Accounting & Tax

Troubled Times at the AICPA

Questionable moves, plus the rise of the PCAOB, have some wondering if the institute needs a new direction -- and a new leader.
David KatzJuly 1, 2003

Back in 1995 — back when Barry Melancon took over as the president and CEO of the American Institute of Certified Public Accountants — even current critics had kind words for the chief defender of the audit industry. Mitchell Freedman, one of the 22 founders of a new group called CPAs Reforming Our Profession, recalls being “avidly in support” of the rookie AICPA chief. “He was a fresh face with new ideas,” Freedman remembers.

Melancon got off to a promising start. In the early days of his tenure at the 116-year old institute, the AICPA head eagerly pushed members to expand their professional horizons beyond mere auditing and tax consulting. As Allan Koltin, president of Practice Development Institute, recounts: “He advanced concepts with accountants about being more than bean counters.”

It seemed like a smart move. At the time, auditing was fast becoming a loss leader for many accounting firms, and the computer had turned tax advice into a commodity business. Melancon, say industry-watchers, wanted bookkeepers to provide a much broader array of services. The goal? To turn accountants into strategic business advisers, some say.

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Under Melancon’s aegis, AICPA leaders pushed for a new, unregulated “XYZ” credential offered globally and focused on strategic issues. Along with such ambitions came an expanded notion of what the institute, which boasts 333,000 members, should actually be. “Until [Melancon] came to the AICPA they were a rudderless ship, with no vision, no direction,” remembers Koltin. “Members viewed [the AICPA] as a way to get continuing education credit and life insurance.”

Then came the late 1990s economic boom, which seemed to fuel even greater ambitions at the powerful industry group. In the spirit of those times, Melancon and other AICPA leaders hatched the idea of spinning off a for-profit Web portal, eventually known as CPA2Biz.

Using the portal, the AICPA could peddle software and training tools, as well as products offered by other vendors. (Editor’s note: CFO.com has an ongoing business relationship with CPA2Biz.) Launched in 2001, CPA2Biz’s gold-plated list of investors included Microsoft and Thomson, which ponied up $50 million between them.

These days, CPA2Biz’s prospects — and those of the AICPA — are decidedly less heady. All of a sudden, the vision thing looks shortsighted. The XYZ credential, which was eventually voted down by 67 percent of the AICPA membership, remains a continuing source of bad blood among those who saw it as a threat to the more rigorous CPA brand. The once-lauded idea of expanding the service offerings of auditors now seems, to some, more like a threat to the independence of those auditors.

And then there’s CPA2Biz, which has proven to be something of a millstone for the AICPA. The for-profit venture of the not-for-profit association has lost tons of money — $80 million in net losses as of last July — and much prestige. The AICPA has paid an especially dear price in bad press for Melancon’s purchase of CPA2Biz stock at an insider’s price.

Indeed, the AICPA now appears to be a professional organization in search of an identity. The recent string of high-profile corporate accounting scandals — Enron, WorldCom, Rite Aid, and the like — has not exactly burnished the image of the accounting industry. Neither has the demise of bellwether firm Arthur Andersen, nor the scores of lawsuits filed by corporate clients and shareholders against the remaining Big Four accounting firms.

Moreover, a new — and well-connected — rival has appeared on the scene. Last year, as per the mandate of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission created the Public Company Accounting Oversight Board. The mandate of the PCAOB: to oversee the audit industry.

In April, the board put itself in a position to do that in the most direct way. In a surprise move, the fledgling oversight body announced that it would not “designate or recognize any professional group of accountants to propose standards.” While agreeing to use the AICPA’s standards on an interim basis, the PCAOB basically stripped the institute of its long-held role as the arbiter of standards for the audit industry.

Why? Hard to say for sure. But clearly, in a post-Enron, post-WorldCom, post-Andersen world, the notion that the accounting industry can effectively regulate itself has fallen into disfavor — particularly on Capitol Hill. “[The AICPA] was the voice of the profession and the profession was viewed as a whole [as] not being able to regulate itself,” says Charles Niemeier, a member of the PCAOB. “And that’s why PCAOB was created.”

As the voice of the voice of the profession, Melancon himself has become a prime target of critics of the accounting profession — and of a fair number of opponents within the AICPA itself. Freedman is hardly alone when he says, “I think it’s time for Barry to step down.”

