Change is inevitable. Knowledge is power. Those two phrases encapsulate how AICPA President and CEO Barry Melancon, CPA, CGMA, views the accounting profession today and where he envisions the CPA—both the credential and the professional—being a decade from now.
In an interview with JofA Senior Editor Jeff Drew, Melancon outlines how change is creating incredible complexity in an increasingly global business environment, one in which he foresees international expansion helping to strengthen the CPA’s position as one of the world’s dominant accounting credentials. He also explores how the mass movement of baby boomer CPAs into retirement is contributing to an age of hyper-merger-and-acquisition activity while simultaneously creating an unprecedented need for knowledge transfer in the profession.
Knowledge, in Melancon’s view, will provide the foundation on which CPAs can build their careers in the coming years. With change and complexity creating “almost mind-numbing” challenges for organizations, CPAs who can devise solutions to perplexing problems will be in the best position to help design and execute strategies for success and growth.
Change is top of mind for Melancon as he looks at his 17 years at the helm of the AICPA. That period has seen the scorching scrutiny of the Enron-WorldCom era, the passing of the landmark Sarbanes-Oxley (SOX) and Dodd-Frank laws; and two significant recessions. It also has seen the AICPA achieve record-breaking membership numbers, produce unprecedented advocacy success in Washington, and spearhead the creation of the Vision and Horizons 2025 reports, which defined the purpose of the CPA as “making sense of a changing and complex world.”
That purpose is at the core of Melancon’s JofA interview. Edited excerpts of the conversation follow.
Drew: Compare the AICPA now to what it was like when you became CEO in 1995. What have been the biggest changes?
Melancon: Our membership is about 14% larger today than it was in 1995. We have about 15% fewer employees. We believe that indicates a strong degree of efficiency. And while I can’t quantify the breadth and intensity of the issues we deal with, they are considerably more numerous and complex than they were in 1995.
Our services have changed dramatically. Our advocacy activities are much more extensive than they were in 1995. Our relationship with state CPA societies is much more collaborative than it was in 1995, which is critical to our success and, I hope, to the state societies’ success as well.
When you combine all those factors, we are a dynamic organization that is proactive and also nimble enough to deal with the many challenges and opportunities on the horizon.
TESTS FOR SUCCESS
Drew: What do you consider to be the AICPA’s greatest recent accomplishments and challenges?
Melancon: In terms of challenges, the Institute continually faces requests from our members to be involved in a wide variety of issues and activities, because we have such a diverse membership—377,000 members who approach the world differently. It’s very tough to have the necessary resources and strike a balance among the many priorities, as we strive to act on our members’ ideas and to address our members’ challenges.
A truly significant accomplishment I’m proud to point to is that we have changed the relationship with our members dramatically in the past 17 years. We measure, as you would expect, everything. We measure member satisfaction. We measure how quickly we answer the phone and respond to emails. Operational efficiency, or excellence, is part of our strategic plan. We’re not perfect at it, but we are much better at it than we have ever been.
CHANGES FORESEEN FOR AICPA, PROFESSION
Drew: What do you see on the horizon for the AICPA as an organization and as a membership body? What do you think the AICPA will look like in 2025?
Melancon: The Institute and our profession will continue to evolve. One of the fundamental issues of Horizons 2025 is how the U.S. CPA is positioned globally. We know that the world is evolving rapidly into a global marketplace. Yes, in 2025 we will still have borders and country-specific issues, but the issues of a particular country, even one as large and as economically powerful as the United States, will be in the context of a global environment. Our profession’s services will change. We’ll see more mergers as firms look to increase their competitiveness.
The business and industry component of our membership will be called upon to be even more strategic and help their CEOs connect the dots using both financial and nonfinancial factors. We’ll see advances in areas such as integrated reporting systems and a higher use of technology in the audit environment.
So from a business and industry perspective, from an attest and assurance perspective, and certainly from a tax perspective, we’re going to see major changes domestically and in our country’s position in the world.
THE CPA: GOING GLOBAL
Drew: Let’s talk about your vision for the CPA credential outside the borders of the United States and the process for realizing it.
Melancon: Our vision for the U.S. CPA’s global footprint vis-a-vis the credential’s United States footprint is important to understand. We do not believe that in the near future there will be one accountancy credential for the whole world. Sovereignty issues will continue to guarantee that.
But we believe there will be three to five credentials that dominate from a global perspective. Our mission—and we hope our members’ vision—is that the U.S. CPA will remain one of those.
We shouldn’t take that for granted. The positioning of the U.S. CPA is so important to our members and to the U.S. economy that we must do what’s necessary to ensure there is no doubt about that particular outcome. That’s the track we’re on. With our partners at NASBA, we launched the U.S. CPA exam, the same one given in Des Moines or Los Angeles or Miami, in locations outside of the United States, starting in Japan and the Middle East on a pilot basis and, in February 2012, also in Brazil. Those constitute the first phase. So far it’s been very, very successful. And the globalization of the CPA exam is going to continue.
