|The following is adapted from
a speech made by AICPA President and CEO
Barry C. Melancon at the invitation of the
Yale School of Management. Mr. Melancon
spoke before a group of business
professionals and representatives of the
media at the Yale Club in New York City on
September 4, 2002.
his is my first chance to speak to
an audience outside the accounting profession
since President Bush signed the Sarbanes-Oxley
Act. That law contains some of the most
far-reaching changes that Congress has ever
introduced to the business world. Its scope is
large. It contains fundamental reforms forms. Many
of its standards are high. And its penalties are
stiff. It included many elements the profession
supported—and yes, some that we opposed.
Now that it has been signed into law, our
position is unequivocal: We will work to implement
it and to rebuild the faith of investors who
depend on us for information critical to the
But let’s recognize the
challenge ahead: Reestablishing the perception of
the audited financial statement as a clear picture
window into a publicly traded company will not be
achieved purely by legislation or regulation.
No, the lead role must be played by all members
of the profession. We must reach back to our core
roots which earned us enormous respect as trusted
advisers. We must reassert the heritage that made
the accountant the professional in whom Americans
confide their most confidential financial
information and to whom they turn for honest
WE MUST RESTORE OUR MOST PRICELESS
All of us who are
privileged to be leaders of our profession have
the responsibility of preserving a legacy of honor
and integrity for future generations of CPAs. We
owe it to all who preceded us and all who will
follow us. We can afford no tolerance for those
who strayed from the commitment to put the public
interest first. We must do better and we will.
What is needed is not just reform of the
accounting laws, it is a rejuvenated accounting
culture, both internally in corporate finance
offices and externally in audit firms. The culture
must build upon the profession’s traditional
values, such as rigorous commitment to integrity,
a passion for getting it right, a commitment to
rules—not just to their letter, but their spirit,
and zero tolerance for those who break them.
These values are the commitment of all of the
350,000 CPAs who are members of the AICPA across
this country. We are determined to restore the
image of the accounting profession and rebuild the
legacy we will pass on to the next generation of
accountants. We’re committed to the same goals
that Congress envisioned when it passed the
Sarbanes-Oxley Act and that the president
articulated when he signed it.
committed to rebuilding confidence in the
financial markets and their institutions. We’re
committed to dramatically reducing the risk that
future investors will fall prey to the kind of
financial malfeasance that characterized Enron and
WorldCom. And we are committed to something else
as well: restoring pride in our profession. For
us, it’s personal.
The revelations of
financial abuse were a traumatic blow to everyone
in the accounting profession. It has been painful
to the nearly half of our members who are
corporate employees, who serve as the financial
conscience for thousands of corporations in
America. It has been painful to the vast body of
CPAs in public practice, CPAs who are not by and
large involved in auditing publicly traded
companies, but who concentrate on providing good
advice and quality services to individuals and
small businesses. Let’s not forget that small
businesses make up roughly half of our economy.
They are America’s engine of economic growth and
job creation and they depend upon their CPAs for
expertise and trusted advice. In a business world
that seems to grow more complex every day, small
business people need to turn to a trusted adviser
to put complicated issues in context. CPAs fulfill
The corporate scandals have
also been painful to auditors who provide
independent, objective judgments to public
companies and insist on full disclosure to
investors; that includes nearly a thousand audit
The business scandals have been
painful to members of our profession because it is
made up of honest people. But hundreds of
thousands of good apples do not excuse the
behavior of a few bad ones. Make no mistake about
it, our profession was part of the problem. And it
came to embody the public’s perception of the
THE PROFESSION IS INVOLVED
But no matter how
small a minority caused the problems, all of us in
the accounting profession are working to solve
them. To begin with, we were “present at the
creation” of many of the reform ideas that were
recently embraced by law. We helped develop the
proposal for a board to oversee auditors of public
companies, an idea that evolved into the Public
Company Accounting Oversight Board. We called for
a requirement that auditors be hired by the
board’s audit committee, not management. We agreed
with a prohibition on those who audit public
companies from consulting in two key areas:
financial systems design and implementation, and
internal audit outsourcing. And we created a
public-interest test against which all reforms
could be measured:
Will it help investors make informed
Will it enhance audit quality and the
quality of financial reporting?
