the Public Interest: Regulating with a Customer Focus
MARCH 2006 - The
following article is adapted from an address given by the
author at the annual meeting of the National Association of
State Boards of Accountancy (NASBA) on October 31, 2005, which
was in turn based on one given to the board of directors of
the New York State Society of CPAs (NYSSCPA) on September
21, 2005. Lynn Turner's experience, including three years
as chief accountant of the SEC, makes him uniquely qualified
as an observer on the accounting profession. Here, he talks
about the evolution of regulation, legislation, and education
in public accounting, and he outlines fundamental principles
to help state licensing boards meet the expectations of the
public. He challenges regulators to embrace change by "thinking
outside the box."
have enormous respect for the work of the state boards of
accountancy, which is often carried out with scarce resources
but very dedicated staff. Early in my career, I had the
good fortune to work for and be mentored by Dick Goode,
a partner in my former firm who was active in the Utah state
board and who would later hold a key leadership role in
NASBA. He provided me with an important lesson as to the
critical public interest role that state boards have in
overseeing the accounting profession.
first CPA legislation in the country became law in New York
on April 17, 1896. The bill provided for issuance of a certificate
conferring the title of “certified public accountant”
upon qualified persons, and for prohibiting the use of the
title by others. It also provided for examination of applicants,
but did not include education or experience requirements.
also reminded of one of the first CPA firms in America:
Barrow, Wade, Guthrie & Co., of New York. The managing
partner in the firm, whose clients included Ontario and
Western Railway, candidly noted, after the first six months
of 1886, that operations had resulted in “gross service
credit” of $4,842.08 and a net profit of $21,33.50,
after charging the principal’s salary.
these tidbits of history because some things in our profession
seem not to have changed in the past 100 years, such as
state boards providing for examinations and conferring the
title of CPA on successful candidates. Yet other things,
such as the partner salaries, firm profits, or the complexity
of the business world we operate in, have changed quite
read: “It has been said that those who ignore history
are bound to repeat it.” With this in mind, I have
tried to relate the development of the profession to the
changing environment, and to record the mistakes and the
missed opportunities, as well as the victories and achievements.
are striking parallels between the problems confronting
accountants many years ago and those facing them today.
Lessons can be learned from the failures as well as the
successes of the past.”
words, of John L. Carey, the respected former vice president
of the AICPA, were penned in 1969, more than 35 years ago.
Yet they resonate as much today as when they were first
set to paper.
as a profession, we have had many successes that we often
overlook. Our financial reporting is much more transparent
today than it was when the accounting profession first formally
began setting accounting principles in the 1930s. I hope
we do not undo that progress with the shortsighted proposal
some have made for two sets of standards: “Big GAAP”
for one company with a certain type of transaction and “Little
GAAP” for another company with the exact same transaction.
And I do believe audits today are of a much higher quality
than they were when the stock market crash of 1929 occurred
or the bear market of the 1970s went bust.
to challenge you to think outside the box and not so much
of the past, but of the future. State boards are at a point
in time when they have a marvelous opportunity to advance
the profession and to serve the public interest.
that regard, as with any business or organization, it is
important to ask: What is the objective or mission of a
state board of accountancy, and what value does it add?
What benefit does the public get from the dollars spent
by a state board?
to list a few, from a public-interest perspective. These
You ensure new entrants into the profession have met basic
levels of knowledge, and that those in practice have maintained
You oversee the examination process and granting of licenses
to those who hold themselves out to the public as CPAs,
a special and not easily obtained title.
You set professional and ethical standards by which CPAs
are expected to conduct their work when serving the public.
As a regulator, you establish programs, principally through
peer review programs, to inspect the quality of the work
of these roles are important. But in the end, what the public
expects first and foremost from you is that subpar performance
is prevented whenever possible. And that state boards will
take appropriate action when an individual does not live
up to his public obligations.
often, people minimize the role of a state board, especially
in light of the PCAOB [Public Company Accounting Oversight
Board]. But I think that is shortsighted. I strongly disagree
with those who have advocated that state boards be eliminated
rather than strengthened. The audits of Enron, Tyco, WorldCom,
and Adelphia were all performed by auditors licensed and
subject to the jurisdiction and regulation of state boards
of accountancy. In recent years, just as there were scandals
among public companies, other scandals across the country
have caught the public’s eye, involving audits of
school districts, municipal pension funds, and health funds.
