Future of the Accounting Profession’ Report
2005 - The bedrock of our commercial system is reliable accounting.
Without high-quality accounting standards, the lifeblood of
capital cannot be efficiently allocated to its best use in
building and sustaining our economy and our way of life.
Richard W. Fisher, Chair, The American Assembly, November
in 1950 by Dwight Eisenhower as an affiliate of Columbia
University, the American Assembly (http://www.americanassembly.org/index.php)
is a national, nonpartisan public affairs forum “illuminating
issues of public policy by commissioning research and publications,
sponsoring meetings, and issuing reports, books, and other
Future of the Accounting Profession,” the Assembly’s
103rd report, was coordinated by a blue-ribbon steering
committee from finance, accounting, and education, including
Paul Volcker, William Donaldson, Robert Denham, David Tweedie,
Arthur Levitt, William McDonough, Derek Bok, Katherine Schipper,
Washington SyCip, Clifton Wharton, and Roman Weil. Donaldson
and Weil were also keynote speakers. This Assembly included
background papers commissioned for the benefit of its participants,
and discussions, along with question-and-answer periods.
The mission of the project was to consider the status of
accounting: the current situation, the desired future situation,
and how to attain it. The participants voiced their own
views rather than their institutions’. The report
was reviewed and, where necessary, modified by the participants
at the end of the conference.
the whole, the participants were satisfied with recent regulatory
changes, including the actions of the Public Company Accounting
Oversight Board (PCAOB), created under the Sarbanes-Oxley
Act of 2002 (SOA) to reform accounting practice, and with
recent steps by accounting firms to enhance their own practices.
The report stresses the subjectivity and judgmental nature
of financial statements. Participants contend that too much
is expected from audits, because financial statements are
not precise and exact. The public, not to mention audit
committees, may be calling for a degree of certainty in
audits and accounting that cannot be achieved. This situation
is usually referred to, though not in the report, as the
“expectations gap.” The participants recommended
that auditors exercise judgment to a greater extent, for
example in detecting fraud. The profession needs to be revitalized
to attract more qualified individuals. The participants
also thought that the profession ought to be insulated from
frivolous legal challenges. Finally, corporate boards should
have more qualified audit committee members.
Era of More Bright Lines, Less Judgment
that auditors should be “gatekeepers” whose
primary allegiance must be to the public, the report recounts
the events in the 1990s that led to the scandals in 2000
and beyond. While the report says accountants were not the
only parties to blame, “all too many independent auditors
lost their autonomy and judgment—and ended by blurring
the line between right and wrong.” The audit became
“a commodity with little intrinsic value,” yielding
to management desires to release misleading financial statements.
In essence, although the report does not explicitly say
so, accounting self-regulation failed.
participants maintained that accountants employ many “bright-line”
rules when they should be using their judgment. Arguing
that the dichotomy between “principles” and
“rules” is artificial, the participants believe
that “principles must accompany rules, and vice versa.”
Put another way, principles and rules are closely related.
The real issue, the participants maintained, is whether
accountants and auditors can exercise professional judgment.
participants were concerned about the organizational structure
of the Big Four firms—each a loose confederation of
partnerships having individual legal entities yet often
using the same overall name. Such firms do not necessarily
use their resources effectively, because experienced auditors
are often not on the scene where they are needed the most
to pinpoint signs of trouble. A number of participants thought
that auditing should not be totally separated from consulting,
because the two functions can be closely linked. Moreover,
this linkage appeals to high-quality professionals seeking
employment in the Big Four. The report does not address,
however, whether auditors may compromise their independence
by also engaging in consulting with the same client.
report forecasts that the balance sheet of the future will
include assets reflecting alternative valuation methods
in order to offer users a wider menu of relevant information
on the statement as well as in accompanying notes, emphasizing
the uncertainties inherent in the figures offered. Although
the report fails to specify whether intangibles not heretofore
reflected on the balance sheet would now be included, it
appears to recognize that such a financial statement would
appear to be appropriate in a dynamic business environment:
“Including additional non-financial performance metrics
… could help future users compare companies within
a specific industry.” The participants also called
for “different attestation standards for different
parts of the financial statements,” with the report
also proposing that auditors provide “limited attestation”
for more subjective information—say, of a procedural
that the consolidation of accounting firms has given companies
fewer audit choices, the participants further assert that
“regulators [should] seek to maintain public confidence
in the surviving Big Four accounting firms.” The report
is unspecific about whether the size of the Big Four firms
should virtually guarantee their survival. Nor does it offer
specific remedies for dealing with any abuses that these
firms may be responsible for. For example, the report might
have recommended establishment by each of the Big Four of
an independent board of directors. Nevertheless, the report
does recommend that the PCAOB adopt a “supervisory”
approach to regulation, engaging in “fire prevention”
rather than extinguishment. The report also calls for accounting
firms to place more emphasis on forensic auditing to uncover
fraud, although the report offers nothing to clarify the
role of the auditor in this respect.
