BA 427 – Assurance and Attestation Services

Lecture 9Overview of the Public Accounting Profession

What is a “Profession”?

The Public Accounting Profession

What is a “Profession”? A calling requiring specialized knowledge

and often long and intensive academic preparation (Webster).

Professional: characterized by or conforming to the technical or ethical standards of a profession (Webster).

The Public Accounting Profession

The Independent Audit The independent audit

At the heart of the public accounting profession is the core service offered by the profession: the independent audit.

“The independent audit fills an essential role for the investing public and creditors by enhancing the reliability of corporations’ published financial statements and giving assurance of that reliability to users of those financial statements.” (Advisory Panel on Auditor Independence, 1994)

The Independent Audit The economics of the independent audit

Demand for audits is largely regulatory-driven.

There are significant barriers to entry It is a demand curve that is fairly inelastic

to economic booms and downturns A commodity product? A loss leader?

History of the Big 8 / 6 / 5 / 41979

Arthur Andersen

Arthur Young

Ernst & Whinney

Deloitte, Haskins & Sells

Touche, Ross & Co.

Peat, Marwick, Mitchell

Coopers & Lybrand

Price, Waterhouse

Ernst & Young

Deloitte & Touche1989

1989

KPMG1987 (merged with a non-Big 8)

PwC1998

Failed in 2002

The Large Firms

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

D&T E&Y PwC KPMG McGladrey GrantThornton

BDOSeidman

MossAdams(#12)

U.S. Revenue (millions)

How Large are the Large Firms?

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

D&T Alaska Air AmericanAirlines

AppleComputer

Starbucks Abercrombie &Fitch

Revenues (millions)

The Large Firms

0

5,000

10,000

15,000

20,000

25,000

D&T E&Y PwC KPMG McGladrey GrantThornton

BDOSeidman

MossAdams

Number of U.S. professionals

How Large are the Large Firms?

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

D&T Molson Coors Hershey Starbucks Ford

Employees (US or N.A.)

The Large Firms

0

20

40

60

80

100

120

140

D&T E&Y PwC KPMG McGladrey GrantThornton

BDOSeidman

MossAdams

Number of U.S. offices

The Large Firms

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

D&T E&Y PwC KPMG McGladrey GrantThornton

BDOSeidman

MossAdams

Number of SEC clients

The Large Firms In 2006, excluding the 7 largest firms,

the next 92 firms audited about 1,200 public company clients.

This is about equal to KPMG, the smallest of the Big 4.

In 2000, over 80% of SEC registrants were audited by the 8 largest firms. (So this statistic has not changed much.)

In 2006, the 93rd largest firm audited 27 SEC clients.

Deloitte & Touche

AuditTaxConsultingOther

Ernst & Young

Audit

Tax

Consulting

Other

PricewaterhouseCoopers

Audit

Tax

Consulting

Other

KPMG

Audit

Tax

Consulting

Other

RSM McGladrey (Chicago)

Audit

Tax

Consulting

Other

Grant Thornton (Chicago)

Audit

Tax

Consulting

Other

BDO Seidman (Chicago)

Audit

Tax

Consulting

Other

Moss Adams (Seattle)

Audit

Tax

Consulting

Other

Sample Client Fees Data from the year 2000

Apple Computer Audit $ 2.3 million I.T. $21.5 million Other $ 7.1 million

General Electric Audit $23.9 million I.T. $11.5 million Other $68.2 million

Sample Client Fees Data from the year 2000

Weyerhaeuser Audit $2.6 million I.T. $4.8 million Other $1.5 million

Southwest Airlines Audit $245,000 I.T. $0 Other $349,500

AICPA The American Institute of CPAs

330,000 regular members 133,000 members in public accounting 141,000 members in industry All regular members are certified to practice

16,000 associate, student and international members

Founded in 1887 Current name was adopted in 1957

AICPA

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

AICPA I IA IMA

Membership

AICPA The AICPA’s Mission:

