Q&A: Melancon warns of threats to CPA licensure

When Barry Melancon, CPA, CGMA, talks about the issues affecting accounting, the one constant is change. That was certainly the case when the CEO of AICPA & CIMA, together as the Association of International Certified Professional Accountants, joined the JofA podcast for a discussion.

Melancon addressed numerous issues, including the following:

• How AICPA & CIMA are fighting legislation in almost every state that seeks to dismantle the licensure system for professionals such as doctors, engineers, and CPAs. “We have to defend in all 50 states,” Melancon said. “We cannot afford to lose in one.”
• The ways generative artificial intelligence (Gen AI) technology creates new opportunities and challenges for accountants. Melancon urges accountants not to ignore tools such as ChatGPT.
• The crucial importance of reskilling for accountants and how midcareer CPAs must scale the steepest hill to keep pace.
• The current state of private-equity investment in public accounting and other changes in the ways firms are valued and owned.
• The need for business model transformation in accounting firms.

This article features an edited transcript of Melancon’s comments, which were originally published as a two-part JofA podcast.

To listen to the full conversation, go to “Podcast Part 1: Melancon on News and Trends Affecting CPAs” and “Gen AI, Business Model Transformation, and More With AICPA & CIMA CEO.”

What is the current state of CPA licensure?

Barry Melancon: There are pieces of legislation in almost every state that attack state licensure of professionals, including doctors, engineers, architects, and CPAs.

We lead a coalition called Alliance for Responsible Professional Licensing (ARPL), along with our friends at the National Association of State Boards of Accountancy (NASBA) and some other professions, that is trying to help state legislatures understand the public interest of an effective state licensing regime.

ARPL has been effective at preventing legislation from being passed in states that would undo the licensing regimes. We have to defend in all 50 states. We cannot afford to lose in one.

It is important for members who are active with their state and the Association, or maybe serve on a state board, to have this very important issue at the top of their list, because losing licensure would be devastating to the profession, to its mobility, to its ability to serve in the public interest.

How should accountants be using Gen AI and how should they not be using it?

Melancon: I would highly recommend to CPAs to not ignore it. It is going to be part of our toolkit.

AI is not going to put this profession out of business. The uncertainty of AI, the applications of AI, the reliability of AI, the need to provide assurance of how AI is utilized — all of those things will have very important roles for the profession.

Particularly in public accounting firms, there are some great use cases that will come about in firm practice management, such as how you respond to emails and how you respond to clients and how you do that more effectively.

But firms and businesses have to understand their risk of using it and what they put in that system that then becomes part of the public domain. I think they need to be very careful with that. Confidential information and the like is a really important aspect of our profession. Therefore, how you use AI in that space is a very important part.

We will start to see even in the filing season of 2024 how AI will affect how tax returns are prepared.

What do you see as the role of AI specifically as it relates to audit and assurance?

Melancon: We have all heard or seen, for instance, where people have used AI to replicate people’s voices to create fake but almost identical voices. We have seen how people have used AI to create fake pictures of people, or fake documents.

The risk assessment for audit evidence is going to be really, really important.

It’s not the first time we’ve done this. We did it with, for instance, cryptocurrencies. There was a question about how can you prove you own a cryptocurrency, how can you prove that you have access to it? We’ve produced guidance on that. We will continue to produce guidance in that environment.

Obviously, if you’re dealing with a company that is a heavy user or a developer of AI capabilities, the risk profile will be even greater in the planning process.

And then, I think, you have to look at how your own people use AI. How much reliance do you have if they’re using AI to answer questions? How do you look at that process in an effective way?

If you’re in internal audit or you’re in management accounting or financial accounting, how do your people use AI in determining the proper accounting treatment or the determination of transaction sets being there for completeness?

All of those things that you would do in any risk profile, you now have to add an AI risk profile into that process.

There’s been a push by private-equity investors into accounting. Would you say that that’s leveled off or should we expect more on that front?

