the partners) at the outset. What a wonderful experience to have been a part of a change process with such a dramatic impact.
Clients. Identifying the ultimate client and meeting his or her needs and expectations are continuous challenges. Our profession has always been tested in balancing our obligation to the public with our desire to respond to the varied needs and expectations of the companies that employ us to provide attest services. We now face, as a consequence of the intense changes in recent years, a period of lessened self-regulation and increased government oversight. Some are concerned that our image has been tarnished. Our challenge is to accept and adapt to these changes and to remove questions about the credibility and value of our core service--the reason for our existence as CPAs--the independent audit. But even those of our clients--public investors and the capital markets--who are not happy today know we are fully capable of changing. I and others are responding by rededicating ourselves to the highest levels of integrity, independence and competence in serving the public interest.
J. Michael Cook, CPA, is the retired chairman and CEO of Deloitte & Touche. He is a member of the board of directors of Comcast, Dow Chemical, Eli Lilly and International Flavors and Fragrances. He chairs the audit committees of Comcast and IFE is a member of the audit committees of Dow and Lilly, and chairs Dow's committee on directors and governance.