Likewise, our work with the CGMA—our joint venture with CIMA (the Chartered Institute of Management Accountants, a U.K.-based body)—which greatly advances our services to, and the positioning of, our members in business and industry, gives us an international footprint. Part of that initiative was CIMA’s commitment to support the U.S. CPA in its 28 offices around the world, none of which are in the Americas.
We also will do more from an advocacy perspective. We’re likely going to move to IFRS in this country at some point. That means we’re going to have to advocate on technical issues at the IASB (International Accounting Standards Board) in London. There are, increasingly, regulatory issues—for instance, in the European Union—that affect the United States. Those types of issues require us to have advocacy beyond the state capitals, where state societies spearhead advocacy for the profession, and Washington, D.C., where most of the AICPA’s advocacy activities have been centered.
THE IMPACT AND IMPLICATIONS OF TECHNOLOGY
Drew: How do you see technology changing what CPAs do?
Melancon: Think about jobs that exist today. For instance, consider a social media position in a company. That job didn’t exist 10 years ago, or probably even five years ago. It exists today. I think we’ll see that type of evolution in what accounting jobs look like.
Now, with that evolution comes great opportunity to bring the CPA’s value as a knowledge worker into what traditionally has been the transactional area, or even the areas of accumulation and reporting. Those types of jobs probably will fade away. As a result, organizations will need knowledge workers who can analyze and apply business information to drive decisions. Our profession excels at doing that.
But let’s remember a very important part about what the futurists tell us regarding the world we’re likely to be living in for the next two decades. We live in a world of global interdependency. We live in a world of incredible complexity, hyperspeed expectations, and challenges that are almost mind-numbing from the standpoint of business decision-making.
Futurists tell us that the ability to manage complexity and understand the implications of complex situations in a business context is going to be more valuable than ever. CPAs possess a skill set—and education base—that allows us to understand the connectivity of those complex factors in a different way than professionals in any other discipline.
Our purpose statement in the Horizons document—and in the 1999 Vision report—is “making sense of a changing and complex world.” That’s the world we’re in. So it’s critical to embrace that evolution and make a commitment to be the key professional to help people sort through that evolution.
SUCCESSION: THE BABY BOOMER EFFECT
Drew: How should the profession prepare to handle the seismic generational shift of baby boomers going into retirement?
Melancon: Succession is a big issue. Knowledge transfer is an even bigger issue. We face challenges from a regulatory perspective, and if we lose the wisdom held by our baby boomer CPAs, how would that impact the quality of the functions we deliver as a profession?
Now, clearly, the people in the generations that follow the baby boomers are very talented, and each generation has been prepared better than the prior generation. But the type of wisdom and experience possessed by the baby boomers is very important.
Baby boomers, the demographers will tell us, are much more attuned to being members of professional organizations and committed to being stewards of the profession than Generation X. Where we find people in Generation X who are really engaged or want to be engaged in the profession’s issues, it’s important to leverage their passion through state societies and the AICPA, because what they think—and where they’re driving the profession—is critically important.
Generation Y is much more likely to be involved and concerned about those professional issues, and it’s important to be investing today in Generation Y. Our baby boomers have a stewardship responsibility to instill professional pride and knowledge in our future leaders to ensure that 20 and 30 and 40 years from now our profession is as well-positioned as it is today.
AN ERA OF HYPER-M&A
Drew: What is your forecast for mergers and acquisitions among public accounting firms?
Melancon: We’re in an era of hyper-merger-and-acquisition activity in the profession. It’s important to think about the implications of that and why it’s happening. Also, we’re in an era in which record numbers of new firms are being created, which is an output of these M&A activities. We have about 44,000 CPA firms in the United States. The 500th largest CPA firm has about 20 CPAs in it. So the universe of firms is skewed heavily to very small CPA firms—the “Main Street” trusted adviser personified.
There’s nothing absolutely common among all of those firms, but the most common trait is that they disproportionately are led by baby boomers, and in most cases, the two biggest assets of the people leading the firm are their home and their investment in their practice. For the practice’s value to be realized, there has to be a way to transition the firm to the next generation of owners. That can be done through merger-and-acquisition activity or by moving a practice to the next generation. Now, we know moving a practice, particularly a small practice, to generation 2 or generation 3 is difficult. It happens, but it’s not easy.
So one of the things driving much of the merger-and-acquisition activity is the baby boomers’ need to find succession in their practice. But that’s not the only thing.
Several mergers and acquisitions have resulted from top 500 firms looking to grow their geographic footprint or to build a talent base in a certain niche by acquiring firms operating in that niche.