These audits are not under the jurisdiction of the PCAOB
or the SEC; rather, they are the sole responsibility of
the respective state regulators.
counter those who would eliminate state boards’ role
in today’s regulatory scheme, I believe you need to
be able to demonstrate that you add value and can meet the
expectations of the public. That means it is important that
you be able to address the challenges you face with respect
to the evolving role of quality-control programs, education,
the establishment of the inspection program of the PCAOB,
the previous system of peer reviews as it relates to auditors
of public companies has disappeared. However, I believe
that ensuring the quality of audits remains a primary and
very important function of state boards of accountancy.
is a topic on which one can learn much from the lessons
of the past, including the failures in the system of firm-on-firm
peer reviews. One lesson to keep in mind is that, from 1977
through peer review’s demise in January 2002, the
former Public Oversight Board (POB) did not oversee a single
inspection report that was modified or that called into
question the quality of audits performed by the major international
accounting firms. During this time, the investing public
suffered through the savings-and-loan failures in the 1980s
and, later, through reports in the press about companies
such as Cendant, Sunbeam, Livent, Waste Management, and
in just the first two years that the PCAOB has existed,
we have seen inspection reports that highlight significant
issues with the quality of audits performed by both large
and small firms. We have seen a number of unqualified reports
as well, but reports of questionable audit quality are what
catch the public’s attention and make headlines.
this change, there is now a serious and real risk that a
firm will receive an unqualified “peer review”
report covering audits for the same period of time as a
report issued by the PCAOB critical of the quality of the
work of the firm. Such reports will call into question yet
again firm-on-firm peer reviews, and whether such reports
benefit the public or mislead them. I cannot imagine why
a state board would want to accept that risk.
the end of the day, what the public wants to know is whether
they can place their trust in the credibility of the profession’s
work, including audits performed by CPAs. They want to know
if substandard performance is being identified and dealt
with in a timely and effective manner. When it is, they
will see the value proposition in their state accounting
regulator. When it is not, they will ask, Why?
that end, I believe some fundamental principles, including
the administration of an effective quality-review process,
will help state boards meet the expectation of the public.
These principles include the following:
the quality-review program should be based in legislation
that provides due process and maintains confidentiality.
A statutory approach is also required to provide disciplinary
powers and to permit the board to work closely with other
regulators. Without an appropriate statutory-based program,
a state board can quickly be turned into a toothless lapdog,
as opposed to an effective watchdog.
the quality-review process should be independent of those
subject to its inspections. This requires public representation
in and oversight of both the process and regulation. It
also means that a firm should not be able to choose or recommend
who will review the firm. After Enron and the final unqualified
Arthur Andersen peer review report, the public will never
accept a process as being independent if a firm can pick
who will perform its review.
the inspection process must have an adequate scope and be
staffed with independent, competent inspectors. When issues
arise in the profession, as they have in the past with the
savings-and-loan crisis, the regulator must be able to perform
“special inspections.” This was one of the sound
recommendations of the Panel on Audit Effectiveness, often
referred to as the O’Malley Panel report, issued in
as the Commission on Auditors’ Responsibilities, known
as the Cohen Commission, recommended in 1978, state boards,
their quality-control process, and discipline must all be
transparent. Inspection reports should be made available
to the public upon completion of the inspection process.
These reports should be in sufficient detail to provide
the reader useful information about the quality of the firm’s
work. This includes both deficiencies and positive comments.
As someone who has read and used these reports, I am just
as interested in learning about the CPA firm that has a
high-quality practice as I am in avoiding one at the other
end of the scale. Also, the principle of transparency is
maximized and at its best when it results in best practices
being reported on and shared with all participants in the
principle of a successful quality-control program is that
it must be educational. It should identify what professional
practice should be, not just what it is. And as I just mentioned,
it should identify best practices. If we are to continuously
improve the profession, inspections should benchmark against
best practices, not existing practices.
sixth principle is that there should be discipline and accountability
for those situations where substandard performance is identified.
