The Golden Age of Accounting: The Issues 85 Years Ago

Arguably, the CPA profession came of age 85 years ago (W.D. Huber, “The History of the Decline and Fall of the American Accounting Profession,” International Journal of Economics and Accounting, vol. 4, no. 4, 2013, p. 374). The issues chronicled by the New York Certified Public Accountant (The CPA Journal's predecessor) were remarkably similar to those of today.

The Journal covered issues such as auditor liability, ethics, and professional responsibility. It covered SEC accounting matters such as footnote disclosure, revenue recognition, whether generally accepted accounting principles are synonymous with sound accounting principles, and how to record and recognize reserves. The McKesson & Robbins audit scandal near the end of the 1930s (The New York Certified Public Accountant, January 1937, pp. 3-14) raised the still-familiar questions of what it means to use an accountant's best judgment, and how to audit inventories.

Ethics and professional responsibility always remained a subject of The CPA Journal. More than 85 years ago, we reported on leaders like Homer Pace, NYSSCPA president, who described professional responsibility as the meeting point of professional service, public service, and sociability (“News Bulletin,” NYSSCPA, Nov. 29, 1924, no. 11). How similar was Homer's vision to the view discussed by Tony Bromell and Martin Martinoff in this issue's article, “What Is the Accountancy Profession For?” (see page 80)

Last year, the State Society launched the NextGen magazine to help guide newer members of the profession. Eighty-six years ago, the New York Certified Public Accountant reported on the identical issue facing CPAs (“How Membership in the Society May be More Readily Available to Younger Members of the Profession,” June 29, 1929, no. 19).

Our Leadership 85 Years Ago

The requirement that only CPAs may conduct audits of publicly traded companies became law through the NYSSCPA's leadership. At that time, the path was not always clear, but strong individuals came forward to navigate the uncharted territory. The “lone voice” of the profession, Colonel Arthur Carter, then serving as NYSSCPA's president, was the only CPA invited to testify before the SEC on the proposed Securities Act of 1933. In his testimony, Carter called for audits by independent accountants to be performed for registered corporations (Mark Ernest Jobe, “The Accounting Profession Goes to War,” December 3 2010, University of Mississippi, p. 97).

Federal vs. State Regulation of the Profession

Another path crossed in the early 1930s clarified the relationship between federal and state regulation of the profession. Until enactment of the Securities Acts, federal law was seen as interfering with the states' rights to regulate the accounting profession (Edwards, “Public Accounting in the United States,” Accounting Review, 1955, vol. 30, no. 2, pp. 240-252). This led Professor Abraham J. Briloff to remark in a December 2002 CPA Journal article (“Accountancy and Society: A Covenant Desecrated”) that while the federal government did not regulate the accounting profession, the rights and privileges it has granted may be more valuable than the actual CPA license, because the Securities Acts restricted access to that major source of revenue, auditing publicly traded companies. Clearly, the establishment of the PCAOB fundamentally changed the nature of the federal government's grant of authority to CPAs. Regardless, the enactment of the Securities Acts resulted in the reputation and prestige of CPA firms being at its highest between the 1930s and the 1970s—a time when accounting firms were proud to call themselves Certified Public Accounting firms.

Path of Unity

Leadership in the accounting profession was divided 85 years ago, as it is today. If it was not for the voice and leadership of Colonel Robert H. Montgomery, another former President of the New York State Society of CPAs, the two competing national professional accounting societies at that time-the American Institute of Accountants and the American Society of Certified Public Accountants-would never have merged in the 1930s to become the American Institute of CPAs.

“There is no shadow of excuse for two national bodies with different aims,” wrote Colonel Montgomery, who was joined by likeminded thinkers such as Walter Staub, then current president of the NYSSCPA [Lybrand Ross Bros. & Montgomery, Fiftieth Anniversary,1898-1948 (Philadelphia, private print, 1949), p. 22]. Staub maintained that rivalry between the two national societies precluded the timely intervention of the profession on matters of national policy (Jobe, p. 97).

Wording of the Auditor's Opinion

Another crossroads of the 1930s was the drafting of the auditor's report, which is again undergoing substantial change amidst much controversy. Walter Staub recommended that auditors effectively should render two separate opinions in their reports, and that audited fnancials first “fairly present,” and second are “in accordance with accepted principles of accounting” (Zeff, Accounting Perspectives, 2007, vol. 6, p. 3). This was clearly intended to signify two evaluation criteria and two opinions separated by a comma (“fairly present” and “in accordance with”). However, whether it was an accident of history, a reprinting mistake, or deliberate omission, by 2000 “the comma finally disappeared from auditing statements when SAS No. 93 was issued” (Zeff, p. 4).

Not only was the case of the disappearing comma of historical significance—perhaps inadvertently—but eminent accounting historian Stephen Zeff informs us that the term “present fairly,” as used in all current standard auditor's report forms in the United States has a somewhat embarrassing history. The term was coined in the early 1930s by Richard Whitney, president of the New York Stock Exchange, who five years later pleaded guilty to two counts of grand larceny and was sentenced to prison. Readers might be reminded of the misdeeds of Bernard Madoff, former head of another major stock exchange, eight decades later.

PCAOB at the Crossroads

The formation of the PCAOB in 2003, which effectively eliminated decades of self-regulation by the accounting profession, was a crossroads no less transformational than establishment of the SEC, and which arguably answered the question that Douglas R. Carmichael raised in a 1978 symposium, “Has the Accounting Profession Lost Control of its Destiny?” (Carmichael is a member of The CPA Journal's Editorial Board, and was the PCAOB's first chief auditor). Carmichael posited that “the accounting profession does not control its status in any of the three areas: the legal liability of independent auditors, the authority to set professional standards, [and] the extent of federal regulation of the accounting profession” (Proceeding of the 1978 Touche Ross Symposium on Auditing Problems, Accounting Historians Journal, vol. 10, no. 1, pp. 85-86). The resulting consequence—the PCAOB—and its effect on the future of the profession, could be profound.

Our Next 85 Years: Audit Futures

As was discussed at our symposium, the discovery of significant auditing deficiencies in the broker-dealer arena has wider implications for the profession, as the PCAOB has now extended its authority over the audits of non-publicly held broker-dealers. Futurists might question whether a new form of public auditing firm might arise. Might this entity be a hybrid that exclusively audits financial statements of publicly traded companies? Might the auditor be paid out of a public fund rather than by the client entity? Might this hybrid consist not only of accountants/auditors (CPAs as certified SEC Auditors) but also attorneys (Certified Independent Attorneys, as suggested by John Coffee in Gatekeepers), securities analysts (CFAs), and industry specialists?

As we celebrate our 85th year of publication, I invite readers to debate the future path of our profession, to ensure our success for the next 85 years. I thank our readers as well for your support over the years in service to the public as voices of the profession.