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The Author Responds

Richard H. Kravitz, MBA, CPA

“The ability to do soul searching is the mark of a mature profession.”—Sigmund Koch

I would like to thank reader Samuel Gunther for his letter on my column. I am sure that his views are shared by many of our readers. I would suggest, however, that neither the history of this great profession nor recent events at AICPA are on his side. Gunther's thesis is, as I understand it, as follows:

  • ▪ Auditors acting as fiduciaries for the benefit of others would “help wreck U.S. capitalism, which is premised on investors seeking only to maximize returns and maximize market values on their investments.”

  • ▪ The IIRC and sustainability movement have been “embraced by European socialists who reject U.S. capitalism.”

While I don't know Barry Melancon—AICPA CEO and IIRC board chair—personally, colleagues who do know him have never characterized him as a socialist. Also included on the IIRC board are the former chair of KPMG International and director at JPMorgan Chase, the former chair of the executive committee of the International Organization of Securities Commissions, the CEO of ACCA, and others. Council members of the IIRC include the CEO of CPA Canada and the global chairs of both Deloitte and Ernst & Young. I am not sure whether these professionals could be characterized as anti-capitalist in any sense.

One of the critical reasons why the IIRC focuses on all six capitals—financial capital, reputational capital, human capital, intellectual capital, social and natural capital—and why the AICPA has developed a strong interest in sustainability is that the asset composition of the modern corporation has changed. Today, 84% of a corporation's value (Annual Study of Intangible Asset Market Value, Ocean Tomo, 2015) lies hidden in nonfinancial or intangible assets. These assets do not appear on the balance sheet or income statement, but from the perspective of enterprise risk, these are critically important to creating value. CPAs have unique skills and training to understand, identify, measure, monitor, and report on these intangibles. We also know that inattention to intangible risk—from natural capital (Dodd Frank on reporting conflict minerals), to supply chain (Foxconn supplying to Apple, Inc.), to geopolitical risk (Venezuela's seizure of a General Motors plant)—can lead to greater value destruction for a corporate enterprise than any financial misstatement. Gunther only needs to look at Wells Fargo, United Airlines, Chipotle, Target, or Fox News to see how quickly a corporation's reputational capital can diminish in the face of crisis.

As to Gunther's second point, Jim Rigos, chair of the Ethics (and Dual Practice) Committee of the American Academy of Attorney–Certified Public Accountants (AAA-CPA), has argued: “Some do not like to use the word “fiduciary” since it may mean more and higher legal responsibility for error … The larger picture though is that the public trusts our audit opinion accuracy“ (“Serving the Public Interest,” The CPA Journal, May 2017, http://bit.ly/2rAAyak). He continued: “‘Unmodified opinions’ support investors' belief in the profession's ‘good housekeeping’ standard of reliable corporate financial statement reporting. The worldwide economy depends in large part on this intangible trust. That is the reason why the word ‘public’ is in the middle of the CPA title.”

A second argument in favor of the fiduciary standard for CPAs comes from Steven Mintz, author of numerous books on ethics, including Ethical Obligations and Decision Making in Accounting. Mintz reminds us that our public interest obligation is embedded in the AICPA's Code of Professional Conduct. In a forthcoming article to be published in the CPA Journal, Mintz focuses on our public interest responsibility as defined by the AICPA Code of Professional Conduct (Article II, 1988; section 0.300.030, as modified December 15, 2014): “[The] collective well-being of the community of people and institutions the professions serves,” including “clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of [CPAs] to maintain the orderly functioning of commerce”—in short, the community of stakeholders that I described in my editorial. The code highlights our principal responsibility to the public: “When members fulfill their responsibility to the public, clients and employers interests are best served” (section 0.300.030.03).

Third, the foundation of our profession is based on our responsibility to the public—or as George May of Price Waterhouse argued, “of the high ethical obligations of the profession, the greatest is to the persons who are not his immediate clients” (Twenty-Five Years of Accounting Responsibility: 1911–1936, Price Waterhouse & Co., 1912).

Fourth, as mentioned in an article that I wrote for The CPA Journal several years ago, the thread of our public service obligation and our high personal moral and ethical standard is woven into the very fabric of what makes a CPA (“Auditors' Responsibility for Detecting Fraud Putting Ethics and Morality First,” June 2012, http://bit.ly/1SILupg). Historically, this was because of the leadership of NYSSCPA; our own president, Colonel Arthur Carter, the only CPA invited to testify before the Congress on the proposed Securities Act of 1933, when asked who audits the auditors, famously responded, “our conscience.”

Our fiduciary duty—what better word is there for it?— to the public is inviolate.

Fifth, my position is consistent with the unanimous decision by the Supreme Court in United States v. Arthur Young [465 US 805 (1984)], which affirmed the “duties owed directly by the ‘gate-keepers.’” The court wrote: “By certifying the public reports that collectively depict a corporation's financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation's creditors and stockholders, as well as to the investing public. This ‘public watchdog’ function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust.” Today, the investing public includes 93 million Americans who own stock or bonds in their retirement accounts, none of whom vote on proxy statements for election nor the compensation of board members or corporate management. According to John Coffee, director of Columbia University's Center on Corporate Governance, absent an effective gate-keeping profession, “no amount of regulation or legislation can make corporate management reasonably responsible to the investing public” (Gatekeepers, Oxford University Press, 2006).

In conclusion, I would ask Gunther and others to rethink their position. Our fiduciary duty—what better word is there for it?—to the public is inviolate. We must protect the company for the benefit of its stakeholder community, regardless of whether they are in house or outside. Corporations touch our daily lives, and it is our responsibility—whether as financial officers, financial managers, internal and external auditors, or business advisors—to protect the public interest.

Richard H. Kravitz, MBA, CPA. Editor-in-Chief, The CPA Journal.

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