Melancon: The speed of the transactions has slowed, but I don’t think that means it’s over by any stretch of the imagination. I just think the economy of 2023 has caused those transactions to take a little bit longer to come together or, in some cases, to stop.

The reality is that private equity sees the profession as a viable avenue for investment, but we need to understand what’s happening. What’s the fact pattern with private equity?

We have an abundance of private-equity funds that are out there and an abundance of capital in private equity. Private equity needs places to invest. The CPA profession is very successful.

That’s not good or bad; it’s a basic supply-and-demand equation.

But it’s not just private equity. We’ve seen a firm like BDO go to an employee stock ownership plan [ESOP], and there are four or five other firms that have ESOPs today. We’ve seen traditional mergers pick up. We’ve seen domestic ties to global mergers of big firms.

We’ve seen firms spin off parts of their firms, for example, investment advisory parts. I think we have to fundamentally just step back and think about what is causing this really to happen.

I believe there are a lot of factors involved, but one of the key components people fail to think about is that for decades the notion of public practice has been driven by formula processes: If you become a partner in a firm, it’s a formula that determines what you buy in. If you retire from a firm, what you get paid on the way out is basically formula-based on how much you earned in the last several years.

It’s not a fair-market-value process. No one sits there and says: “This is the value of the firm; it’s going to cost you the fair market value to buy in. This is the value of the firm when you retire; this is what you get paid when you leave.”

That is shifting. What we’re seeing is firms gravitate to more of a fair value type of process. Firms that sell to private equity, that’s selling the firms on a fair-market-value basis. When an ESOP is formed, it’s done on a fair-market-value basis. That’s a fundamental shift in our profession. It’s moving more so to a fair-market-value notion of how you get into a firm and how you get out of a firm.

Other than understanding and getting comfortable with AI, what are some other skills that CPAs need to be learning, unlearning, and relearning?

Melancon: We talk about the T-shaped professional. If you think about the trunk of the T, that’s the technical knowledge we have to have. You can think of it as, if we were in Vegas, it’s table stakes. It’s what’s necessary to sit at the table.

The cross part of the T is really about success skills for which people use different terms: the ability to think in systematic ways, to think strategically, to deal with emerging technologies. It’s communication skills and risk management skills. It’s elevating your game with all of those skills because that’s what clients and employers want.

How you analyze risks in an audit is really more about success skills than how you do the audit from a technical perspective. How you give the right advice when it’s a tax client or an advisory client. Those types of things are really critical.

Reskilling is about the profession bringing a different set of skills to the needs of business, which are changing because of the complexity and the speed and the technology and the globalization. The profession has to marry those expectations from a skillset perspective.

The people for whom that change is most difficult are midcareer. Because if you’re close to retirement, that need for change, that gap is smaller. If you’re entering the profession, you have a lot of digital-native skills, which gives you a head start. But if you’re midcareer, you’ve grown accustomed to a certain set of things you’ve been doing for the last 20 years. But you’ve got another 20 years to work, and it’s how you shift in those skills that’s really going to determine your success trajectory in your career.

AICPA & CIMA have an ongoing business model transformation initiative that focuses on accounting firms. In what ways do business models need to change?

Melancon: If you’re in a small or medium-size firm, the need for smaller businesses to transform their finance functions is critically important, and you probably are the trusted adviser in that space. On the management accounting side, we deal with large companies on how they’re going.

To comment on this article or to suggest an idea for another article, contact Jeff Drew at Jeff.Drew@aicpa-cima.com.

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AICPA & CIMA RESOURCES

Articles

“Technology in Audit: More Than a Numbers Game,” JofA, Nov. 1, 2023

“How 3 Firms Tackle the Audit Talent Crunch,” JofA, Sept. 1, 2023

“Private Equity Eyes Accounting Firms Large and Small,” JofA, Feb. 1, 2023

Podcast

“Why Should CPAs Understand ChatGPT?” JofA, Oct. 5, 2023

Websites

Demystifying AI for the Accounting and Finance Profession

Future of Finance 2.0

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Private Companies Practice Section (PCPS) — Firm Membership.