Restoration Project: AICPA President Discusses Strategic Initiatives

By Jay Dismukes

In one of the toughest years in the history of the accounting profession, Barry C. Melancon, president and CEO of the American Institute of CPAs, remains optimistic about the future, but he harbors no illusions about the challenges ahead.
As leader of the nation’s largest accountancy body, representing more than 350,000 CPAs, Melancon recently spoke to the New York State Society of CPAs Board of Directors about those challenges and the Institute’s plan to overcome them.

To borrow from a speech Melancon delivered earlier this month, the Institute has spent the past year “engag(ing) in a long and serious process of introspection… over what went wrong and what must be done to make it right.”

In May, just when the Institute believed it had a handle on the Enron scandal, calling for reforms like an oversight board with disciplinary powers and the prohibition of certain consulting services for public company auditors, among other items, WorldCom hit, eclipsing what had previously been the country’s largest bankruptcy and causing an even more critical assessment of the profession, according to Melancon.

At that time, the AICPA’s introspection process shifted into overdrive and it became clear that much more would have to be done to restore investor confidence in the financial markets and their institutions as well as in the profession’s esteemed reputation.

Speaking on Sept. 24 at the Penn Club in Manhattan, Melancon told the board that the AICPA’s plan to achieve those objectives includes stepping up efforts to minimize financial fraud, focusing on its motivation, detection and deterrence. The Institute will establish anti-fraud criteria and controls for corporations by June 2003, and will ask that the Auditing Standards Board enhance the existing attestation standard for CPAs to test client anti-fraud controls, reporting the results to the public. Among other initiatives, the Institute is also calling for anti-fraud training for all members of management, boards of directors and audit committees, as well as increased anti-fraud continuing education requirements for public company audit and finance professionals.

In October, Melancon told the board, the Institute’s Governing Council will consider several proposals concerning the ethics process, including coordination of actions with the Securities and Exchange Commission and other regulators should the regulators take action against an AICPA member under investigation. The AICPA also believes the ethics process should include an “admonishment” option for CPAs under scrutiny, and is looking into the possibility of publicly disclosing ethics investigation findings in mainstream media.

The AICPA is also calling for a profession-wide debate to discuss whether standards and rules need to be differentiated between widely held and closely held businesses, and, if so, how to reform generally accepted accounting principles (GAAP) to reflect the changes. The Institute is asking for feedback from its committees and state societies, which is due by the first quarter of next year.

“What most small firms are telling me is that the relationship between small firms and small businesses is as good as it has ever been, but from a ‘macro’ level, we have an image problem,” said Melancon, referring to the public’s perception of the profession.

When asked what could be done about the problem, Melancon said the Institute and the state societies need to find ways to publicize the stories in which “things were prevented, fraud was detected,” to demonstrate to the public that the profession “is made up of people who want to do the right thing.” Among other tactics, he also said the Institute is reevaluating past ads and communication strategies to make certain they are effectively promoting the positive image of the CPA.

Other potential problems that Melancon addressed include the profession’s authority to set auditing standards, a power that now rests with the Public Company Accounting Oversight Board (PCAOB), though it can choose to work in cooperation with the state societies and the Institute. However, when asked to explain what he foresees as the future working relationship between the Institute and the PCAOB regarding audit standards setting, Melancon said, “I believe the best people to set auditing standards are with the profession. In this sense, it should be like an outsourcing arrangement.” Melancon was less certain about the future relationship regarding ethics and independence standards setting, an ability which the PCAOB, created under the Sarbanes-Oxley Act of 2002, also enjoys.

Melancon said the Institute is also concerned about the enhanced liability of firms that resulted from Sarbanes-Oxley, noting that 98 percent of all public capital is audited by the Big Four. The worst possible scenario would be another corporate scandal situation involving any of those firms, he said.

Though the AICPA is working to ensure that small firms will not be too impacted by the events of last year and the ensuing regulations and state legislation, Melancon added that scope of service limitations could have damaging implications on small firms that provide nonaudit services to not-for-profits, small companies and government entities that can’t afford to perform such tasks in-house. In what he described as a “cascading effect” resulting from proposed state legislation, Melancon predicted “major battles with state issues” over the next several years.

Given the Institute’s introspection process, it perhaps came as no surprise that several board members questioned Melancon about previous undertakings, including last year’s failed global credential initiative and the possibility that the leadership is out of touch with its membership.

Acknowledging that the credential, also known as XYZ and Cognitor, was not supported by the membership—it was defeated in a referendum vote by almost two to one—Melancon noted that new ideas and proposals that already experience complete support probably arrive too late.

“I don’t think that the profession wants an Institute that doesn’t bring new things forward,” Melancon added.
With respect to the leadership question, Melancon said the AICPA is a strong proponent of grassroots feedback and relies on the profession’s input to help guide its decisions and objectives. To that end, he pointed out that the Institute’s board members have been asked to conduct periodic visits with assigned state societies to make certain that questions, concerns and other issues are being addressed by the AICPA.

For more information on the AICPA’s plan of action, see Melancon’s Sept. 4 Yale Club speech, posted on the Institute’s website at www.aicpa.org.