Growing the Business

The business and ethical questions that have beset the institute’s involvement with CPA2Biz have been the most visible of AICPA’s woes. Yet the AICPA governing council’s decision in 2000 to allow Melancon to buy CPA2Biz stock at a low price was very much in keeping with the executive-retention practices of those times. (In the fiscal year ending July 2002, the AICPA paid its CEO $747,000 in salary and contributed about $214,000 to his benefit plan — a 22 percent raise that came on top of 32 percent hike the year before.)

The stock purchase turned out to be a lucrative one for Melancon. His initial investment of $100,000 of his own money grew to about $5 million as of March 2002, according to a report in The New York Times. Still, sources defend Melancon’s actions at CPA2Biz, asserting that it wasn’t his idea to purchase stock in the for-profit business. They claim he invested his own money in the portal because other investors wanted to know that he was personally committed to making the venture work.

“They asked him to invest so that the deal would go forward, and he did,” explains Linda Dunbar, director of public relations for the AICPA. (Editor’s note: In preparing this story, CFO.com requested interviews with Melancon, AICPA chairman William Ezzell, or any other AICPA member who could talk about these issues. The AICPA provided access to Ezzell, and Dunbar supplied answers to written questions.)

Others saw Melancon’s involvement at CPA2Biz in a different light. The stock deal “created the perception that AICPA management had engaged in self-enrichment at the expense of the organization’s membership,” according to a recent paper on CPA2Biz written by William E. Shafer and Dwight Owsen and published in the Journal of Business Ethics.

Within the CPA community itself, that perception has spawned questions about Melancon’s ability to continue to lead the institute. “That [Melancon’s stock purchase in CPA2Biz] was something that shouldn’t have been done,” said Bruce Rosen, a lead audit partner of Eisner LLP and a member of the AICPA’s SEC practice section executive committee. “I don’t know if that issue is grounds for [Melancon] stepping down, but it’s not something I’d want my leader to do.”

Unseemly

Apparently, others agree. Citing broader concerns about having a for-profit venture under the AICPA umbrella, Jeffrey Hoops, president of the 30,000-member New York State Society of Certified Public Accountants, also says his group doubted the propriety of Melancon’s deal.

While Melancon’s defenders point out that the stock purchase was perfectly legal, detractors say the deal just didn’t look good — particularly at a time when corporate executives were getting hammered for similar arrangements. As accountant Freedman argues, “Your independence is governed not only by fact, but by appearance.”

Eventually, the AICPA chief responded to the criticism. According to Dunbar, Melancon’s investment “turned out to be a distraction and took focus away from the merits of [CPA2Biz] and its benefits to members.” Thus, last July, Melancon and other AICPA executives donated their shares to the organization’s charitable and educational foundation. When asked if the AICPA executives received tax deductions for their charitable contributions, Dunbar termed the issue “a personal matter.”

But the dumping of Melancon’s holdings in CPA2Biz has not put an end to the controversy surrounding the for-profit startup. Among other CPA2Biz-related challenges, the AICPA has to defend itself against a lawsuit filed in 2000 by BDO Seidman, a non-Big Four accountancy. Management at the Chicago-based firm claim that AICPA and some of the state accounting societies have, through CPA2Biz, leveraged “monopoly power” to unfairly compete with BDO Seidman’s own services business.

One alleged unfairness: By supplying a link to the CPA2Biz Web site on the AICPA site, the institute is using its non-profit role as a provider of auditing standards to bring in business to its for-profit spinoff. The suit, filed in U.S. District Court for the Southern District of New York, is “still alive,” according to Scott Univer, BDO Seidman’s general counsel.

The AICPA asserts that there is no basis for the suit. In fact, Dunbar insists that CPA2Biz does not unfairly compete against the institute’s own members, but rather “serves our members’ interests.”

Nevertheless, the institute has cut back on it holdings in the venture, reducing its original 90 percent stake to a current 54 percent, on a diluted basis. (Last year, the company underwent a 400-1 stock split.) For this year, AICPA expects the spin-off to get close to breaking even. Further, current AICPA chairman William Ezzell claims the big losses CPA2Biz endured were largely expected.

But Ezzell does concede that the prospects for CPA2Biz remain uncertain. “It’s not out of the woods, we’re not saying it’s a home run yet,” he grants. “The jury’s still out.”

