Shrink from the Challenge; Stand Up and Do What’s
Larry A. Deppe, Ronald M. Mano, and Matthew Mouritsen
2005 - The accounting profession is facing great challenges.
Federal and state regulatory bodies, investors, public interest
groups such as Ralph Nader’s Association for Integrity
in Accounting, and the public at large are demanding professional
independence and accountability. Many view the accounting
profession as the culprit in precipitating the recent bull
the actions of a relatively small number of accountants
have cast a shadow over the entire profession. Government
intervention has been swift and decisive. Accountants, both
public and private, have been led away in handcuffs. Meanwhile,
skeptics gloomily question the continued existence of the
Utah Association of Certified Public Accountants (UACPA)
decided to confront the problems head on. Under the leadership
of President Marty Van Wagoner, President-Elect Troy Lewis,
Vice President Susan Speirs, and CEO Jeannie Patton, the
Association held a day-long conference of 65 member CPAs
from sole practices, local firms, national firms, business
and management, education, and government to consider the
future of the CPA profession.
conference was designed to do four things:
Inform the participants of the effects of recent events
on the accounting profession.n Provide an opportunity
for CPAs to discuss the effects of these events on all
segments of the profession.
Engage participants from each segment of the profession
in the process of developing recommendations for actions
designed to address the issues and problems confronting
Provide a forum for an exchange of ideas among the various
segments of the profession.
first half of the program featured an update on recent developments
affecting the accounting profession. The provisions of the
Sarbanes-Oxley Act (SOA) were presented, as well as their
potential impact on the profession. In the second half of
the day, participants formed working groups along the following
segments of practice: national public accounting firms;
local public accounting firms; sole practitioners in public
accounting; business and industry; education; and government.
The conference placed an emphasis on creating a true dialogue
between professionals and avoiding adversarial debate.
force was created to take the conference proceedings and
prepare a white paper presenting recommendations to the
profession. The UACPA executive board planned to use the
information from the conference as a guide in formulating
a plan of action for the leadership of the association.
The UACPA staff planned to use the information in developing
continuing education and conference sessions.
next step was to capture participants’ ideas. Participants
were asked, “What information do you need?”
Participants were told to individually write down their
questions or issues. Participants at each table were then
instructed to appoint a spokesperson and a recorder, and
begin a group discussion on a second set of questions: “What
additional information do you need, or what questions do
you have?” Afterward, each group recorded its top
three items on a flipchart and reported them to the entire
conference via the spokesperson. The earlier notes were
second major question was, “What in all of this can
we have an impact on?” The profession cannot address
every problem and issue confronting it at once. Participants
were asked to consider two criteria: What are specific actions
in specific areas that individual CPAs in my segment can
and should take? What are specific actions in specific areas
that firms, companies, governmental units, and educational
institutions can and should take?
participants were asked to work individually first before
discussing those ideas in a group. Each table’s top
three items were recorded on flipcharts and reported to
the entire conference via the spokespeople. All notes were
final question posed was, “What would constitute a
real breakthrough for the profession?” The same procedure
was applied. By this point, major themes had emerged from
the previous discussions (see Exhibit
1), and participants were now asked to select the top
three breakthroughs for their segment. The goal was to identify
long-term solutions rather than short-term remedies. The
proposed solutions should be capable of providing the profession
with a sound and viable future. These solutions should serve
to begin closing the expectation gap in all segments of
the profession. The breakthroughs are presented in Exhibit
information generated was organized and assembled into a
white paper and distributed to all UACPA members. The report
was divided into four sections:
The accounting business model
Regulation of the profession
Image and reputation.
section contained background information on the specific
topic, examined the current status regarding the topic,
discussed issues relating to the topic as well as opportunities
for change, and provided recommendations for CPAs in each
segment of the profession.
accounting business model. There has been
a longstanding debate over whether an accountant in public
practice could maintain auditor independence while providing
management advice and services. Housing an audit practice,
with its strict rules of professional conduct, within a
consulting firm not subject to the same stringent rules
of conduct posed a formidable challenge. Although SOA mandated
a solution to the consulting issue, serious questions regarding
the auditor/client relationship persist.
