Profession - 1

Is Accounting a Profession?

What difference does it make?

Profession - 2

Examples of “Professions”

Prepare a list of fields (other than

accounting) which you consider “professions”

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Definitions of a “Profession”

Profess– To declare or admit openly– To declare in words or APPEARANCE

Profession– An act of openly declaring or publicly

claiming a belief, faith, or opinion (RELIGIOUS VOWS)

Profession - 4

Characteristics of a “Profession”

What essential features identify a field as a “profession?”

Profession - 5

What is a “Profession”?

Vocation requiring advanced training and

generally recognized by universities and colleges as requiring special training of an advanced character leading to degrees distinct from the usual degrees in arts and sciences

requiring principally mental rather than manual or artistic labor and skill for its successful prosecution by reference to a common body of knowledge

recognizing the obligation of public service and of the public interest

having a code of ethics generally accepted as binding upon its members

Kohler’s Dictionary for Accountants (6th ed. ), Prentice-Hall, 1983.

Profession - 6

CHARACTERISTICS OF APROFESSION

ESSENTIAL SOCIAL FUNCTION

SPECIALIZED BODY OF KNOWLEDGE

REQUIREMENTS FOR ADMISSION

SELF-REGULATED

ADAPTABILITY

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ESSENTIAL SOCIAL FUNCTION

Recognition by society– Presence of problems – Grant of monopoly– Image or prestige

Recognition by employers

Recognition by members– Individuality– Acceptance of responsibilities

Profession - 8

SPECIALIZED BODY OF KNOWLEDGE

Formal education– Long and rigorous preparation

Conceptual rather than practical– Mental more than physical

Unique language

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REQUIREMENTS FOR ADMISSION

Demonstration of technical competence– Education

Hurdle for monopoly rights Usually requires examination and

experience Licensing often required

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SELF-REGULATED

Code of Ethics– Character– Ability to make difficult decisions

Concern for “interests of society”– Willingness to accept responsibility

Procedures for discipline

Ethics & Accounting There is a ‘structural problem’ in modern auditing, in that

auditors are not paid by those whose interests they are supposed to represent

Accountancy is a profession that arose so recently (approximately years ago) that it lacks the history, tradition, and self-understanding which corresponding to a traditional profession

Accountants must take care to state the truth in a way that is adequate to particular circumstances – and thus they need an inner orientation to the truth

Accountants must serve as ‘watchdogs’ for the marketplace, and thus they must be especially able to resist greed and greediness

CHEFFERS – p. 23

Profession - 11

Profession - 12

ADAPTABILITY

Continuing professional education

Awareness of changing social conditions

Significance of broad “liberal education”– Breadth

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ADAPTABILITY

Profession - 14

U.S. Accounting ProfessionPrior to 1930

American Assoc. of Public Accountants (1887) – becomes AICPA

No regular audits

1913 – 16th Amendment (Income tax)– Demand for complete accounting records– Acceptance of depreciation

Early consulting = management accounting and information systems

Profession - 15

Great depression

Formation of the SEC– Regular audits– Standardized audit report

Committee on Accounting Procedure (AICPA)– Establishes accounting standards– Cooperation with the SEC

U.S. Accounting Profession1930’s

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U.S. Accounting Profession1940 to 1970

Establishment of GAAS (1947)

Uniform CPA Exam

CPAs become public figures

Development of computer information and MAS

Formation of APB (1959)– Standard setting body– Addition of permanent research staff– Dominated by CPAs

Influence of partners of major CPA firms– Speak out on accounting standards– Possess “tenure” and support from firms

Profession - 17U.S. Accounting Profession

1940 to 1970Continued

SEC overrules APB on Investment credit (1963)

Accounting scandals and lawsuits– Webtec, Nat’l Student Marketing, etc.– Firms begin to adopt “defensive posture”

Continued criticism of APB– “Brush-fire” approach– Highly technical opinions– Debate over pooling vs. purchase

• APB 16 & 17

Profession - 18

U.S. Accounting Profession1970 to 1980

Further accounting scandals (Stirling Homex, Equity Funding, etc.)

