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Evaluating the AICPA’s CPA Horizons 2025
In late November 2011, the AICPA released the results of CPA Horizons 2025: A Road Map for the Future, a strategic look into the next 15 years of the CPA profession that built on its 1998 Vision Project. With more than 5,600 CPAs participating through over 75,000 comments, in-person and online forums, focus groups, interactive surveys, and discussions led by a 21-member advisory body, the objective of this monumental study was to examine the current and future relevance of their Core Purpose, Values, Competencies, and Services” over the next 15 years. The report provided many positive and meaningful observations, recommendations on education and training, pride in the knowledge required to be a CPA, and pride in the CPA profession. In January 2011, Congress released The Financial Crisis Inquiry Report, an emotionally charged but formal response to the congressional investigation of the causes of the economic downturn.
A “Road Map for the Future” or a More Socially Responsible Path?
In late November 2011, the AICPA released the results of CPA Horizons 2025: A Road Map for the Future, a strategic look into the next 15 years of the CPA profession that built on its 1998 Vision Project. With more than 5,600 CPAs participating through over 75,000 comments, in-person and online forums, focus groups, interactive surveys, and discussions led by a 21 -member advisory body, the objective of this monumental study was to examine “the current and future relevance of our Core Purpose, Values, Competencies, and Services” over the next 15 years (http://www.aicpa. org/Research/CPAHorizons2025/Downloa dableDocuments/cpa-horizons-reportweb.pdf).
The report provided many positive and meaningful observations, recommendations on education and training, pride in the knowledge required to be a CPA and pride in the CPA profession. It also defined the profession’s core purpose as “making sense of a changing and complex world,” which is relevant today and will remain relevant in the future. The core values and competencies identified in the report are shown in Exhibit 1.
In the spirit of open dialogue and intellectual honesty as this 15-year journey begins, this author must say mat, unfortunately, CPA Horizons 2025 failed to address the most fundamental issue facing CPAs today: our role in society and the changes that we will need to make in order to remain relevant in the future.
The CPA profession faced almost exactly this same issue 100 years ago, when George May assumed legendary leadership of the accounting profession as head of Price Waterhouse in 1911. Should we follow in May’s footsteps and in his “zeal to protect the public trust”? Should we take this on as our principal obligation, our responsibility to protect the public? As May put it: “the high-minded accountant who undertakes to practice in this field assumes high ethical obligations. … Of all the groups of professions . . . there is none in which the practitioner is under a greater ethical obligation to persons who are not his immediate clients” (Twenty-five Years of Accounting Responsibility, 1911-1936, Price Waterhouse, 1936, p. 173). Should we employ accounting as a “social force” or continue the status quo and place client service over public service? (See Mike Brewster, Unaccountable: How the Accounting Profession Forfeited a Public Trust, Wiley, 2003, p. 98.)
Among investors, employees, shareholders, and the general public, the CPA brand is still the most trusted financial professional brand in America. But we are now at a crossroads. The question we need to ask is whether we should allow mis franchise to be continually diluted by abdicating all responsibility over financial reporting and auditing practices to the federal government and those bodies authorized to carry out its statutory authority – the SEC, the Public Company Accounting Oversight Board (PCAOB), and FASB. Is there not something more that a CPA should embrace? Unfortunately, these critical, pivotal issues were not addressed in the AICPA’s CPA Horizons 2025 report.
The Economic Realities of Recession
CPA Horizons 2025 was issued against the backdrop of the current prolonged recession and the accompanying unprecedented wealth destruction; between 2004 and 2010, the median wealth of the average American declined by 8% (“Economic Downturn took a Detour at Capitol Hill,” New York Times, Dec. 27, 2011). Absent from the AICPA report is a discussion of the frequent revelations during the past four years of enterprise fraud, misstated or materially misrepresented financials, and an explosion of suspicious fraudulent activities. (According to the FBI, 1,700 pending corporate, securities, commodities, and investment fraud cases are under investigation, an increase of 37% since 2001 [http://www.fbi.gov/stats-services/ publications/facts-and-figures-20102011/investigative-programs].)
Bankruptcies, insolvencies, and forced mergers over the past four years have meant frequent disclosures about Federal National Mortgage Agency, Federal Home Loan Mortgage Corporation, and MF Global – not to mention American International Group (the largest corporate failure in history), Lehman Brothers, Bear Stearns, Merrill Lynch, Washington Mutual (the largest bank failure in U.S. history), Countrywide Financial, Olympus, Westridge Capital, Sky Capital, and the disgraced financiers Bernard Madoff and Allen Stanford, and lawyer Marc Dreier.
The Financial Crisis Inquiry Report
In January 2011, Congress released The Financial Crisis Inquiry Report, an emotionally charged but formal response to the congressional investigation of the causes of the economic downturn. The report vilified the banking and financial service industry. It concluded: “The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble. While the business cycle cannot be repealed, a crisis of this magnitude need not have occurred” (p. xvii, http://www. gpo.gov/fdsys/pkg/GPO-FCiapdf/GPOFCIC.pdf).