The disciplinary process should be embedded in each firm
as part of the quality-control process. Disciplinary actions
should be taken by an appropriate body and should match
the level of behavior with the appropriate discipline. Remedial
actions may be appropriate in certain situations involving
simple negligence, but they are insufficient when there
are repeated instances of negligence, reckless, or fraudulent
practices. And ultimately, when the disciplinary process
is complete, and all involved have been afforded appropriate
due process, the results of the process should be publicly
there needs to be accountability for those who are responsible
for inspections and discipline. Unfortunately, this is one
issue for which the performance of many, but not all, state
boards has fallen way short. At the SEC, I saw example after
example of seriously substandard performance by a practitioner
go unpunished by state regulators. While some of this shortfall
is the result of a lack of funding, it is nonetheless cause
for the public to wonder if state boards are in fact capable
of oversight and regulation of the profession.
number seven on my list is that state boards and the work
they undertake to perform, including quality-control processes,
must have adequate funding. The O’Malley Panel recommended
greater funding to ensure the credibility of the process.
Yet today we continue to see a lack of adequate funding,
which serves only to undermine the credibility of your work.
eight is the ability to affect standards when deficiencies
in practice are identified. For example, as issues with
contingent fees and commissions have arisen, it is important
that changes be made to standards to avoid these abuses.
most of these principles are common sense, not rocket science.
That is why they are easily understood by the public, and
why the public challenges attempts to avoid them. It is
also why, if they are ignored, the public will eventually
cause them to be adopted when a crisis develops and we in
the profession once again lose control of our destiny.
me digress here to discuss the governance of the large international
accounting firms. I believe, as the Cohen Commission recommended,
that these firms should be required to have independent
external boards of directors. I also believe they should
be required to produce annual financial reports, similar
to what public companies file with the SEC. Given the immensely
important role these firms have in today’s capital
markets, and the limited competition in that market, it
is only appropriate these firms enhance their transparency
and governance. Had better governance and transparency existed
in the past decade, I believe we would still have an Arthur
Andersen today, and KPMG LLP would not have become involved
in the tax-shelter business that seriously threatened its
1894, members of the accounting profession first approached
the New York Board of Regents asking that it establish schools
of accountancy. And while that experiment ended just two
years later, the role of education in our profession and
the positive impact state boards of accountancy can have
on education have increased exponentially. To that end,
I greatly applaud the efforts of the vast majority of state
boards to adopt the 150-hour requirement.
the profession needs to think “outside the box”
with respect to its education system, curriculum, and teaching
methods. Having recently spent time as a professor in academia,
I believe the current system is falling short of what it
can be, and is failing to provide businesses and accounting
firms with adequately trained new hires. In doing so, it
is shortchanging the very students it seeks to educate.
me share another quote from the Cohen Commission report:
desirability of establishing separate schools of accounting
in universities has received increasing attention in recent
years. … Whether the argued improvement in the recognition
and prestige of accounting and control over curriculum
will be realized and whether the problems of appropriate
balancing of courses and faculty can be overcome cannot
be determined with certainty in advance. However, the
gradual and successful development of separate graduate
professional schools in law, medicine, and other fields
suggest that such problems are capable of solution. …
The importance of instilling in students an appropriate
professional attitude and the need to expose them to the
pressures and problems of public accounting practice during
the formal education process support the need for graduate
professional schools of accounting similar to law schools.
… Our review of major audit failures that have caused
public accounting firms difficulty indicates that problems
have resulted largely from the exercise of poor judgment
under conditions of stress and pressure.”
words were timely in 1978, and they are certainly most relevant
today. As a result, one must again ask why it takes our
profession decades to adopt such wise recommendations.
back at the history of the medical and legal professions,
their schools were not always what they are today. And certainly,
the complexities of the medical profession and practice
have increased, just as they have in our own profession.
