BA 427 – Assurance and Attestation Services Lecture 9 Overview of the Public Accounting...
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ANDREW GREGG ANDREW GREGG CURTIN CURTIN “ “ Among the loyal Among the loyal governors of the governors of the Northern States during Northern States during the rebellion, none were the rebellion, none were placed in circumstances placed in circumstances requiring greater requiring greater watchfulness, or more watchfulness, or more prompt and decisive prompt and decisive action, than the action, than the patriotic Governor of patriotic Governor of Pennsylvania, and none Pennsylvania, and none fulfilled their high fulfilled their high trust with greater trust with greater fidelity and loyalty.” fidelity and loyalty.”
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Transcript of BA 427 – Assurance and Attestation Services Lecture 9 Overview of the Public Accounting...
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.