But absent from this 600-page report was any reference to auditors, who have audited banks and financial service companies for almost 100 years, and are responsible for ensuring mat the financial statements of the companies they audited were accurate, truthful, and presented fairly their operating results.
Socially Responsible Accounting
The question for the accounting profession, ignored by bom the AICPA and the financial Inquiry Commission Report, is: what is our responsibihty as CPAs to act in the public interest and safeguard the public trust? Certainly, we owe our certificate to the public and our license to the state. But as the most trusted advisors in the financial service industry, are we satisfied with our collective performance during mese past four years? Are we not part of the chorus of discontent directed toward Wall Street over these abuses? Are we, as accounting professionals, unimpeachable? In 2009, Louis Grumet, former NYSSCPA executive director, asked, “When it comes to assigning blame, when do we stop looking elsewhere and start looking in the mirror?” (“Losing Our Moral and Ethical Compass,” The CPA Journal, May 2009, p. 7)
The Expectations Gap: Is It Widening?
Throughout the 20th century – and past the Millennium, driven by the scandals of Enron and WorldCom – government, the investment community, and the accounting industry debated the role and responsibility of the accounting firm in American society. The profession continues to be burdened with the “expectations gap” – that is, a gap between what the public perceives as accountants’ role in society and what the profession perceives as its role in service to clients. Study after study defines and reaffirms this obligation:
We conducted our research over a decade after the release of the expectation gap SASs and also after the issuance of SAS No. 82 (AICPA 1997). Our findings indicate that an expectation gap exists; investors have higher expectations for various facets and/or assurances of the audit than do auditors in the following areas: disclosure, internal control, fraud, and illegal operations. We also find mat investors expect auditors to act as “public watchdogs.” (John E. McEnroe and Stanley C. Martens, “Auditors’ and Investors’ Perceptions of the ‘Expectation Gap,'” Accounting Horizons, Dec. 1, 2001, pp. 345-358)
In its simplest form, the public wants outside auditors and internal auditors to uncover fraud, and it wants CFOs not to bow under CEO pressure to commit it. CPA Horizons 2025 ignores this fundamental issue, our raison d’être, our unique value, and the contribution we make to postmodern capitalism.
CPAs need to be watchdogs of the pubhe trust. As auditors and financial managers, their principal responsibility is to ensure the integrity, transparency, fairness, and accuracy of the financial statements they review, and to ensure mat financial statements are not materially misleading or misstate the results that others rely on (Richard H. Kravitz, “Socially Responsible Accounting: A Call for Reform in the Profession,” The CPA Journal, Nov. 2009, pp. 16-22).
How well has the accounting profession uncovered fraudulent financial reporting and protected the public interest over the past four years? According to Lee Seidler, an NYU professor and a leader of the profession, “no major fraud has ever been discovered by auditors … the reason why external auditors have a very poor record of uncovering fraud is that much of the auditors’ work and examination time is based on a faulty assumption that separation of duties within the corporation prevents fraud” (Seidler, as quoted in Forensic and Investigative Accounting, 4th ed., by D. Larry Crumbley, Lester E. Heitger, and G. Stevenson Smith, CCH, Aug. 2009). In fact, the “many disclosures of cooked books . . . proved Seidler correct” (Crumbley 2009).
The discussion in CPA Horizons 2025 focuses on outcomes; the expectations gap was not explicitly addressed, and one of the few times the subject is discussed is only to extent that “the profession must stay vigilant in defending its unique role as providers of audit and attest services” (p. 24). The issue, according to CPA Horizons 2025, appears to be one of selfprotection rather than self-improvement.
Growing Loss of Trust
The growing loss of trust in our institutions has been chronicled in public surveys over the past four years. But the surveys within the accounting profession are even more interesting:
* Of more than 200 financial chiefs surveyed, 62% believed that CFOs could intentionally misstate financial statements, representing a 10% increase over the prior year (Financial Management Network, Smart Pros, Aug. 2011).
* More than 83% of the financial chiefs in the same survey believed it was not possible for outside auditors to detect fraud in all cases (Financial Management Network 2011).
* In 72% of fraud cases occurring over a 10-year period, the CEO was implicated; in 23% of the cases, the outside auditors were implicated (Mark Beasly, Joe Carcello, and Dana Hermanson, “Fraudulent Financial Reporting: 1998-2007,” Committee of Sponsoring Organizations of the Treadway Commission [COSO], May 2010, http:// www.coso.org/documents/COSOFRAUD STUDY2010_001.pdf).
* A 25-year study by the Conference Board of accounting and auditing enforcement actions revealed that CFOs who were implicated in the action had an even bigger risk of litigation in accounting manipulation cases than CEOs, yet they did not have the immediate personal financial benefits of cooking the books (Universal Conduct: An Ethics and Compliance Benchmarking Survey, September 2006).