a Margin of Safety
the issue of auditor liability is troubling to the participants,
they formulated specific suggestions for providing a margin
of safety, including the following:
If the PCAOB’s inspection and evaluation of auditors
finds an auditor has satisfactory quality control, that
auditor could be given a measure of protection from civil
The PCAOB plans to scrutinize audits of companies deemed
to have a higher risk profile. If these examinations find
the audits satisfactory, the auditors could receive an
additional measure of protection.
participants called for the SEC, PCAOB, and FASB to work
together to implement, as they see fit, the report’s
proposed changes in reporting formats and attestation. Such
changes should reduce auditor liability.
participants contend, in perhaps the report’s most
significant recommendation, that auditors, who have to make
many judgments and form subjective opinions, need to be
protected from legal exposure; therefore, their liability
ought to be limited. However, in view of the recent corporate
scandals, this proposal would seem to an outside observer
to be dead on arrival.
Assembly participants argued that auditor compensation should
stress audit quality rather than selling audit and nonaudit
services. Audit opinions “must … dispel the
notion that it is acceptable to use an accounting treatment
of a transaction that may be in technical compliance with
a GAAP rule but which presents a clearly misleading result.”
The participants assert that auditors should override GAAP
in such instances if necessary, but how that would operate
is left unsaid.
revitalizing audit committees, the report supports a proposed
PCAOB rule to require auditors to evaluate whether committees
satisfy stock exchange and SEC standards. A number of participants
suggested knowledge of the following items as criteria for
assessing the “literacy” of audit committee
The transactions that require management to choose between
accounting practices and use judgment in making an assumption
or an estimate;
The choices available to management when reporting such
The choices made, and the reasons for the choices; and
Whether the choices made lead to, overall, a fair presentation
of the transaction.
report seems to equate the “accounting profession”
with the Big Four, and does not address itself to the many
accounting practitioners who do not work for the Big Four,
have no SEC clients, and have not been implicated in scandals.
By its omission, the report seems to suggest, at least implicitly,
that the small accounting practitioner, or non–Big
Four auditor, does not play a significant role in American
business. That is hardly the case.
report stresses the notion that financial reporting and
auditing are plagued by uncertainties that are not adequately
disclosed. The key reason has traditionally been accountants’
apprehension about possible legal liability associated with
the preparation and attest functions involving estimates
and guesstimates. That is ironic, because failure to disclose
the underlying uncertainties could magnify an accountant’s
legal obligation for misleading reporting. The report does
not note that this has been a perennial issue in accounting.
proposal stemming from the Assembly, although not a new
one, is that Big Four firms should not necessarily hire
accounting majors. New hires from other disciplines could
pursue accounting courses and the CPA credential subsequent
to joining an accounting firm. The Big Four have actually
pursued that path in the past, with mixed results, although
the report does not mention this. This observer is aware
of this practice by the Big Four in China.
report says the Big Four could assume a greater role in
continuing professional education, recommending greater
emphasis, in particular, on ethics, professionalism, and
forensic accounting. In this manner, the report asserts
that the Big Four “could become the gold standard.”
It is not clear whether the Assembly participants are referring
only to the education of Big Four staff or to the accounting
community as a whole. The report also vaguely calls for
the training of corporate directors to be “literate
and knowledgeable” of business and accounting, but
does not say how that should be done.
Consensus Perspective Worth Reading
American Assembly report synthesizes the views of 57 well-known
participants on the current state of the accounting and
auditing framework. The principal themes are: broadening
the financial statements; improving the audit function;
applying principles versus rules; reducing auditors’
legal liability; enhancing the functioning of audit committees;
and cultivating highly qualified accounting professionals.
While most suggestions are broad-brush in nature and lack
specific implementation guidance, the group appears to have
reached a consensus on a number of thorny issues and controversies.
The report is worth reading as a perspective on the current,
and future, status of financial accounting.
Bloom, PhD, is professor in the department of accountancy
of the Boler School of Business, John Carroll University,
University Heights, Ohio.