Accounting Professionalism-They Just Don't Get It!: Arthur R. Wyatt
Accounting Professionalism-They Just Don't Get It!: Arthur R. Wyatt
COMMENTARY
Accounting Professionalism-
They Just Don't Get It!
Arthur R. Wyatt
J INTRODUCTION
realize that my title contains two ambiguous pronouns-"they" and "it." After reading this
commentary, I hope you will be able to identify who is "they" and what it is that they don't get.
The accounting profession has been beaten up badly in the media over the last few years, and
with some justification. The forces at work were numerous and complex and different investigators
place emphasis on a variety of phenomena that created the environment in which Arthur Andersen
disappeared and the reputation of the entire profession was tarnished. Some of these forces were not
new, such as:
* corporate and individual greed,
* delivering services that acted to impair independence,
* becoming too cozy with clients, and
* participating actively in finding ways to avoid the provisions of accounting standards.
What was new is that the profession's historical defenses to combat these forces proved ineffective.
The bottom line is that the profession-indeed, society as whole-has paid a high price for the
accounting profession's failure to meet the expectations of investors, creditors, and other users of
financial statements.
This commentary attempts to identify the core of the problem. I will also make some suggestions
on how the profession can prevent a recurrence of the recent bad times, and how educators may
better prepare entrants to the profession. My observations are based upon observing the profession's
evolution over the past 50 years and participating actively in it for nearly 40 years. My comments
will frequently refer to Arthur Andersen, since that is the only firm with which I had substantive
experience. Those comments are not intended to be praiseworthy, apologetic, or critical of Andersen.
Rather, they merely will help illustrate the world as I saw it over a good many years.
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46 Wyatt
Chicago-and had about 30 partners. Andersen was a part of the Big 8 by the mid- 1960s, and it was
probably seventh in size, with about 350 partners around the world. Accounting education in the
1950s and 1960s focused more on professionalism and the accounting code of ethics. Nearly all
entrants to the large firms were recent college graduates whose courses in auditing focused on
professional responsibilities and the importance of ethical behavior. The apprenticeship approach
inherited from the United Kingdom was a thing of the past, and the hiring of experienced individuals
with diverse business backgrounds had not appeared on the scene.
The American Institute of Certified Public Accountants (AICPA) was mostly a professional
organization whose senior committees developed the professional standards that guided accounting
decisions and auditing approaches. Jack Carey was the Institute's most significant spokesman, and
his focus over the years was on heightening the awareness of the importance of ethical professional
behavior. Only later did the AICPA become, in effect, a trade association with only limited impact on
matters of professionalism and ethical behavior. The large firms were headed by a leading account-
ing professional, often one who had risen to the top of the firm based upon acknowledged know-how,
exposure to diverse accounting issues, and honed technical skills. These individuals were often well
known in the broad business community and were active outside their firm. The firm leaders used
articles and speeches to articulate the nature of the profession and its importance to our business and
commercial system. They spoke out forcefully on the issues of the day, often without regard to
whether one or more clients might find their remarks objectionable. The leaders included Leonard
Spacek, Phil Defliese, Herman Bevis, Russ Palmer, and John Queenan.
Within the firms, new hires were guided on a path of professional behavior, both through firm
training sessions and observance of the manner in which the objectives of firm leadership were
implemented in every day practice. For example, all new hires were expected to work to pass the
CPA exam. Promotions to manager were delayed until that milestone was achieved. At Andersen,
and I expect at other firms as well, a clearly specified approach existed for staff personnel to inform
top management of any observed behavior that departed from firm policy. The relatively small size
of the firms meant that interpersonal relationships with leaders within the firm were possible. As a
result, staff personnel had a high level of comfort in taking their concerns to those a number of levels
above them within the organizational hierarchy.