All of those things collectively have produced this hyperactivity. What we’ve seen for the past three or four years is a historically high number of larger, top 100 firms acquiring smaller firms. What we’re seeing much more often today are what I call horizontal mergers, similarly sized firms coming together for economic reasons, such as creating efficiencies, or to address issues such as succession.
We’ve also seen several examples of top 20 firms coming together. Often with those transactions, some people peel off and create smaller firms. I think horizontal mergers are likely to continue. It’s going to be harder for firms to find appropriate partners, but there’s still going to be an imperative, due to the aging population of CPAs, to move to a next generation or to a succession environment.
We predicted in 2007 that the number of mergers and acquisitions from 2007 to 2017 would be higher than the number for the entire history of the profession before 2007. Based on where we are in 2012, that prediction looks pretty good. That means we’ve got at least another five years of that volume of activity.
THE CAREER OUTLOOK FOR CPAs
Drew: What do you see as the best career opportunities for AICPA members at this time?
Melancon: This is a great time to be a CPA (see Exhibit 1, “Master’s in Demand”). When you’re in a period of hyperchange or unbelievable complexity, people entering the profession are at less of a competitive disadvantage to more experienced people, because everything is new. If you have a major new tax act, the knowledge base of that tax act starts at or near zero for everybody.
The career path opportunities for a CPA today, regardless of experience, are almost unlimited. We believe that the unemployment rate, when it was running about 9% in the country, was about 4.5% or less for the CPA profession.
One of the beauties of our profession is that your education and certification prepare you for almost an unlimited array of opportunities.
KEEPING DUES AFFORDABLE
Drew: As the Institute offers more services and products to its members, how do you balance that with keeping dues affordable?
Melancon: Approximately 50% of AICPA revenue comes from dues, and about 50% comes from continuing education, publications, technology services, conferences, and other activities. We think that 50/50 mix is about right. Clearly, there are things that we do as a professional organization that are in the public interest and for the good of everyone—standards, ethics, peer review, protection of the CPA brand, increasing the pipeline of people coming into the profession. We invest heavily in those areas. Those activities benefit everyone and, as a result, are part of our dues base.
There are other programs that are specific to individuals, or in some cases, firms, because we have sections that are firm-based as well.
We try to look at our service mix from that standpoint and balance it. We’re sensitive to how much is the right amount of dues. We’ve always been. We’ve gone years without increases. When we do have increases, we try to keep them in line with inflation. We’ve done a lot of things to economize our operations despite increasing the breadth of services that we provide and the growing complexity of the challenges we face. So striking the balance between dues and member services and stewardship for the profession itself is always front and center, and that balance is something that we always try to manage.
LESSONS FROM ENRON AND WORLDCOM
Drew: What did the accounting profession learn from Enron and WorldCom?
Melancon: Enron and WorldCom highlighted some things that, from the standpoint of public perception or government perspective, we needed to do better. Some of it Sarbanes-Oxley changed, and some of it we’ve changed ourselves. For instance, our peer review process, which included public companies at that time, certainly evolved into a government, or a quasi-government, activity with the inspection process. Peer review still exists for private-company activities, but peer review has evolved since that time as it relates to private companies and the interaction with state boards of accountancy. We hope this has addressed some of the issues people might have viewed as a failing in the era of Enron and WorldCom.
We were supportive of a lot of the changes. There are certain things a government agency can access—subpoena power, for example—that we couldn’t. There were some built-in limitations in our self-disciplinary process.
We were not supportive of only one thing at the time Sarbanes-Oxley was enacted, and that was the movement of public-company auditing standards. We felt that was a very important part of the profession. Today, auditing standards for public companies are set by the PCAOB through a public standard-setting process similar to how FASB sets accounting standards. But private-company auditing standards are still set through the AICPA in cooperation with the state boards of accountancy, and today are based on an international standards platform.
The Enron-WorldCom era was a difficult time for our profession. It was a time in which the profession’s brand was impacted to a large degree, but not nearly as much as people might have perceived it to be. What we learned was the real strength of the Main Street CPA, because the Main Street people who interact with their CPAs day in and day out knew the quality of those individuals, and as a result, the brand was preserved and, ultimately, enhanced (see Exhibit 2, “Perception of CPAs’ Skills on the Rise”). The incredible competencies and ethics of Main Street CPAs played a huge role in the success of the CPA brand after Enron and WorldCom.
UNPRECEDENTED LEVELS OF LEGISLATION AND ADVOCACY
Drew: Talk about the expanded scope of AICPA advocacy efforts.
Melancon: The number of issues has grown exponentially, as has their complexity. There are so many issues that potentially can affect the profession, and there are so many different pieces of legislation that can have unintended consequences for the profession. We’ve called upon state societies and our grass roots to engage with Congress at an unbelievable rate.
