Reconciling Image with Reality

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In our October 2004 issue, an excellent article by Robert L. Bunting (“Transparency: The New Peer Review Watchword,”) presented a refreshing policy position. Bunting, elected last month as AICPA chairman, is firmly committed to reforming the peer review and quality assurance systems and views this as a critical step toward greater transparency throughout the profession. A underlying aspect of this initiative is the gap between the public’s image of CPAs’ responsibility and the reality.

Public Expectations

For example, a popular but erroneous belief among corporate stockholders and the general public is that the objectives of CPA audits of public companies include rooting out fraud and verifying every aspect of the financial statements. Moreover, the public also believes that the audits of entities such as nonprofits, school districts, municipalities, and governmental, and quasi-governmental agencies not only ensure that their financial statements meet accounting standards, but also verify that an entity’s expenditures are in line with its mission—what the Yellow Book auditing standards refer to as performance audits. But in practice this level of auditing is rarely done, and many government agencies are not audited. New York State Comptroller Alan Hevesi’s audits of more than 20 of New York’s 700-plus public school districts have made headlines, and I think it’s because people recognize that the financial problems in some districts may be only the tip of the iceberg. (See the interview with Hevesi in the October 2004 Journal.)

Another myth is that the audits of government agencies and nonprofits are presented to their board of directors and audit committee, when in many cases only the entity’s executive staff sees the audit. Many people have called for mandatory auditor rotation as a way to improve accountability. The NYSSCPA has always opposed auditor rotation because there aren’t enough audit firms with the right experience to audit all of the entities and businesses that would be affected, and many small CPA firms don’t have enough audit partners to rotate them. Also, many government entities and nonprofits give scant attention to their bidding and to RFP policies and practices for audits. So such entities’ problems are probably both broader and deeper than the audit itself, and pervade many levels of the organizations’ management and governance structures.

Changing the Status Quo

The status quo for the selection of many entities’ officers and board members is to appoint people based on their dedication to the organizational mission, often limited to their programmatic or fundraising ability; managerial or financial expertise is generally secondary at best. Boards must change their mindset about job qualifications for these positions, and then arrange the necessary organizational resources to facilitate complete, objective audits, and be willing to pay for them.

Finally, the media have a vital role in improving transparency in financial reporting and dispelling erroneous beliefs about the profession. To that end, the NYSSCPA is expanding its program of educating journalists about how to understand financial statements and about auditing standards and practices. With that knowledge, the media can serve their audiences more effectively. They can investigate stories instead of just reporting what they are told, thereby perpetuating the myths that jeopardize the financial security of our markets and our country, as well as CPAs’ reputation and integrity.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA




















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