CPAs had the most to lose and the least to gain. Whether it is the revelations of the Bernard Madoff scheme, recent investigations of feeder funds, the disclosure of $1.2 billion missing in custodial accounts at Jon Corzine’s MF Global, or the SEC’ s new civil and criminal investigations of alleged massive fraud in bundling mortgage obligations at Fannie Mae and Freddie Mac (Franklin Yu, “Former Fannie CEO takes Leave Amid SEC Charges,” Epoch Times, Dec. 21, 2011), it is undeniable that over the past four years, clean audits were rendered on enterprises that subsequently became insolvent, that practically seized up the global financial markets, or that were forced to merge (Merrill Lynch, Countrywide) or liquidate (Lehman Brothers). We should be better than this.
Who Will Fill the Leadership Gap?
It is said that abuse invites regulation. What might shape the accounting profession over the next 15 years, absent the advocacy of the AICPA, is sobering. Politically motivated solutions are usually not optimal. They lead to political overreaction; punitive government oversight; and substandard, politically motivated regulation. Just look at the Sarbanes-Oxley Act (SOX) of 2002 and at the PCAOB- the world’s largest frauds were committed under their watch.
Jf current direction is an indicator of future direction, look no further than PCAOB Chairman James R. Doty’s presentation at an NYSSCPA conference; he highlighted the fundamental conflict between a company and its auditor, and noted that in its roughly 3,000 audits, the PCAOB found hundreds of flaws that “cut to the heart of an audit’s fundamental objective of obtaining reasonable assurance that a financial statement is free of material misstatement” (Chris Gaetano, “Doty Seeks Shift in the ‘Culture of the Audit,'” The Trusted Professional, Dec. 2011, p. 8).
Would CPAs prefer their profession to be “restructured” as a service provider to the federal government? Would they prefer to be paid by a government trust fund mat would hire outside auditors to audit publicly traded enterprises under strict regulatory oversight? Or, as some have suggested, would CPAs prefer that professional liability insurers hire the outside auditors in an attempt to reduce their own liability? Would this improve financial reporting and transparency for the public, or would it be self-serving for insurers? Would insurance companies and risk managers establish audit procedures and processes in the same way that they do for medical procedures? Would CPAs accept the legitimacy of nonauditor, third-party administrators to determine the necessity of certain audit procedures and ehgibility for subsequent reimbursement?
Why Accountants Need to Step Up to the Plate
The practical reality is that there are many more accountants and auditors than there are PCAOB inspectors and SEC staff. Regulatory staff number in the hundreds of thousands, but there might be nearly 1 million CPAs and Chartered Accountants in the world. Public accountants work yearround in the offices of the largest corporations in the world. While Lehman Brothers was on the brink of destruction, at least three of the Big Four were allegedly working in the firm, performing tax preparation work, advisory (consulting) services, and auditing services. Because of their industry footprint, CPAs constitute the largest body of independent observers of corporate behavior.
The services provided by public accounting firms to their clients are extensive. Ernst & Young, Lehman’s principal auditor that was recently charged with civil fraud, actually has a separate global fraud investigation and dispute service division. It also has a special advisory group in the financial services sector that handles financial risk management.
The SEC and similar state and governmental watchdogs lack not only the legal mandate to “live” in companies, but also the staff, depth, competency, organizational breadth, flexibility, and structural ability to provide this kind of coverage, which, when best employed, has the potential to prescriptively uncover fraud before it gets out of hand and forces the entity to fail.
There are few alternatives. Crumbley, one of the founding fathers of forensic accounting, remarked that:
Internal auditors put disclaimers in their charters. Management looked to audit committees. Audit committees looked to independent auditors. Independent auditors looked to management. Were it not for the phenomenal amount of investment funds and jobs lost by innocent individuals, the whole business would remind one of the “who’s on first” classic comedy routine (Crumbley 2009).
The public accounting firm must therefore assume its role as a check-and-balance enterprise of the sort inherent in a democratic society in order to meet the needs of the public and to reduce the expectations gap. There are no other legitimate global institutions that can observe and or police corporate enterprise as effectively.
This author argues that now more than ever- -in these politically, socially, and economically troubled times – CPAs, as the most trusted advisors and in conjunction with the profession’s most trusted institutions, must reassert their leadership, ethical guidance, and moral compass in order to protect the public interest and insure the public trust.
The question for the accounting profession is: what is our responsibility as CPAs to act in the public interest and safeguard the public trust?
Richard H. Kravtiz, CPA, MBA, is a fellow of the American College of Forensic Examiners, and founding director of the Center for Socially Responsible Accounting. The above is adapted from Post Modem Capitalism: A Reassessment of the Institutions, Advisors, and Models in a Period of Unprecedented Wealth Destruction, slated to be published in 2012.
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Copyright New York State Society of Certified Public Accountants Nov 2012