– Moss and Metcalf Congressional Committees– Issues of auditor responsibilities– Firms begin to help clients prepare responses to

FASB proposals

Formation of Wheat Committee

Establishment of FASB (1973)– Independent body to establish accounting standards

• Full-time, highly compensated, no CPA requirement– FAF retains influence (later reduced)– Formal recognition by SEC

SEC proactive on financial reporting issues– Chief Accountant – “Sandy Burton”– Agency assumes lead on issues of accounting

measurement and disclosures (“inflation reporting”)

Profession - 19U.S. Accounting Profession

1970 to 1980

AICPA reforms (1977-1978)– SEC Practice Section

Peer reviews

– Private Companies Practice Section– Public Oversight Board

Dept. of Justice and FTC regulations (1979)– AICPA must eliminate rules against direct,

uninvited solicitation, and advertising– Allow receipt of commissions from nonaudit

clients

Beginnings of criticism of MAS work for audit clients

Profession - 20

U.S. Accounting Profession1980 to Today

“Professional” accounting firms become business firms– Emphasis on growth and broad “scope of

services”– Acquisition and retention of audit clients is key

(price competition is keen)• Withdrawal of accounting firms from dialogue on

accounting principles• Perception that audit partners are less willing to

“challenge” a client’s aggressive accounting practices

– “Low-performing” partners are removed– No longer identify themselves as public

accountants or auditors– Revenues from non-audit services grow to over

50% by 1999

Profession - 21

U.S. Accounting Profession1980 to Today

Internationalization and merger of major accounting firms

Significant litigation against accounting firms

Crisis in S&L and banking industry– Congressional committee hearings – John D. Dingell

Other business/auditing failures (ESM Securities, Wedtech, ZZZZ Best)

Profession - 22

U.S. Accounting Profession1980 to 2000

Assaults on independence of FASB

Aggressive accounting practices – Pressure for continued rapid growth in

earnings– Significance of “hitting” analysts

forecasts– Dot Com market of 1990’s– “Opinion shopping” by CEOs & CFO’s

Significant concerns about auditors’ independence because of “scope of services”

Profession - 23

U.S. Accounting Profession2000 to Today

Major stock market volatility

Significant number of business frauds and related accounting issues– Enron, WorldCom, Global Crossing, etc.– Elimination of Arthur Andersen– MaDoff

Sarbanes-Oxley

IFRS

Profession - 24

Professional Reflections

“Reflections on a Half-Century asAn Accounting Professional”

Frank C. Minter, CPAVP of Trustees

Financial Accounting Foundation

Strategic FinanceDecember 2007

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What Went Wrong?Frank C. Minter

1980’s– Accounting frauds (ZZZZ Best, Crazy

Eddie, etc.)– Treadway Commission

• COSO Standards on internal control• Emphasis on “tone at the top”

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What Went Wrong?Frank C. Minter

1990’s– SEC Chairman, Arthur Levitt criticized

accounting profession on various accounting practices

– “Cookie jar reserves, Big Bath Accounting, Improper revenue recognition”

Profession - 27

What Went Wrong?Frank C. Minter

2000 – 2002– Major corporate scandels– Enron, World Com, Global Crossing,

etc.– Fall of Arthur Andersen– Sarbanes-Oxley Act

• Federal regulation of the profession

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Cause of Latest Failures Frank C. Minter

Vast increase in number of stock options– Esp. due to lack of “expensing” until recently

Public accounting firms emphasized consulting & total revenue growth – auditing became a “commodity”

SEC made lots of noise but took little action

Profession - 29

Cause of Latest Failures Frank C. Minter

“Corporate greed” led to emphasis on growth through inflated stock values and acquisitions accounted for as “pooling of interests”

Investment community’s short-term focus on the next quarter’s earnings– Earning expectations became KING

Profession - 30

Is Accounting a Profession?

Yes or No Is your answer different for

specialties within accounting– Financial reporting

• Profit oriented entities• Not-for-Profit entities

– Management accounting– Auditing– Tax services– Consulting