In addition, accounting firms were precluded from advertising their skills and achievements
through the 1970s. Reputations were gained, in part, from a firm's policy on how tough a stance to
take on the interpretation of accounting standards. In one instance, Andersen resigned from a large
railroad engagement because the firm disagreed with a particular accounting principle that was
accepted in that industry. Later, it resigned all of its savings and loan clients, again because the firm
disagreed with an acceptable accounting principle involving deferred taxes applicable to savings and
loans. While that position proved advantageous when the savings and loan fiasco developed in the
late 1980s, the point is that the firm took tough positions on accounting standards, without regard to
immediate revenues lost. Those stances were followed by relatively rapid increases in audit rev-
enues. The underlying rationale at Andersen at the time was that most clients wanted their auditors to
keep them out of trouble and, therefore, expected the auditors to object when the client wanted
to follow an accounting policy that might lead to problems in the future. One's auditing firm was the
epitome of trust, honesty, and decency-all attributes that a successful business enterprise was
expected to possess. In effect, being tough on accounting standards was at the forefront of what
today would be characterized as the firm's marketing strategy. In the recent environment that kind of
thinking, successful as it was, suggests a fair measure of naivete.
accounting firms had regularly assisted clients with suggestions for improving their internal controls,
their efficiency of operations, and even their business strategies. These services were an outgrowth
of the audit, and while they generated some additional revenues, they were generally viewed as an
integral part of the broad audit process and not as free-standing engagements of a fee-generating
nature. The suggestions provided to clients for improvement were generated by the audit personnel
and were not the result of separate service engagements undertaken by nonauditing trained person-
nel. Reports including client improvement suggestions were an expected deliverable at the conclu-
sion of the audit. The quality of these suggestions often provided a distinguishing characteristic for the
firm. The advent of the computer spawned what came to be known as "consulting services." In
the early 1950s, Andersen assisted IBM in a major punched-card installation for a General Electric
unit in Louisville. The lead personnel were audit-trained. Their success on this engagement, their
skill sets, and their forceful brand of leadership soon led to an expanded "administrative services"
unit at Andersen, the predecessor to Andersen Consulting. The General Electric engagement pro-
vided Andersen with a head start in this area, and being good businessmen, the partners exploited
this competitive advantage over the years. While early efforts were made to keep this evolving set of
services within the then accepted bounds of professional accounting practice, the skill sets developed
by the innovative people involved gradually led to a wider expansion in the range of services offered.
As other firms strove to compete with Andersen, service offerings were expanded until almost any
service that could generate revenues was undertaken.
understanding or appreciation of the level of professionalism that accounting firm personnel were
expected to meet in the conduct of their engagements. Likewise, these individuals progressed with-
out necessarily having been exposed to the accounting rules of professional conduct, although they
did have to abide by the intemal rules on restricted investments, a necessity that became increasingly
distasteful for consulting personnel in the "go-go" markets of the 1990s. As the consulting practices
grew, the numbers of nonaccounting-trained personnel likewise grew. These people were not para-
professionals, but rather they were relatively high-paid personnel with strong skill sets in areas with
little or no relation to accounting or auditing. Their numbers grew rapidly, and their success in
generating high-margin fees gave them an increasing voice in firm management.
taken seemed a logical outgrowth of existing practices-an adaptation to changing times. Through-
out this period, concerns were expressed by many about the expanding types of services being
offered by public accounting firms. Most of those concerns centered on possible impairment of the
independence expected of public accounting firms when reporting on the fairness of presentation of
the financial statements of their clients. On a fairly consistent basis throughout this period, the
leaders of the accounting firms rebuffed efforts to constrain the types of services rendered by their
consulting units. In fact, the emphasis was on continued expansion in the range of services offered,
with the consequent relative de-emphasis on audit objectives and procedures. Firm leaders tended to
overlook the potential impact of these new services on auditor independence. The environment was
growth- and profit-oriented. Times were good. The old values that had served the profession so well
were overwhelmed by the new set of values that was serving the firms even better. Firm leaders did
not acknowledge any problems existed.
THE 1990S
As we moved into the 1990s, the Securities and Exchange Commission expressed increasing
concern about both the range of services rendered and the increasingly large billings related to
consulting services. The SEC challenged several firms, alleging that certain services impaired the
independence of auditors, but the Commission was not able to demonstrate any direct tie-in between
consulting fees and the granting of an inappropriate opinion on financial statements by the auditors.
Throughout the period, the accounting firms and the AICPA stonewalled all efforts by the Commis-
sion to limit consulting activities to certain types of services. Firm leaders not only failed to recog-
nize how the widening range of services was impairing the appearance of their independence, but
they also failed to recognize how the emphasis on increasingly conflicting services was changing the
internal culture of the firms. Consulting revenues had relegated the traditional accounting and tax
revenues to a subsidiary role.
