Magazine article The CPA Journal

'The Future of the Accounting Profession' Report

Magazine article The CPA Journal

'The Future of the Accounting Profession' Report

Article excerpt

The bedrock of our commercial system is reliable accounting. Without high-quality accounting standards, the lifeblood of capital cannot be efficiently allocated to its best use in building and sustaining our economy and our way of life.

- Richard W. Fisher, Chair, The American Assembly, November 2003

Founded in 1950 by Dwight Eisenhower as an affiliate of Columbia University, the American Assembly ( is a national, nonpartisan public affairs forum "illuminating issues of public policy by commissioning research and publications, sponsoring meetings, and issuing reports, books, and other literature."

"The Future of the Accounting Profession," the Assembly's 103rd report, was coordinated by a blue-ribbon steering committee from finance, accounting, and education, including Paul Volcker, William Donaldson, Robert Denham, David Tweedie, Arthur Levitt, William McDonough, Derek Bok, Katherine Schipper, Washington SyCip, Clifton Wharton, and Roman Weil. Donaldson and Weil were also keynote speakers. This Assembly included background papers commissioned for the benefit of its participants, and discussions, along with question-and-answer periods. The mission of the project was to consider the status of accounting: the current situation, the desired future situation, and how to attain it. The participants voiced their own views rather than their institutions'. The report was reviewed and, where necessary, modified by the participants at the end of the conference.

On the whole, the participants were satisfied with recent regulatory changes, including the actions of the Public Company Accounting Oversight Board (PCAOB), created under the Sarbanes-Oxley Act of 2002 (SOA) to reform accounting practice, and with recent steps by accounting firms to enhance their own practices. The report stresses the subjectivity and judgmental nature of financial statements. Participants contend that too much is expected from audits, because financial statements are not precise and exact. The public, not to mention audit committees, may be calling for a degree of certainty in audits and accounting that cannot be achieved. This situation is usually referred to, though not in the report, as the "expectations gap." The participants recommended that auditors exercise judgment to a greater extent, for example in detecting fraud. The profession needs to be revitalized to attract more qualified individuals. The participants also thought that the profession ought to be insulated from frivolous legal challenges. Finally, corporate boards should have more qualified audit committee members.

An Era of More Bright Lines, Less Judgment

Emphasizing that auditors should be "gatekeepers" whose primary allegiance must be to the public, the report recounts the events in the 1990s that led to the scandals in 2000 and beyond. While the report says accountants were not the only parties to blame, "all too many independent auditors lost their autonomy and judgment-and ended by blurring the line between right and wrong." The audit became "a commodity with little intrinsic value," yielding to management desires to release misleading financial statements. In essence, although the report does not explicitly say so, accounting self-regulation failed.

The participants maintained that accountants employ many "bright-line" rules when they should be using their judgment. Arguing that the dichotomy between "principles" and "rules" is artificial, the participants believe that "principles must accompany rules, and vice versa." Put another way, principles and rules are closely related. The real issue, the participants maintained, is whether accountants and auditors can exercise professional judgment.

Some participants were concerned about the organizational structure of the Big Four firms-each a loose confederation of partnerships having individual legal entities yet often using the same overall name. Such firms do not necessarily use their resources effectively, because experienced auditors are often not on the scene where they are needed the most to pinpoint signs of trouble. …

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