Future of the Accounting Profession

Greg Callow

Matt Faulkner

Dana Gies

Mary Mumcuoglu

Marcel Nugent

Tracey Weiler

• Warm Up

• Evolution of the Accounting Profession

• Accounting – A Need for Change

• Future Directions

• Group Exercise

• Conclusions

• Questions

Agenda

Warm Up

Evolution of the Accounting

Profession

Profession: “An activity that involves a responsibility to serve the public, has a complex body of knowledge, has standards for admission, and has a need for public confidence”

How well has the profession been of service to the public?

Is there a need for change?

Accounting as a Profession

How the U.S. Accounting Profession Got Where it is Today- Stephen A Zeff

• 3 logical divisions: −Before 1940: Setting the Stage−1940’s to mid 1960’s: Profession at its

Peak−Mid 1960’s to the Present: The

Profession Begins a Descent under Stress

The Evolution of the Accounting Profession

Before 1940- Setting the Stage:

• Scottish and English Chartered Accountants who settled in the U.S. did most of the early auditing work

• Legislation was enacted in early 1900’s creating more complicated tax laws

• Standards developing- after stock market crash in 1929, the SEC is created

• Overall this was a development period for the profession

The Evolution of the Accounting Profession

Key milestones:

• 1887- American Association of Public Accountants Formed

• 1913- Revenue Act Passed

• 1929- Stock Market Crash

• 1934- SEC Created

The Evolution of the Accounting Profession

1940 – Mid 1960’s: Profession at it’s Peak

• Profession has a large influence on setting norms- GAAP developed

• CPA laws passed, most universities offered accounting classes

• CPA’s hold important government positions

• Big accounting firms successful and innovative

The Evolution of the Accounting Profession

Key Milestones:

• 1947- Generely accepted auditing standards created

• 1950- Most states institute CPA laws and exams

• 1960- Big 8 Accounting Firms are dominant

The Evolution of the Accounting Profession

VIDEO- Accounting in 1945

The Evolution of the Accounting Profession

Mid 1960’s – Present: Decent Under Stress

• Corporate scandals

• Decline in public opinion

• Conflicting goals, auditor independance

• Questionable behaviour from big accounting firms

• Talk of government regulation

The Evolution of the Accounting Profession

Key milestones

• 1965- Collapse of Westec, 1969 National Student marketing

• 1970’s- Increased litigation against auditors

• 1976- Congressional committee slams profession

• 1980’s- Big firms continue to expand into consulting services

The Evolution of the Accounting Profession

Accounting – A Need for Change

• Enron corporate scandal

• Conflicts of interest

• Public and private interest

• Why we need change?

A Need For Change

• Investors depend on auditors to monitor the financial integrity of the companies they choose to invest in

• If these numbers are inflated this could potentially lead to a large loss

Investors

• Shareholders lost $60 billion in market value

• Employees lost more then $2 billion in pension funds

• 5,600 people lost their job

The Effects of the Enron Scandal

• The effect of corporate scandal on the Enron stock

Corporate Scandals

• Enron paid large fees to professionals to inflate their earnings

• Andersen signed off on the audits

• Andersen ordered the destruction of all audit materials in relation to Enron

• See video clip (2:59 to 5:05)

Accounting Professions Involvement

• Auditors judge the financial integrity of companies that pay them

• Pressure to increase client revenues led to shady accounting methodologies

• Auditing companies are entering into consulting services −e.g.) Andersen earned $25 million in audit

fees and $27 million in consulting fees from Enron

Conflict of Interest

• Auditing−Are historical −Address compliance issues and business

risks −Initiated by audit director −Primary client is audit committee/senior

manager −Leads to a standard audit report

Difference Between Auditing and Consulting

• Consulting−Are future oriented −Addresses implementing activities −Initiated by the manager −Primary client is manager −Yields a product rather than an audit

report

Difference Between Auditing and Consulting

• Private interest is the desire to enhance the goals of the professional body

• Private interest can be achieved in the following ways:−Social status−Political power and influence−An influence in the overall environment

the profession operates

What is Private Interest?

• The public interest is the interest of the client together with the environment

• There needs to be a high interest of credibility and trust to ensure that all parties can operate fairly

What is Public Interest?

• Due to accounting scandals it is questionable whether or not accounting firms can maintain a balance between public and private interest

• If this delicate balance is not achieved the result is a potential conflict of interest

Balancing the Public and Private Interest

• Protect investors

• Balance the public and private interest

• Enhance the accounting profession

• To ensure investments of capital to increase the growth of the economy

Why do we Need Change?