does the independent auditor serve: The company that pays
the fees, or its shareholders? Can an auditor become so
dependent upon one company that independence is compromised
in order to retain its business? Should engagement partners
be rotated periodically?
is not the province of the auditor alone. Corporate governance
procedures play a major role not only in maintaining auditor
independence but also in deterring behavior like earnings
management. Membership on corporate boards should not be
a function of celebrity or cronyism. Board members must
be productive contributors to the corporate governance process,
including auditor independence.
recent years, the accounting standards-setting process has
been criticized for being slow and ponderous, as well as
for producing results that do not reflect economic reality.
Standards setting has degenerated from due process involving
constituents to congressional oversight involving lobbyists.
SOA marks the beginning of a new level of government oversight
of the standards-setting process. The increased authority
behind accounting standards presents the very real possibility
that standards intended for public companies will be seen
as universally applicable to all entities, particularly
those where a public interest is perceived to exist. The
“trickle-down” of earlier SEC standards thus
may become a cascading waterfall of new standards applicable
to entities for which the standards (new or old) were never
intended, with costs that will be onerous.
participants views on these issues included the following:
Public accountants supported strong boards of independent
directors. Auditors should meet with the board in the absence
of management. Public practitioners also viewed partner-rotation
requirements as particularly burdensome on smaller firms
and suggested that smaller firms might need to form partnerships
with other firms to meet this requirement. Public accountants
were sensitive to the need for caution regarding the overdependence
of a firm on a single client, which might exercise undue
influence on professional staff. The quality of audit and
attest services was viewed as important, with the proper
training of professional staff in both concepts and procedures
paramount. Ethics training and ethical behavior were specifically
cited as potential or actual influences on audit quality.
Last, public accountants believed that individual CPAs should
not lose incentive income for withdrawing from a high-risk
client. No disincentive should exist for refusing to serve
a client that poses an inordinate risk.
from the business-and-management group stressed the importance
of a company-wide policy of ethical conduct that is adopted
by the board of directors. The board itself should be composed
of independent directors. An independent and competent audit
committee must be accessible to the independent auditor
and the internal auditors. The audit committee should establish
clear guidelines as to other services that may be provided
by the auditor.
recognized the need to stress independence in fact rather
than just appearance. Students should be aware of situations
in which a company under audit might exert influence that
could compromise independence. Students should also be aware
of the dangers of overdependence on a single client. Ethical
considerations must be integrated into all courses, at all
levels of the curriculum.
from government entities suggested that policies such as
partner rotation and second partner review should be established
in order to encourage accounting firm independence.
process. How can auditors improve the audit process?
Public accountants emphasized the importance of a written
statement of scope of services and the need for direct communication
with the audit committee, without management present. CPAs
in business, management, and government agreed on the issue
of audit scope; those in business and management added that
the audit scope must meet stakeholder needs. Public accountants
expressed a need for client risk assessment and compensation
policies regarding the decision to no longer serve a client.
The need for risk assessment of services provided was stressed
as well. Public accountants emphasized the need for relevant
CPE and for participation in the process of educating new
accountants. Educators also supported the participation
of public accountants in the education process as a way
to bring practical issues into the classroom. Educators
further stressed the need for faculty to participate through
internships with accounting firms and other entities.
accountants stressed the importance of remaining current
with new standards and practices. Public accountants must
be committed to their audit practices. As part of this commitment,
public accountants should help clients improve their financial
groups agreed that additional emphasis and training should
be given to fraud detection. CPAs in government expressed
a need for evidence that CPA firms bidding on governmental
audits complied with policies and procedures relating to
ethical behavior. Educators emphasized the need for ethical
issues to permeate the curriculum. All groups agreed on
the need for increased attention to internal controls designed
to prevent fraud, as well as the need for increased direction
from standards-setting bodies.
groups recognized the need for a better understanding of
materiality and its importance, on the part of both auditors
and auditees. Public accountants thought that standards-setting
bodies should do more to clarify materiality.
management was also on the minds of conference participants.