Will it help restore confidence in
the capital markets, our nation’s financial
reporting system and the accounting profession?
Will it be good for America’s
financial markets and economic growth?
we’ve looked beyond legislation. We’ve engaged in
a long and serious process of introspection at the
AICPA over what went wrong and what must be done
to make it right.
WHAT WENT WRONG?
For executives of
Enron, WorldCom and yes, for some auditors, part
of the problem was simple greed or arrogance. Part
of the problem was the pressure of a market in
which the difference of a penny or two in earnings
per share could lead to the difference of a
billion or two in market cap. Part of the problem
was a failure of some auditors to step up to their
own responsibility. And part of it is the
financial reporting model itself: The proper
treatment of many issues is not clear, such as
off-balance-sheet activity. Financial statements
are not written in plain English and disclosure is
periodic, even though the Internet allows it to be
provided in real time.
Part of the problem
is a GAAP model with too many rules that leaves
too little room for principle-based judgment. And
even where GAAP does allow for such judgment, far
too many preparers don’t exercise it, opting for a
form of “connect the dots” accounting that doesn’t
necessarily draw a full and complete picture of a
Part of the problem is the fact
that institutional investors and other market
professionals have not traditionally provided
feedback to the AICPA’s standard-setting process.
In retrospect, we could and should have done more
to solicit it. Now, we must demand it.
Clearly, part of the problem was some inherent
weaknesses in disciplinary and monitoring
processes for the profession. And part of it is
the threat—real or perceived—of auditor dependency
on fees from major clients.
Part of the
problem is an inclination among many auditors to
assume good intent. Most of those who make up the
leadership of corporate America are honest, with
the interests of their shareholders foremost in
mind. But an auditor must carry a standard of
professional skepticism into each and every audit.
As President Reagan said of arms negotiations with
the Soviets: “Trust, but verify.” That’s our
obligation to shareholders.
explanations, but they are not excuses. They
remind us that there is no one simple answer to
the question of what went wrong. And there will be
no one simple answer to the question of what must
we do to make it right. The accounting profession
must start with a basic commitment—a commitment
that has governed the AICPA and its members since
the organization was founded over a century ago.
Let me illustrate that commitment with a
story about an auditor named Al Bows, who this
summer was the subject of a profile in The
Wall Street Journal. He went to work for an
audit firm in the depths of the Depression. Public
companies had just been mandated to have their
financial statements certified. There were no
nationally recognized standards in place, no
history to draw upon. Bows took pride in helping
to reform capitalism. He took pride in something
else, too: his integrity. One day he discovered
that the CEO of one of his client companies was
secretly running a competing business on the side
to siphon off profits. The client controlled a
major account for Bows. But Bows told him to cut
out the con game or he’d turn him in. The client
was angry, but he stopped cheating his
shareholders. Al Bows possessed a characteristic
crucial to the profession: He had the guts to say
no, even when he had a lot to lose.
WHAT INVESTORS DESERVE—AUDITORS WHO SAY
be no doubt: Hundreds of thousands of members of
the CPA profession say “no” every day. “No” means
protecting the public interest by rejecting
unsound corporate accounting practices. “No” means
reducing the risk of deceit and fraud. “No” means
ensuring that audited statements are not just
accurate, but illuminating. “No” means questioning
and challenging management. When justified, it
means rejecting management’s accounting decisions.
Saying “no” means saying “yes” to protecting the
public interest. Only if auditors are fully
prepared to say “no” will investors be fully
prepared to say “yes.”
