The Statement
The Statement

Questions, concerns, advice surface at 'State of the Profession' conference

By Carol Kirwan
MACPA Director of Technical Services and Regulatory Affairs

PHOENIX — At a recent conference for small and mid-sized CPA firms, AICPA President Barry Melancon expressed some of his observations of the current state of the accounting profession as it relates to the Sarbanes-Oxley Act of 2002. He also expressed some of the concerns he has about what might happen to further impact CPA firms and asked some tough questions that might stimulate thought but have yet to be answered.

In addition, Melancon made recommendations for going forward and encouraged CPAs to individually demonstrate their commitment to doing the right thing.

Observations

Melancon's observations included the following:

  • Dependency is the issue. Small firms usually have a key client; how can we ensure we don't have a dependency issue?
  • There are 800-900 firms that do public company audits. Some have only two or three SEC company clients, and they will be considering getting out of that business.
  • Further consolidation of public company auditors is another implication.
  • The Sarbanes-Oxley Act does not contain a paragraph that prohibits evidence from SEC investigations from getting into court. As a result, SEC investigations can go into civil proceedings.
  • The newly formed Public Company Accounting Oversight Board does not have a balance of CPAs with professional perspective of servicing clients.
  • The profession might lose audit standard-setting for public company audits if the PCAOB does not defer to the ASB.
  • The potential implication is that the PCAOB could require that audits be designed to detect fraud. This could impact audits of non-public companies.
  • It is unknown how peer review will work for SEC auditors. Currently, if anything comes out in peer review, it does not go into an ethics case. Under PCAOB inspections, they may refer results of inspections to ethics.
  • If a firm is hired to observe inventory in a remote location for a public firm, will it have to register with PCAOB?

Concerns

Melancon said he is concerned about the following:

  • A previous Department of Labor study revealed 20 percent of audits were substandard. DOL officials will do another study this year. If they find a similar deficiency rate, they will be compelled to take significant action.
  • Banking and other regulators may react to the Sarbanes-Oxley Act.
  • Congress is looking at tax shelters.
  • The General Accounting Office issued a rule on independence prior to Sarbanes-Oxley that would limit even tax return preparation.br>

Going forward ...

According to Melancon:

  • CPAs should be committed to restoring the profession's image.
  • CPAs should build on traditional professional values.
  • Auditors must be willing to say "no."
  • CPAs should "trust but verify."
  • CPAs should be involved in setting standards.
  • CPAs can be the liaison between users and market professionals.
  • Research should be conducted into fraud issues.
  • There is a need for more education on issues.
  • Improvements must be made in financial reporting.
  • The profession must engage in debate of whether or not we should have differential standards.
    AcSEC will transition away from setting second-tier standards and will continue to issue guidance.
  • There must be strong corporate governance and internal controls.

Hard questions

These might include the following:

  • Is it time to stop explaining what an audit is and step up to the public's expectations?
  • What should be our responsibility for detecting fraud?
  • Should the report change and include auditor discussion and analysis?
  • What kind of reports should we issue on internal control?
  • What will happen to standard setting?
  • How can we help firms in business models?
  • What can we do now to begin healing?
  • Should we have a new ethics process?
  • Should we have broader dissemination of ethics findings?
  • How can firms remain competitive?
  • Should we bifurcate rules for public and non-public companies?
  • What is the role of the audit committee, auditor and management?
  • What is the impact of audit-only firms on the profession?
  • Will small firms remain CPA firms?
  • Will CPAs own tax space?

Conclusions

Melancon referred to a quote attributed to John F. Kennedy, who said, "When written in Chinese, the word 'crisis' is composed of two characters — one represents danger and one represents opportunity."

"Despite media and other criticism from regulators," Melancon said, "we all know there are 350,000 men and women truly committed and interested in doing the right thing who can pave way for unbelievable future for our profession."

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