Public accountants believed that client acceptance-and-retention
policies are essential. Criteria must be established to
evaluate risk, and clients presenting unacceptable levels
of risk should be dropped. CPAs in business and management
should implement procedures to reduce risk. These procedures
should cover fraud detection and the separation of duties.
standards. All groups stressed the ongoing need for
CPAs in all areas to participate in the standards-setting
process. The “cascade effect” is real. The inapplicability
of SOA standards to nonpublic entities must be recognized
and communicated. The same process of review and communication
must be applied to proposed standards, with particular emphasis
on specific areas that are not appropriate for nonpublic
measures of performance that are useful to investors, the
capital markets, and managers are much needed. The recent
proliferation of earnings metrics has brought confusion
and deception, but also suggests a need for new and more
effective measures of performance.
groups agreed that accounting choices and business strategies
should be supported by sound business purposes. Attention
should be directed toward substantive improvement of value
rather than deceptive practices that create false value.
all groups emphasized the need to simplify financial statement
presentation. Financial reports should provide clear explanations
rather than using boilerplate language or, worse yet, avoiding
the issue altogether.
perception. How does the profession regain its reputation
for integrity? Public accountants expressed concerns about
how much companies understand the nonaudit services they
can provide. More needs to be done to inform business and
the public about these services and their limitations.
accountants also suggested offering tiered services for
risk-based fees. For example, a baseline audit could be
expanded to include fraud-detection procedures and performance
measures. Increases in the level and risk of services would
be accompanied by increases in fees.
accountants echoed a theme from other discussions: Client
retention policies must be in place and must function effectively.
Firms should redirect resources consumed in servicing marginal
clients to finding and retaining quality, low-risk clients.
in business and management emphasized the need for ethical
behavior from management and finance personnel. The need
was expressed for sound business practices, particularly
in financial reporting and performance measurement. CPAs
in business and management should be leaders in identifying
problems and finding solutions.
in education stressed the need to imbue their students with
the core values of the profession: integrity, objectivity,
competence, attunement to broad business issues, and lifelong
learning. Students must fully understand independence as
well as the need to meet stakeholder expectations.
in government expressed a need to educate more than just
students about the meaning, purpose, use, and limitations
of financial reporting. They also agreed with the other
groups that the profession must address the expectations
gap and meet the demands of the marketplace. All groups
agreed that CPAs must be willing to stand up and do the
right thing. CPAs should know what is right and should have
the moral courage to do what is right.
ethics. CPA licensure requires the completion
of the Uniform CPA Examination, which gives limited consideration
to ethical problems or dilemmas. Some states require candidates
to pass the AICPA Ethics Self-Study Examination, which tests
the candidate’s basic knowledge of the code of professional
conduct but does not test its applications in complex ethical
issues. As a result, candidates are often poorly prepared
for ethical challenges.
have revealed that cheating at every age and in every aspect
of life has become the modus operandi for many people in
the United States. Our capital markets are built on trust,
particularly on trusting audited financial statements. Lack
of reliable information has thrown stock markets into chaos.
Cheating is incompatible with our market system.
accountants encouraged firms to establish a code of conduct
and then develop policies (including compensation policies)
consistent with the code. Firm management should regularly
discuss appropriate professional conduct, for example, at
staff meetings. Additionally, auditors should make companies
aware of the firm’s ethical standards and its resolve
to adhere to those standards.
in business and management as well as in government also
stressed the need for a code of conduct, not only for the
enterprise generally but for the finance function specifically.
Like public accountants, CPAs in business, management, and
government believe that appropriate professional conduct
should be discussed regularly. CPAs in business and management
also suggested that finance and accounting policies focus
on the long-term business purpose rather than on short-term
recognized the need for more integration of ethical issues
in the curriculum. A major issue for educators is the availability
of case material to serve as a basis for class discussions.