“No” is not always
easy to say. But obscured by the recent focus on
our profession is the fact that auditors say it
every day. These stories rarely come to light
because an auditor prevails on clients to do the
right thing. Every day, an auditor is telling a
corporate executive what must be disclosed, why an
item can’t be treated in a certain manner or why a
certain activity must be shown on the balance
Every year, members of the AICPA
collectively conduct almost 17,000 audits of
public companies that are unblemished by
restatements or allegations of impropriety. That
doesn’t even include hundreds of thousands of
audits of privately held companies and government
and not-for-profit institutions that exemplify the
highest standards of integrity.
true spirit of the accounting profession, a spirit
we must marshal in pursuit of a fair investment
climate. We must strive for zero audit defects,
knowing full well that a combination of factors
will prevent us from ever achieving perfection.
But when a failure occurs, we must be unrelenting
in ensuring that its weaknesses are not repeated.
The president and Congress have taken a
significant step. The accounting profession is
determined to carry the cause forward. We realize
that no single initiative will rebuild investor
confidence, that no single magic bullet will put
fraud or malfeasance to rest.
introspection at the AICPA have brought us to the
conclusion that we have six leadership roles to
fulfill. All of them require cooperation with
other important players, who have jurisdiction in
many vital areas.
First, the AICPA has a role as a
standard setter. While the new
Public Company Accounting Oversight Board has
broad responsibilities, CPAs have a responsibility
to set standards for their own profession, just as
professionals do in medicine, engineering and
To ensure that our standard-setting
capacity is as robust as possible, the AICPA will
make it a priority to obtain greater involvement
of the users of financial statements in setting
We are developing new guidance
regarding an auditor’s potential dependency on
fees from large clients, including discussion with
audit committees about potential dependency and
expanded rotation requirements for key personnel.
The guidance would also consider compensation
policies that reward partners primarily based on
auditing proficiencies and policies that prevent a
firm from penalizing a partner who says “no” at
the risk of losing a client.
Second, the AICPA has a role as a
liaison between market
institutions and corporations, jointly shaping
programs and policies to guard the interests of
investors. Reducing the incidence of financial
fraud will require a partnership among auditors,
corporate management and all financial
professionals, with the goal of achieving an
environment of fraud-free financial reporting.
We will design antifraud criteria and
controls intended for public corporations,
targeted for introduction next June. We invite
corporate America to work with us. We are calling
on the Auditing Standards Board to enhance our
existing attestation standard for CPAs to test and
report on client antifraud controls and programs
and to develop ways to communicate the results to
We will be sponsoring a summit,
before the end of this year, of financial
executives, corporate directors, audit committees,
stock exchanges, analysts and regulators to
identify new antifraud initiatives and collaborate
in implementing them.
Third, the AICPA has a research role.
Academic research can provide new
insights into the who, what, when, where and why
of corporate fraud. These insights will improve
corporate-fraud-prevention controls, strengthen
undergraduate education and enhance audit
procedures to detect fraud.
Today, I am pleased to announce that
the AICPA, the University of Texas at Austin and
the Association of Certified Fraud Examiners are
jointly establishing an Institute for Fraud
Studies. We call upon leaders in corporate America
and CPA firms to participate in this initiative.
We are committed to incorporating the research
results into the task of standard setting. One of
the outcomes must be improved investor education.
For that reason, one of the first research
projects will be to study how investors can help
protect themselves against fraud.
Fourth, the AICPA has an educational
role. We are developing training
programs aimed at combating fraud.
We will initiate discussions with the
American Accounting Association, the Federation of
Schools of Accountancy, chairpersons of university
accounting programs and college textbook
publishers aimed at promptly incorporating fraud
prevention materials into the accounting
curriculum and university textbooks. This will
give students the knowledge and skills to
understand the fundamental characteristics of
fraud, identify factors that may indicate it
exists and acquire enhanced interviewing
techniques. The AICPA will work with academic
institutions to develop appropriate materials,
targeted for inclusion in college courses in the
fall of next year.
We further believe all members of the
AICPA should commit more time to continuing
education in the area of fraud detection. While
considerable ongoing professional education is
required to maintain professional standards, we
are calling on audit and finance professionals
dealing with public companies to commit at least
10 percent of their continuing education to the
area of fraud detection.
