CPAs entered a covenant when they accepted the statutes that created their professional license. There is also the very special franchise, granted to the accounting profession by a threeto-two vote of the SEC at its inception, which requires all registrants to submit financial statements audited by accountants in the private sector rather than by employees of governmental agencies. That special franchise generates revenues amounting to billions of dollars annually.
This covenant was undertaken by the profession and society for a compelling reason: to assure the effective functioning of capitalism catalyzed by the corporate complex, but with an effective system of corporate governance and accountability. Society licensed the accounting profession to oversee that process.
In the day-to-day existence of our citizenry, the private sector of corporate complexes plays a more direct role than the government. The air we breathe, our recreation, mobility, habitats, health, and economic well-being are all affected by decisions of those who control the conduct of corporate enterprises.
Here then is where we meet up with the "power without property syndrome," described early in the 20th century by Gardner C. Means and later expanded by Adolf A. Berle. Enormous pools of power have been delegated to managers by those who own the resources. To provide assurance to those that have thus delegated their resources to managers, we have built a system of checks and balances, corporate governance, and accountability. Think of a system of concentric rings, with management at the center of corporate power.The first outer ring is the board of directors, whose authority is derived from the shareholders and which is responsible for determining the corporation's policies, reviewing its operations, and ensuring that the policies are fully and fairly implemented. There then follows the independent audit committee of the board of directors.Those in this role should be aware of why the audit committee has become a vital force in corporate governance and the accountability process. They should be mindful of the standards governing independent audit committees, mandated by stock exchanges and the SEC. Only if the members carry out their role conscientiously and professionally will they fulfill the very special mandate that has been bestowed upon them.
The crucial ring in this system is the independent auditor, responsible for probing the conduct of all aspects of the corporate enterprise on behalf of third parties, the investing public.
This brings us to the ring that represents the nexus of state and federal agencies involved in regulating the corporate complex. The states bring business enterprises into existence by granting corporate charters or licenses as appropriate. The states also bestow licenses for the various professional pursuits, including accountancy and law, that may be involved in the corporate governance and accountability process. The SEC is charged with the administration of the Securities Exchange Acts of 1933 and 1934. It is also the source of Regulation S-X, which governs registrants' accounting responsibilities and practices.
The next succeeding ring is Congress, which, through its investigative and legislative actions, affects the standards for corporate governance and accountability. Further outward lies the judiciary, principally the federal courts, which through their determinations in civil and criminal proceedings further define the standards for conduct of all those involved in an enterprise.
In addition to accountants, professionals in the fields of law, finance, journalism, and academia are involved in each ring. If this system of interrelated responsibilities fails, we have Enrons and similar market disasters.
Over the past quarter of a century the accountancy profession had been confronted with recurring crises, which have led to Congressional hearings, reports, and even legislation. …