Within Andersen, and certainly at the other firms, the consulting arms exerted increasing pres-
sure for additional profit shares and for ever-increasing rates of growth. Client share prices were
rising in the booming stock market, executives were becoming wealthy (on paper at least), and
accounting firm partners felt entitled to participate in the economic boom by achieving increased
earnings in their firms. Since the partnership form of organization did not permit the use of stock
options, accounting firm partners had to grow firm revenues and profits in order to enjoy wealth
increases like those of the top executives of their clients. In retrospect, it is easy to see the greed
factor at work. At the time, however, the changing focus on revenue and profit growth was viewed as
merely adapting to the changing times. The focus on professionalism diminished, and the focus on
revenue growth and increased profitability sharpened.
A CHANGED CULTURE
Just as greed appears to have been the driving force at many of the companies that have failed or
had significant restructurings, greed became a force to contend with in the accounting firms. In
essence, the cultures of the firms had gradually changed from a central emphasis on delivering
professional services in a professional manner to an emphasis on growing revenues and profitability.
The gradual change resulted in the firm culture being drastically altered over the 40 years leading up
to the end of the century. The historical focus of the accounting firms was on quality service to clients
in order to provide assurance to investors and creditors on the fairness of clients' financial state-
ments. The credibility added to a client's financial statements by the clean audit opinion was the
central reason for a CPA firm's existence. This focus gave way to a focus on an ever-expanding range
of services offered to a client pool fighting to achieve the short-term earnings per share growth
expected of them in the marketplace. This increased focus on revenue growth and profitability was
not, of course, limited to leaders of accounting firms. Corporate managers became overreaching and
greedy beyond one's comprehension. Investment bankers wanted in on the large fees and regularly
the
pressured accounting firms to accept accounting practices that, in retrospect, were clearly outside
provisions, of the existing standards. Security analysts were pressuring clients
intent, if not the actual
revenue
to show growth, and these clients too often leaned unduly on their auditors to accelerate
thought at the time that
recognition and to delay expense recognition. Probably none of these groups
accounting firms should have been
it was being greedy. But, the fundamental responsibility of the
that
clear. Their role was to protect investors and creditors from being misled by financial statements
disclosures. Thus, while many participated in the
embraced unacceptable accounting and inadequate
accounting firm leaders led their firms to the top of the list of
shoddy financial reporting of the era,
entities that failed to meet investors' justifiable expectations.
In essence, the culture of the leading firms in the profession had changed. New personnel who
in-
lacked a background that placed prominence on accounting professionalism gradually gained
creasing influence in accounting firms. The consulting arms were rapidly growing and were gaining
higher compensation levels than the audit and tax partners. The leaders of the audit and tax practices
felt increasing pressure to grow revenues rapidly and, more importantly, to grow profit margins in
their service areas. Those with a facility to sell new work advanced more rapidly. Cross-selling a
range of consulting services to audit clients became one of the important criteria in the evaluation of
audit partners. Those with the technical skills previously considered so vital to internal firm advance-
ment found themselves with relatively less important roles. Staff personnel within the firms were
easily able to observe the attributes of those who were the rapidly rising stars and undertook efforts
to emulate these attributes. The focus on delivering quality professional service did not disappear, of
course. No one rang a bell in a firm and announced, "Quality professionalism is out!" On the other
hand, keeping the client happy and doing what was necessary to retain the client achieved a promi-
nence that did not exist prior to the advent of the consulting arms.
Primarily commercial interests had undermined the core values of the professional firm. The
issue was not how the delivery ofa particular consulting service might affect the auditors' judgment.
The issue was not how the existence of consulting fees that were greater than the annual audit fees
might affect the auditors' judgment. The issue was how the increasing infusion of personnel not
conversant with, or even appreciative of, the vital importance of delivering quality accounting and
audit service affected the internal firm culture, its top-level decisions, and the behavior patterns of
impressionable staff personnel. It wasn't that consulting personnel were unprofessional in perform-
ing their work, it was that their actions and behavior were far more commercially driven than would
be acceptable for audit personnel. The consultants did not focus on investor or creditor interests, and
their attitudes gradually affected how auditors approached their work. Auditors were more willing to
take on additional risk in order to maintain their revenue levels. Many long-standing audit proce-
dures that put audit personnel in touch with recurring transactions were scaled back. Clients were
more easily able to persuade engagement partners that their way of viewing a transaction was not
only acceptable but also desirable. Audit partners too often acquiesced to the client views in the
current period, agreeing to fix the problem next year. (How did that notion ever get started?) Healthy
skepticism was replaced by concurrence. The audit framework was undermined, and the result was
what we have recently seen in massive bankruptcies, corporate restructurings, and on-going litiga-
tion. The cultural changes evolved over a long period and have become pervasive in nature. The
current challenge of firm leaders is to gain anunderstanding of how the current culture evolved and
how best to eliminate the damaging commercial initiatives and restore a proper degree of
professionalism.