Professional standard setting Advocacy Certification and licensing Continuing education programs Promotion of the profession to the public Promotion of the profession to prospective

accounting students

AICPA AICPA Senior Committees:

Accounting and Review Services Committee Accounting Standards Executive Committee  AICPA Peer Review Board Auditing Standards Board Board of Examiners (the CPA Exam) Board of Public Company Auditors’ Forum  Consulting Services Executive Committee  Information Technology Executive Committee  Private Company Practice Section Exec. Committee Professional Ethics Executive Committee Four others  

The U.S. Chamber of Commerce Auditing: A Profession at Risk (2006)

The auditing profession faces a number of significant legal challenges. It is subject to new regulation under the auspices of the PCAOB. More important, the profession finds itself the target of a difficult litigation and regulatory enforcement environment, where business losses by a client can result in lawsuits, and a single indictment—even without a conviction—can result in the destruction of thousands of jobs.

The U.S. Chamber of Commerce Auditing: A Profession at Risk (2006)

Because of SOX and other requirements, auditing expenses have increased tremendously. At the same time, many clients believe that they are receiving less overall advice and support from their auditors. Audit firms feel that they are caught in a no-win situation between the demands of regulators, law enforcement, the plaintiffs’ bar, and their clients.

The U.S. Chamber of Commerce Auditing: A Profession at Risk (2006)

The process of developing accounting principles remains in flux, even as business transactions become ever more complex.

There remain significant misunderstandings about the meaning and nature of accrual accounting systems and the level of precision inherent in such systems.

The U.S. Chamber of Commerce Auditing: A Profession at Risk (2006)

The profession—through voluntary mergers as well as through the elimination of Andersen—is severely contracted, with only four major firms serving a large majority of the listed and actively traded public companies in the U.S. While four appears to be a sustainable number, any further contraction in this industry would present a major challenge to the viability of the profession.

The U.S. Chamber of Commerce Auditing: A Profession at Risk (2006)

William McDonough, former chair of the PCAOB, said “None of us has a clue what to do if one of the Big Four failed.”

The U.S. Chamber of Commerce Auditing: A Profession at Risk (2006)

Action Plan Help the profession become insurable Clarify PCAOB standards Support expansion of and competition

among the Big Four firms

The U.S. Chamber of Commerce Auditing: A Profession at Risk (2006)

Help the profession become insurable Better define an auditor’s procedures for

fraud detection, and the limits of an auditor’s responsibility.

Create an Alternative Dispute Resolution (ADR) system for disputes about audits. Permit auditors and clients to agree to ADR. (An accounting court)

Regulate threats of indictment against firms. (To prevent another Andersen scenario.)

The U.S. Chamber of Commerce Auditing: A Profession at Risk (2006)

Clarify PCAOB standards Auditing Standard #2 … is a large,

expansive, principles-based document. While it provides a great deal of room for auditors to exercise judgment … it doesn’t provide much guidance as to when “enough is enough” with respect to the auditing of internal controls.

The U.S. Chamber of Commerce Auditing: A Profession at Risk (2006)

Support expansion of and competition among the Big Four firms … we need to remove nonmarket

barriers impeding competition with the Big Four. Unfortunately, there are no easy means to that end, as there are tremendously high barriers for entry into this group.

The U.S. Chamber of Commerce Auditing: A Profession at Risk (2006)

Support expansion of and competition among the Big Four firms Although the task of expanding the Big

Four is difficult, it does not mean that it is impossible or unimportant. We call upon the SEC and the PCAOB, as well as the NYSE, NASDAQ, and FASB, to make long-term expansion of the Big Four a high policy priority.

The U.S. Chamber of Commerce Auditing: A Profession at Risk (2006)

The following changes might increase competition for the “Big 4”: Policies that help the profession become

insurable. Simplified GAAP (so that it is less

expensive to stay current) Public companies should consider high-

quality firms outside the Big Four, at least for nonaudit services.