Let’s start with the highest-profile piece of legislation in the past five years, the Dodd-Frank Act. Dodd-Frank, at more than 2,000 pages, is the largest piece of business regulation ever enacted in the United States. In that legislation, the CPA profession, in the course of providing the services that we normally provide as CPAs, is exempted from regulation by the new Consumer Financial Protection Bureau, which was created as part of the Act. That was a conscious decision of Congress, but it resulted from the work we did on Capitol Hill to explain the profession, what it does, and why it was inappropriate to have additional reaches of regulation.
During the Dodd-Frank process, there were numerous items we were able to get amended into Dodd-Frank, or in some cases deleted from the bill, that could have been detrimental to the profession or to the businesses that we serve. We were instrumental in educating Congress, which led to the repeal of unsound provisions. For instance, we opposed numerous attempts to affect the independence of FASB and the accounting standards process. Unfortunately, some of those issues are back on the table in 2012.
We also had success in other legislative areas. One of those was enforcement of the Federal Trade Commission’s Red Flags Rule as it related to CPA firms, which would have been affected unintentionally by a regulation that was put forward. (Editor’s note: President Barack Obama in December 2010 signed the Red Flag Program Clarification Act, which exempted CPA firms from a requirement to implement a written identity theft prevention program. Previous JofA coverage is available at tinyurl.com/6md9ks8.)
After five years of focused advocacy work, we succeeded in convincing Congress to ban new tax strategy patents. There are only three things you can’t patent in the United States—a medical surgical procedure, how to make a nuclear bomb, and a new tax strategy. So tax work is in some pretty good company from a prohibition standpoint.
We led a coalition of business interests in repealing some onerous proposed expansions of Form 1099 reporting requirements that came out of the health care reform act, because they had huge, unintended consequences.
Also during that time, working with the state CPA societies, the National Association of State Boards of Accountancy, the state boards, The Accountants Coalition, and other grass-roots efforts like ncCPAp (National Conference of CPA Practitioners) in some jurisdictions, we were able to pass mobility legislation in 44 additional states and the District of Columbia. We now have mobility enacted in 49 of the 55 jurisdictions. This allows CPAs, on the basis of their home state license, to work in other states or jurisdictions that have enacted mobility legislation without having to obtain a reciprocal license, give notice, or pay a fee, but being subject to enforcement, if necessary, based on their home jurisdiction license.
Five years ago, four states had passed that legislation. Expanding mobility to so many more jurisdictions in such a short time is a significant accomplishment and a testament to the coalition. Work is active in the remaining states.
Another high priority for us has been private-company financial reporting. The AICPA continues to urge the Financial Accounting Foundation to create an independent process and structure that would allow differences in GAAP for private companies to make financial reporting more relevant and less complex for those companies and the users of their financial statements.
Drew: What are your top concerns in terms of potential government legislation facing the profession?
Melancon: I am concerned that some of the expectations in the regulatory environment are putting incredible pressures on line partners.
Another concern is the set of potential regulatory reforms being debated in Washington on audit firm rotation. Those debates are being characterized as exploring ways to increase quality and skepticism, and that’s certainly a noble goal. The question becomes, would mandatory rotation improve quality? There is a good deal of evidence indicating that would not be the case. That’s a concern.
The last thing we want is for an environment to be created in which it’s so difficult for auditors to perform at their top level that we create issues of professionals exiting for other roles. Such turnover would not be in the best interest of the public.
On the tax side, we’re going to have a national debate about taxes, both federal and state. It’s probably not going to occur in 2012. It probably will occur after the election, and its direction will depend on the results of the election. Regardless of the direction, it will have an impact on the business community. It’ll have an impact on individuals. And it certainly will have an impact on our profession.
AN ERA OF UNPRECEDENTED COMPLEXITY?
Drew: Have we encountered similar periods of complexity and rapid change before, or is this completely unprecedented?
Melancon: When you study the history of our profession, there have been significant periods of change. But what we’re facing now is an incredible number of moving parts:
- International, regulatory, and expansion issues at every level;
- Huge financial concerns from an economic perspective;
- Interdependency of sovereign economies—the European crisis to the U.S., the U.S. to the European crisis;
- The complexity of what we report on or what management accountants prepare;
- The notion of an expanding or broader financial reporting model;
- The expectations of the public, the implications of technology, and the speed at which everything happens;
- And changing investment habits throughout the world.
All of those things together create a set of issues that are incredibly interconnected and complex. Our profession, to a large degree, if it’s not exactly in the center of those issues, we’re in that first ring of being significantly involved. That’s a huge opportunity, a huge challenge, and a very important place for our profession to be.
Jeff Drew is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact him at firstname.lastname@example.org or 919-402-4056.