REESTABLISHING PROFESSIONALISM
This evolution of the growth in consulting services and the significant impact that consulting
personnel had on changing the internal culture of the accounting firms was a profession-wide
phenomenon and led to the demise of Andersen. The survival of the other large firms is possibly
somewhat happenstance, as well as somewhat related to the particular nature of Andersen's consult-
ing practice. Andersen was no doubt the most vulnerable of the firms. Its consulting practice took
shape at an earlier date and prospered at a more rapid rate. Internal battles over profit share and how
best to grow the business arose earlier at Andersen. Compromise efforts were largely unsuccessful,
partly because of the aggressive nature of the consulting leadership and partly because the auditing
and tax leadership was not sufficiently aggressive in demanding retention of long-standing core
values.
Several of the remaining firms have taken steps now to divest themselves of their previously
existing consulting practices, thereby removing some significant pressures that created internal
cultural changes. Even so, these divestitures have been undertaken under duress rather than because
firm leaders acknowledged the necessity of such divestitures to the firm's survival. These firms, even
today, continue to expand the range of services offered within their auditing and tax divisions,
compensating in part for the previous services that have had to be discontinued under provisions of
recent legislation. The passage in 2002 of the Sarbanes-Oxley legislation will help establish bound-
aries on the scope of nonauditing services, and it should improve the qualifications for audit commit-
tee members (among other provisions); however, the underlying causes of the decline in accounting
professionalism remain in place. The leaders of the various firms need to understand that the firm's
internal culture requires a substantial amount of attention if the reputation of the firm is to be
restored. No piece of legislation is likely to solve the behavioral changes that have evolved within the
firms over the past 30 years.
The firms need to consider a number of initiatives. The tone at the top of the firms needs to
change. As a starting point, the major firms might require that their managing partners meet the
standards established by the Sarbanes-Oxley Act for the individual on SEC-registrant audit commit-
tees who is designated as a qualified financial expert. Recent managing partners have too often been
chief cheerleaders, promoting revenue growth, or individuals with more administrative expertise
than accounting and auditing expertise. The policies established at the top of the firms must be
approved by and articulated by individuals who have the professional respect of the managers and
staff. The challenge to restore the primacy of professional behavior in the conduct of services
rendered will not be easily met. Such restoration likely will not be met at all if the chief messenger is
known throughout the firm as being primarily an advocate of revenue growth even when that growth
may be at the expense of the firm's reputation for outstanding professionalism in the delivery of its
services.
The top leaders in the firms also need to consider whether the four largest firms are really
effectively unmanageable. In smaller accounting firms (or when the current four large firms were
smaller), a key partner is able to monitor partner performance and assess the strengths and weak-
nesses of the individual partners. As the firms have grown to their current size, establishing effective
monitoring is a substantial challenge. Maybe some consideration should be given to whether a split-
up of a big firm would enhance the firm's quality control and permit more effective delivery of
quality service. While such a thought will no doubt be draconian to some, one only has to consider
what might be the end result if one of the current four large firms meets the same fate as Andersen.
Firm break-ups might then be at the mercy of legislative or regulatory intervention-an even more
draconian thought. The bottom line, however, is whether the large firms are able to manage their
practices effectively to assure top quality service to their clients and the public.
The firms need to place greater internal emphasis on quality control in audit performance. More
effort should be devoted to assuring that clients meet the intent of the applicable accounting stan-
dards, and less effort should be devoted to assisting clients to structure transactions to avoid the
intent (and sometimes the letter) of the standards. In working with the FASB, the focus of the firms
should be on pressuring the FASB to develop standards that are conceptually sound and that avoid
compromises that are designed to keep one segment of society happy at the expense of sound
financial reporting. Too often, the accounting firms have acted at the direction of their clients in
lobbying the FASB on specific technical issues and have not met the standards of professionalism
that the public rightfully expects. Too many of the FASB standards contain conceptual impurities that
encourage gaming the system, and too many firms are active participants in the gaming activity.