Standards at Half-Staff

The jury is also out on whether the AICPA will have much say about the setting of audit industry standards. In April, the PCAOB issued a stunning statement, announcing that it would not delegate audit standards-setting to AICPA. Instead, the SEC-governed board would take on the job itself.

In a later move, the accounting oversight board adopted the AICPA’s generally accepted auditing standards. But it did so on an interim basis. During the next few months, the PCAOB will review the standards and make decisions about whether to keep, change, or jettison them.

That represents a dramatic shift in the setting of standards for the audit industry. Instead of holding sway over the process, the AICPA will have to take a place in line with others applying for a role in advising the PCAOB.

Admittedly, the institute starts out with a certain advantage over other would-be advisers to the new board. “It’s virtually impossible to have a standards-setting process completely divorced [from the] profession,” says the PCAOB’s Niemeier. “We do see the AICPA certainly as being a voice for the profession.”

A voice, however, not the voice. PCAOB officials insist they will choose advisory council members based on the contributions applicants can make to standards setting. No one group will have pride of place. Thus, each of the Big Four will likely make its own nomination, expects Douglas Carmichael, PCAOB’s chief accountant. “They don’t need to come through the AICPA.”

What did the AICPA do to bring such a loss of power upon itself? Nothing, Niemeier insists, adding that he has no beef with AICPA. He says the institute was simply swept up in the wave of accounting scandals that led to the passage of Sarbanes-Oxley.

Still, the longstanding influence of top-tier audit firms on standards setting “casts some doubt on whether standards [have been] truly set in the public interest,” asserts Carmichael, a former AICPA executives who’s gained a reputation as a tough critic of the industry. Although the standards-setting process wasn’t necessarily designed to favor larger accountancies, “those people who have the resources and the time will have the influence,” he claims. “The large firms had the financial resources, [and] that gave them more influence.”

A related criticism, voiced mostly by CPAs working for small firms serving nonpublic businesses, is that AICPA’s policies and programs are overly influenced by the marquee firms. Ezzell doesn’t see it that way, however. “I don’t think we’re too aligned with the Big Four,” says Ezzell, a partner at Deloitte & Touche, noting that many institute activities are geared toward smaller bookkeeping firms.

On the other hand, since the 17,000 or so publicly traded companies conduct about as much business as the 350,000 or so private ones, AICPA doesn’t want to ignore CPAs who audit public companies, he says.

Going Private

Nevertheless, losing the audit standards-setting role for the public sector will likely trigger a shift in the AICPA’s heading. The new direction, say some, will involve providing more support and standards for audits of private companies. Institute leaders are already exploring a plan to revamp the AICPA’s Auditing Standards Board so that the standards it issues reflect “greater knowledge and background in the private-company arena,” says Ezzell.

Part of the AICPA’s push will apparently involve fighting attempts to add Sarbanes-Oxley provisions to state laws. In his inaugural address last year, AICPA chairman Ezzell pledged to “work with great vigor to prevent the Act’s provisions from inappropriately cascading to the state level and applying to all areas and practitioners that serve nonpublic companies.”

One example: Sarbox’s requirement that corporations and their auditors attest to the adequacy of internal controls. The standard is “a great thing for a public company,” Ezzell notes, “but for a small, closely held company with $5 million in sales, that might be beyond [what’s reasonable]. At that level, PCAOB is not beneficial to the marketplace.”

How successful the AICPA will be in holding the line on private company audit standards, however, might depend on how well the fledgling public company oversight board carries out its mission. “If PCAOB rules make sense and are effective, probably over time everybody will gravitate to their standards,” says Eisner LLP’s Rosen. “But if they’re difficult and hard to work with, you will see two sets of standards.”

In the meantime, the AICPA will likely seek out a new identity — and renewed clout. It won’t be easy. Observes consultant Koltin: “They’ve hit the bottom.”

For his part, Carmichael thinks the AICPA could be effective in speaking out on national tax policy. “It’s really up to them to define what their role should be going forward,” he says. “How they do that will mean a lot about what their future influence is.”

It remains to be seen if addressing tax issues will be enough for a professional association that once set the standards for the entire audit industry. “They have been influential within their membership,” says Carmichael. “The real issue is whether they can be a voice outside the membership again.”