The difference is that medicine and the law have changed
their schools from undergraduate programs to advanced degrees
with specializations. If we are to gain equal stature through
better-prepared and -educated entrants into the marketplace,
then we too need to rethink our education system and the
need for professional schools. The 150-hour education requirement
is a very positive step forward, but it should be only the
profession’s next step, not its last step.
had the good fortune to visit many universities over the
past half dozen years. My interactions with students at
numerous schools have led me to believe that the students
in professional schools of accountancy, such as the University
of Texas or Brigham Young University, are better equipped
to enter the job market and to serve the public than those
who are not.
the universities also need to rethink their curriculums
and to ensure that they provide the following:
The fundamentals, including accounting principles and
concepts. A student who does not understand the principles
of revenue recognition, accounting for leases, or asset
securitizations is not ready for a public accounting firm.
Likewise, someone who does not understand risk management
and related topics, such as the use of derivatives, is
not ready for corporate America.
There needs to be more instruction on “accounting
theory” that teaches students not just the how-to,
but also the why. This will also teach students to exercise
their judgment and to develop an ability to apply principles,
not just rules.
Ethics education needs to be built into the coursework
to provide students with real-life, pressure-packed situations
in which they must make stressful decisions. It is unfortunate
that we as a profession have failed to heed the recommendations
made by the Cohen Commission. If we had, maybe some auditors
would have made some different decisions in recent years,
thereby avoiding career-ending mistakes.
Accounting students should receive broader and more in-depth
knowledge of finance, including financial instruments;
a greater understanding of marketing and its critical
relationship with accounting; as well as more management,
including strategic decision making and risk management.
And that is on top of understanding technology and its
role in these areas of business.
Colleges need to require internships and bring more practical
experience into the classroom. Both the medical and legal
professions in Britain require this practical education.
My belief that this will improve and enhance the education
of those entering the accounting profession is founded
partly on academia today being too much of an ivory tower.
For better or worse, a much higher percentage of college
professors today have a PhD than 30 to 40 years ago, but
they often have little or no experience as a practitioner.
Consequently, although they can do an excellent job of
teaching accounting theory—what is between the covers
of a book—they have great difficulty in going further.
Therefore, practitioners need to find a way to provide
more of their time to assist and provide resources to
business schools. At the same time, the accounting firms
need to find a way to provide academia with greater, unfettered
access necessary for research projects.
technology, business, finance, marketing, and management
have undergone titanic changes since I enrolled in college
35 years ago. But based on my recent experiences on campuses,
education has not kept up with these changes. For the most
part, we still try to teach too much in too little time,
and we fail to teach students how to think and make judgments.
I urge you to spend some time in classrooms, and while you
will see the positive benefits of new technology, I think
you will also find curriculums and textbooks are still too
similar to those of earlier years.
present age is digital, mobile, and global. Borders exist
for only two purposes: maps and politics. Although having
to obtain a CPA license in each state where one practices
has been properly questioned, so long as state boards are
effective overseers and regulators, protecting the public,
they have a reason to continue this practice. But when they
fail in this role, the value proposition for their existence
the states for their efforts to make it easier for CPAs
to obtain licenses by reciprocity. But every state can and
should do more to facilitate this process. There is no reason
that, with the technology available today, state boards
working in coordination with NASBA cannot create a national
database of CPAs, including examination and licensing data,
that would also permit those with current licenses to request
and receive reciprocity online within hours, rather than
weeks or months. That goal can and should be achieved in
the foreseeable future, not in decades.
I have challenged you to get outside the box, throw off
the chains that have often hobbled our profession and prevented
us from leaving the comfort of the status quo. It takes
that type of thinking to reclaim control of our destiny,
to create a really exciting profession that will entice
the best young minds to join us, and to be not just good,
but to be better than that. I hope that you, individually
and as an organization, will provide our profession with
the leadership that will enable it to become not just good,
Turner is a managing director of the investment research
and proxy advisory firm Glass Lewis & Co. LLC and a member
of the CPA Journal Editorial Board. He was chief
accountant of the SEC from July 1998 to August 2001.
photos courtesy of the National Association of State Boards
of Accountancy (NASBA).