Lobbying the FASB on behalf of particular client interests is not professional on its face, and it casts
as much of a cloud on the firm's independence as does providing a range of consulting services to
audit clients.
As a side note, I have seen recent comments by leaders of several of the Big 4 firms that suggest
the real cause of recent financial statement shortcomings is the failure of existing accounting stan-
dards to reflect the underlying economics of reporting companies. These statements seem to be self-
serving attempts to deflect criticism from accounting firm performance to the adequacy of the
current set of generally accepted accounting principles. To test the sincerity of these comments, I
suggest an analysis of the recent firm submissions to the FASB on proposed standards that have
emphasized economic reality over "backward-looking historical cost." I suspect such analysis would
reveal several firms have missed numerous opportunities to encourage the FASB in its efforts to
adopt standards that reflect better economic reality and, in fact, have often taken strongly contrary
positions, at least in part at the urging of their clients.
While on the subject of the FASB, we need to recognize that the Board fared well in the
Sarbanes-Oxley legislation. Going forward, the Board needs to do a betterjob in educating congress-
men and senators on their proposed standards and why the lobbying efforts of constituents are often
far more self-serving than desirable from the perspective of fair financial reporting. The Board needs
to attack a significant number of its existing standards that are conceptually unsound and that
embody a series of arbitrary boundaries that attempt to prevent users from misapplying the standard.
We should have learned by now that standards containing arbitrary rules that attempt to circumvent
aberrant behavior really act to encourage that very behavior. Firm leaders should recognize that their
audit personnel can deal with aggressive client behavior if the standards are soundly based and
operational. Isn't it more important to provide the firm's staff with the best possible tools to meet
their challenges than to gain some short-term warm feelings by bowing to a client's wishes? The big
firms need to decide that the FASB is their ally, not their opponent, and become more statesmanlike
in pursuing sound accounting standards. This will require leaders who understand the nuances of
technical accounting requirements and are able to grasp that acceptable levels of profitability will
flow from delivering top-quality professional service to clients.
The firms should reexamine their policies on hiring nonaccounting majors and experienced
personnel. The restrictions imposed by the Sarbanes-Oxley Act on the range of consulting services
will reduce the need for employment of such individuals. Even so, the firms need to evaluate the cost
to their culture of introducing individuals who have no understanding of the significance of account-
ing professionalism and the importance of ethical behavior. Firm-wide training in the ethics area
needs to focus on the underlying concepts and the overall philosophy and expectations rather than on
the "thou shalt nots" that are commonly emphasized. Clear avenues must exist for managers and staff
to report perceived shortcomings in professional behavior or inappropriate condescension to client
demands to top management. Staff personnel should gain an appreciation for the importance of
professional behavior throughout the organization and should understand early on that each of them
has an important role to play in helping the firm achieve an appropriate level of such behavior.
Finally, firms need to reconsider their compensation philosophies. While selling new work has
always been an important objective in a public accounting firm, rewards for such endeavors should
be balanced with rewards to those who have been particularly effective in their technical and
professional performance. Firm revenues will grow when potential clients recognize that the funda-
mental basis for evaluating their audit firm lies in the quality of service provided and the care with
which auditors guide client decisions in the direction of superior financial reporting. Auditors need
to get clients to understand that auditors really earn their fees when the auditor acts aggressively to
prevent the clients from falling short of providing top-quality financial statements and disclosures
about their operations and condition.
CONCLUSION
My goal is to prompt a reconsideration of what is necessary to restore the accounting profession
to the level of credibility that it once enjoyed. The leaders of the powerhouse large accounting firms
must acknowledge that some serious assessment of the current state of affairs is necessary. The
accounting profession is an important facet of our society, and its survival should not rely on the
effectiveness of the Sarbanes-Oxley legislation. The leaders of the profession, whoever they may be,
need to gain an understanding of why they have failed to serve the public well in recent years. These
leaders. need to embrace policies now that will enable their professional staffs to once again meet the
public's expectations.