Short-term Enron solutions may have unintended consequences

Editor's note: The following remarks were given on March 14, 2002 to the U.S. Senate Committee on Banking, Housing and Urban Affairs by William E. Balhoff, CPA, CFE, chair of the AICPA's Public Company Practice Section.

These remarks offer a small-firm perspective of the impact of Enron-related legislation. They include a reference to a letter submitted to the PCPS by an MACPA member who practices on the Eastern Shore.

By William E. Balhoff, CPA, CFE
Chair, AICPA Public Company Practice Section

In my role as chair of PCPS and as a partner in a local CPA firm, I am here today to represent the opinions of small firms located in towns and cities all across the United States. I have two main topics I would like to discuss with you: (1) how restricting the performance of non-audit services would adversely impact small business owners and our ability to meet their very diverse needs; and (2) how any new legislation that would affect the accounting profession must take into account the need for small accounting firms to recruit new talent.

My firm performs over 150 financial statements audits, of which only three companies are public registrants. However, the majority of our PCPS members do not audit public companies. Still, we believe any legislation that imposes new scope-of-service limitations on auditors will have unintended consequences that adversely affect small CPA firms, the small businesses we serve and, ultimately, the public.

History shows that new legislation by Congress is highly likely to become the "template" for parallel legislative or rule changes at the federal and state levels that would directly affect small CPA firms and the small business clients we serve. In particular, as auditors who provide services to small businesses, we are often subject to rules established by state accountancy boards, the U.S. Department of Labor, the General Accounting Office, and state and federal bank regulators. These bodies traditionally follow the lead set by Congress and the SEC in adopting new laws or regulations for auditors of public companies.

Indeed, after the SEC issued new rules on auditor independence in late 2000, the GAO followed suit with its independence standards earlier this year. The GAO requirements not only duplicate but in some cases exceed the new SEC restrictions on non-audit services.

I have brought with me, and will submit to the committee, a letter we received from one of our small CPA firm members, a sole practitioner located in Denton, Md., a small, rural community on the Eastern Shore. In his letter, this CPA explains that as a result of the new GAO restrictions, firms such as his that audit clients subject to GAO regulations are required to assign separate personnel to perform non-audit work, such as the preparation of income tax returns. Of course, as a sole practitioner, he has no "other personnel" to assign. He explains that the practical result is that he will either have to give up his solo practice and associate with a larger firm or tell his GAO clients that they will now need to hire a second firm to perform either their audit or tax work — an alternative that, for many such clients, is not economically feasible or justifiable.

Small businesses have long depended on small accounting firms to provide much more than auditing services. The CPA serves as the "trusted advisor" of the small business owner. For example, a CPA firm will often assist a small business as it is just starting out, providing guidance on setting up its record-keeping systems, providing tax and estate planning and making suggestions to help make its business more successful.

The CPA also helps the business as it grows. I have one client that had decided to expand its business by adding another location in the local area. After asking questions concerning its projected increase in sales, changes in gross margin and expected competition, as well as the impact on its financial statements, I helped the client develop a financial model to address these issues. The bottom line was that the company decided that, if it went forward with its plans, it would risk the very financial stability it had taken decades to build. This is just one example that displays the important role CPAs play in providing small businesses with information necessary for them to maintain their financial strength.

As I am sure you will agree, successful small businesses are a cornerstone of Main Street America. It is likely that, in many cases, if the CPA does not have the ability to act as the "trusted advisor" to his or her clients, many small businesses will simply not seek the input of other third-party professionals. It is vital, both for the small business person and for the survival of many thousands of small accounting firms, that current laws not be changed in a manner that is insensitive to these concerns.

My second concern is the effect new legislation might have on the ability of our profession to retain personnel and attract new entrants into the profession. This is already an area of great concern for firms of all sizes, and research undertaken by the profession has uncovered alarming trends.

Specifically, studies completed by my committee confirm that we are experiencing significant difficulty attracting students into accounting programs and the profession. For example:

the number of accounting graduates in the United States has decreased from 60,000 to 45,000 from 1995 to 2000;
the number of students enrolled in accounting programs has declined from 192,000 to 143,000 from 1995 to 2000;
the number of candidates sitting for the CPA Exam has declined by 33 percent from 1990 to 2001.

Our surveys show that the major reason fewer qualified students are studying accounting is because the profession is perceived as narrow and focused too much on historical "numbers," whereas other business careers are seen as much more rewarding and exciting. It is critical that we change this perception and continue to attract young, bright minds to the accounting profession. Any of our current efforts to recruit students to the CPA profession could be severely undercut by any reforms that restrict the services small audit firms perform for their clients.

There is much to do post-Enron to restore confidence in corporate America and the accounting profession. As you have heard from my colleagues, the AICPA and its members, large and small, fully support many important reforms. As Congress considers these issues, however, I urge you to consider the unintended consequences of short-term legislative solutions in your effort to respond to the Enron business failure.

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