Future Directions

• Legislation

• Global Accounting Alliance

• Worldwide accounting rules

Future Directions

• Historically profession has been one of self regulation

• With SOX and other legislations, the profession is moving more toward one of self regulation to one of external regulation

Legislation: Self vs. External Regulation

• U.S. legislated reforms mandated to:−Increase corporate responsibility and

accountability−Create transparency−Internal controls−Respond to corporate accounting fraud

• Resulted in the creation of the Public Company Accounting Oversight Board (PCAOB)

Legislation: Sarbanes - Oxley

Legislation: The Public Company Accounting Oversight Board• Power to investigate and bring disciplinary

action against public accounting firms and persons associated with those firms who are accused of and found to be in violation of the provisions of SOX, the rules of the PCAOB, or the SEC

• SOX shifts all regulatory responsibilities from other accounting bodies to the PCAOB

• The PCAOB has been given regulatory powers over the audit and accounting profession

• The Canadian equivalent of the SOX Act, enacted in 2005

• Applicable to all corporations publicly traded on the TSX, with some exceptions

• As Canadian securities regulators move toward tighter internal control requirements−Many smaller and medium sized Canadian

companies worry about SOX-like problems emerging here

Legislation: Bill 198

• Self vs. External Regulation

• Large accounting firms are no longer able to maintain similar clients for both audits and consulting services

• Focus on ethics and professional codes of conduct

• Corporations are looking at individuals with certifications to uphold their ethical standards and keep shareholders at forefront of all engagements

Legislation: How Does Legislation Affect the Profession

Legislation: How Does Legislation Affect the Profession• New rules for auditors

• Section 201: Services Outside the Scope of Practice of Auditors

• Auditors must report information such as:−Critical accounting policies and practices−Alternative GAAP treatments−Auditor-management disagreements to

the company’s audit committee

• Prohibits auditors from performing non-audit services

Legislation: How Does Legislation Affect the Profession• Still huge controversy in the United

States over the corporate-governance requirements of the 2002 SOX legislation

• Unwieldy and costly to implement, especially for smaller firms−An SEC advisory panel recently

recommended exempting small public companies from some of SOX’s internal-control provisions

Global Accounting Alliance• April 2006 - CICA joined eight of the

world’s leading professional accounting organizations to form the alliance

• Global Accounting Alliance−Promote quality professional services−Global membership support−Share information−Collaborate on important international issues−Work with national regulators, governments

and stakeholders, through member collaboration, articulation of consensus views, and working with other international bodies

Global Accounting Alliance• Founding members of the GAA are:

− American Institute of Certified Public Accountants (AICPA)

− Canadian Institute of Chartered Accountants (CICA)− Hong Kong Institute of Certified Public Accountants

(HKICPA)− Institute of Charted Accountants in Australia (ICAA)− Institute of Charted Accountants in England and

Wales (ICAEW)− Institute of Charted Accountants in Ireland (ICAI)− Institute of Charted Accountants in Scotland (ICAS)− New Zealand Institute of Chartered Accountants

(NZICA)− South African Institute of Chartered Accountants

(SAICA)

Worldwide Accounting Rules• Canada’s standard-setting body is the

latest to join the movement

• Big breakthrough came early this year when the U.S. FASB and the IASB agreed to close major differences in their rules by an interim target date of 2008

• IASB and FASB will concentrate on 10 financial reporting areas, making their first priority common standards for mergers and acquisitions

Worldwide Accounting Rules: Why Change?• Canada is a small open economy

• IFRS would provide more access to global capital markets

• More cost effective than maintaining a separate, and isolated, set of accounting standards

Worldwide Accounting Rules• Global economy advantages:

−Companies with cross country stock exchange listings will not have to prepare separate financial filings for different jurisdictions

−Estimated cost savings of $1-million a year and more for companies that now must reconcile statements using IASB’s IFRS, with U.S. GAAP

• Improve comparability of financial statements

• Improve evaluation of new investment opportunities

Worldwide Accounting Rules• IFRS rules are now used in:

−EU−Australia−Hong Kong−70 other jurisdictions−In talks to Japan−China standards in line by 2007−U.S. joint standards and convergence by

2008

Worldwide Accounting Rules• In January 2006 Canada unveiled a

“strategic plan”

• Converge Canadian accounting standards for public companies with IFRS over the next five years

• Previous thrust was to align Canadian GAAP closer to U.S. GAAP

• IFRS approach will be more in keeping with Canada’s principles-based standards vs. the detailed rules oriented U.S. standards

Worldwide Accounting Rules• Meanwhile, Canadian companies

with large U.S. shareholder bases will be allowed to follow U.S. rules

• Need for different accounting treatments for public companies, private businesses and not-for-profit organizations

• One size does not fit all

Worldwide Accounting Rules• Transition issues in the years ahead

• Will affect more than just financial reporting−Lending agreements and debt covenants may

have to be changed

• Technology infrastructure in companies for financial reporting will need to be changed

• Tax advisors and regulators will need to absorb the changes

• Education and process changes for Canadian public companies, investors, lenders and advisors

Worldwide Accounting Rules• AcSB will be working to eliminate

existing differences over the transition period

• Canada’s Accounting Standards Oversight Council, an independent body, will monitor implementation and the interests of stakeholders

• The AcSB has prepared a detailed comparison between current Canadian GAAP and IFRS (available on their web site) for those who must deal with the technical level

Group Exercise

Conclusions

• Long history of professional development, including tumultuous times

• Auditing profession has emerged alive, battered, and still in the limelight

• The past has elicited the need for changes in the industry

• Highlighted by the accounting scandals that have come to light in recent years

• Regain credibility for the profession and regain investor confidence

Conclusions

• External rules are in place and are still in their infancy

• Still too early to determine the impact and value of legislation, but future years will tell the story

• The Global Accounting Alliance

• Move toward worldwide accounting rules

Conclusions

Questions