We are urging stock exchanges to
mandate effective antifraud training for all
members of management, boards of directors and
audit committees. As a public service, by the end
of this year, we will develop and make available,
free of charge, training programs focusing on the
roles and responsibilities of management and those
in corporate governance.
Fifth, the AICPA has a role to play in
advancing the level of financial reporting.
Achieving more transparent financial
reporting is central to ensuring fair markets and
restoring investor confidence. We are eager to
pursue this goal in concert with FASB and with
leading corporate organizations. We seek to work
with all interested parties, but we are prepared
to move forward on our own if necessary.
One of our first steps is to initiate
a debate within the accounting community on how to
differentiate between the needs of widely held and
privately held businesses, and how to reform GAAP
to reflect this reality. Given the media focus on
public companies, it’s easy to lose sight of both
the importance of small business and its unique
reporting needs. As a first step in addressing
this, the AICPA is asking all of our committees
and those of state societies that deal with
small-company issues to put this high on their
agendas. Feedback is due by the first quarter of
We will work with FASB to ensure an
improved reporting model is built that will
provide investors with higher-quality
information—addressing such issues as
off-balance-sheet activity, liquidity, financial
performance indicators and unreported intangibles.
In addition, we’re working with the
Canadian Institute of Chartered Accountants to
lead the way in updating the reporting model.
We’ve jointly developed the Value Measurement and
Reporting Collaborative, which brings together
stakeholders in the financial reporting process
from around the world to determine the best
methodologies for value measurements and
reporting. This will enable investors to see more
information about what makes a company successful.
It will also help boards of directors and senior
management to make better strategic decisions.
We fully support the SEC’s current
proposal to expand and enhance the disclosure of
estimates and accounting policies. When the new
rules are finalized, we will provide our members
with tools to implement it. The additional
disclosures should be included either as part of
the financial statement disclosures or as part of
management’s discussion and analysis (MD&A).
And we fully support the auditor’s examination of
MD&A. As well, the Auditing Standards Board is
seeking input from users of financial information
as to other types of information that should be
communicated by the auditor.
Sixth, the AICPA has a role in promoting
strong corporate governance and internal
control systems. A public
company’s ability to withstand pressures to
provide false information to the public depends
largely on those factors.
For that reason, we are calling on
the Auditing Standards Board to revise existing
internal controls and reporting standards so that
the public will be put on notice when the auditor
communicates internal control weaknesses to the
audit committee. Situations that will be
considered as constituting reportable conditions
will include one individual holding the dual
positions of chairman of the board and CEO or an
audit committee that is not fulfilling its
mission. It may include lack of mandatory
antifraud education or lack of a code of conduct.
In fulfilling all of these roles, the AICPA
has an overriding mission: to shape an accounting
culture for the future that surpasses the legacy
of our past.
Over the past few months,
certainly one good thing has occurred: The
importance of the audit has been reaffirmed loud
and clear. Now, we must build on its core value.
The AICPA will be both a watchdog and a
source of leadership. We pledge to be a force for
raising new issues and examining issues that are
raised by others. We will serve as common ground
for all in the profession and those involved in
the financial reporting process to bring their
concerns and proposals.
To be certain,
none of us—auditors, corporations or
investors—will look back fondly on this year. But
the 350,000 members of the AICPA are concentrating
on looking forward. We’re looking forward to
implementing the fundamental reforms enacted by
Congress. We’re looking forward to working with
lawmakers, corporations and the public to
implement new reforms as necessary and to
rebuilding the faith of investors in the audited
financial statement as an open window into
publicly traded companies. We’re looking forward
to reclaiming our profession’s heritage as a
bedrock of business integrity and continuing our
historic role as trusted advisers to businesses of
all sizes and protectors of the public interest.
It will not be easy. But we are committed to
it. We are committed to moving forward. We will
rebuild trust in our profession brick by brick.