Educators proposed a partnership with professional organizations
to develop current, relevant instructional materials. All
groups agreed that each individual must choose the “public
good” over personal enrichment.
Early in the conference it became evident that many CPAs
are not well informed regarding the state laws and rules
regulating the profession. Many CPAs believe regulation
is not working, although they have no idea how the regulatory
process works or how it could be improved.
problem with accounting regulation in Utah is that no referral
program exists for informing regulatory authorities about
alleged misconduct. Although a CPA might be aware of misconduct,
many federal and state tax laws, AICPA standards of professional
conduct, and client privacy issues prohibit referral of
the alleged misconduct. CPAs are hesitant to ask clients
to make referrals of misconduct by other CPAs.
participants expressed a need for a system that allows misconduct
to be reported without placing the informant in violation
of professional, ethical, or legal duties, but could not
suggest how such a system would be designed.
of the profession. The major theme of participants’
comments about self-regulation was involvement. All groups
expressed the need to be involved in professional groups
and report violations of professional and ethical standards.
Many states require periodic training in ethics and professional
conduct. Educators suggested developing a database of ethics
case studies from actual incidents in public, private, and
governmental accounting. These case studies could be used
in training students as well as in continuing professional
and reputation. The gap between what the public
expects of CPAs and what CPAs actually can do has been widening
for the last 40 years. The public has expected the independent
audit to detect fraud; CPAs can provide no such assurance.
The public expects CPAs to maintain the same standards of
independence and objectivity associated with an audit when
performing other services. The only people more confused
about the role of CPAs than the public are CPAs themselves.
increasingly competitive environment has created a perceived
need for public accounting firms to provide a broad range
of services to clients. “Public accounting”
firms became “professional service” firms, providing
everything from bookkeeping to human resource management
to manufacturing systems. Consulting fee revenues grew exponentially,
while audit fees stagnated. The audit became a commodity
(and was marketed as such) and was simply a means of gaining
access in order to sell lucrative consulting services.
dependence on consulting services revenues grew, CPAs found
it increasingly difficult to maintain independence and objectivity
toward audit clients that were also consulting clients.
The temptation to compromise was overwhelming. The revelation
of major accounting scandals caused the federal government
to order the profession to cease providing audit clients
with services that compromised auditor independence and
objectivity. The cost to the profession has been monumental.
recommendation made by participants from all segments of
the profession was to clarify the scope of services to be
performed. Engagement letters should clearly specify the
procedures to be performed. Public accountants should be
proactive in highlighting the scope of services of an engagement,
the risks avoided, and the benefits derived from stressing
clarity and integrity in financial reporting. Many participants
felt that clarity in financial reporting will come only
through the development of a new financial reporting model.
accountants suggested that one’s capabilities should
be weighed against each prospective engagement. Quality-control
systems should be enhanced to address the effects of SOA
and related rules. Staff should regularly be reminded of
the firm’s commitment to integrity and quality.
in all segments encouraged a more active education of the
public about what the profession does. CPAs should be proud
of what they do, and remind the public of the honesty and
integrity of the vast majority of CPAs. Everyone also recognized
that no amount of public relations activity is a substitute
for individual integrity.
Call to Action
conference and the resulting white paper represent a call
to action for CPAs in Utah. Other states are welcome to
use this same approach as a way to identify issues and to
plan actions to be taken to restore public confidence in
the profession. The full text of the white paper can be
found at www.uacpa.org/members/pdfs/stand_up_and_do_the_right_thing.pdf.
to the white paper has been very positive. Many Utah CPAs
who had heard about the forthcoming white paper expected
a litany of apologies and excuses. Instead, they have found
a document that outlines a plan of action to successfully
deal with the challenges that confront the profession now
and in the future.
A. Deppe PhD, CPA, CMA, is an associate professor
at Weber State University, Ogden, Utah, and chair of the Utah
State Board of Accountancy.
Ronald M. Mano, PhD, CPA, is a professor
and Matthew Mouritsen, PhD, is an assistant
professor, also at Weber State University.he accounting profession
is facing great challenges.