Celebrating 40 Years in the CPA Profession

It’s hard to decide whether to use a question mark or an exclamation point for the title of this article.?Both are appropriate.?It could be a question because the number seems too high, yet it could be with an exclamation point for how fantastic each of the years have been.?Either way, this next year will be my 40th in the CPA profession.??

When reflecting on the CPA profession then and now, the changes are nothing short of amazing.?To take you back in time, when I started in the profession, my fashion decisions were made for me, the sound of calculators filled the staff work room, work papers meant real paper, and taking the “exam”, which was only offered twice a year, lasted three days with no calculators and freshly sharpened pencils to start each day.??

We obviously didn’t have internet or emails so “sharing” a document meant literally handing it to someone! ??Today, that would seem like a crisis.?

But which changes over the last 40 years have been the most significant??And is the professional better today for the changes???Below are my responses to these questions, and each makes for an interesting discussion.

Fewer Firms Due to Mergers and Failures

In the early 1980s, the “Big 8” firms dominated the profession, especially for the audits of public registrants.?There were also many recognized national firms, respected regional firms and strong local firms that served middle market and closely held corporations.?

Over the years, mergers and firm failures shrunk the pool of firms, and changed the industry landscape materially.?Today we have the “Big Four”, each a muti-billion-dollar global enterprise, and a few next tier firms with global affiliations.?Regional firms, while still around, are lesser in number and frequently the subject of merger announcements. ?Local practitioners still exist but more for niche practice specialties than aspirations of growth that existed during my early years.?

Is the industry better off today with fewer firms??This question surely causes debates.?In my opinion, the market would benefit from more competition and alternatives, so it is not better off today.?Unfortunately, brand acceptance in the capital markets is a barrier to entry for new and or emerging firms, so we are not likely to see a new firm emerge and gain market acceptance.???

General Partnerships Became Limited Liability Partnerships

When I entered the accounting profession, firms operated as general partnerships, meaning partners could lose their capital and be responsible for the obligations of the entity.?Considering the risks, it’s amazing that people signed up to be partners.??Although once signed on, a partner was incentivized to be risk averse on all firm matters and decisions.

During the late 1980’s, professional service firms faced increasing liabilities for malpractice related to client failures.??Plaintiffs viewed the firms as deep pockets for the recovery of losses, and partners in both law and accounting firms bore personal liability.?As a result, states began to pass laws governing the formation of limited liability partnerships for professional service firms in the early 1990s and “LLP” status became part of the Uniform Partnership Act in 1996.?As a partner in an LLP, one would be liable only for their capital account and wouldn’t bear personal responsibility unless involved personally in alleged malpractice.

The shift from general partnerships to limited liability partnerships had an enormous impact on the accounting profession.??In my opinion, the change created an environment for delegating firm decisions to leadership, and firm expansion decisions with a materially different risk mindset.?Before the change, one had a reason to really care about who your partners were in far-away locations and how they conducted firm business.??After the change, partners were mostly concerned with their individual actions, and let firm management deal with the rest.?

Is the industry better off with the LLP status???The answer is a strong yes.?Having seen professional service firms file bankruptcy and the consequences to the former partners financially, it’s doubtful whether people would accept the personal risks of being a general partner in a large multi-office firm.?Do I think more of the “old school” mindset that general partners displayed would be beneficial to the industry??Without hesitation, that answer is also a strong yes.

Rapid Rise of Consulting Services

The growth of consulting services during the past 40 years has been so significant, it’s hard to call any of the major firms “audit firms” anymore.?The brand names arose from being audit firms, but today audit is far less than half of the biggest firms’ revenues.

In hindsight, the growth of consulting services seemed inevitable.?Audit firms had strong relationships with businesses, and the businesses had needs requiring assistance.?Who better to help than a trusted organization with well trained and experienced professionals??Turning to the “audit firms” for consulting was very natural.?For the firms, it was also very profitable.?

From minimal services offerings in the early 1980’s, the industry began to offer a long list of special services.?Firms began to track revenue by service at clients.??This mindset became problematic during the 1990s when the firms also looked at audit partners as “sales” people for the firm’s “full services”.?

Ultimately, the perception of auditor independence line was crossed, and the Sarbanes- Oxley Act of 2002 restricted firms from providing consulting services to their audit clients.??As a result, firms focused on selling to each other’s audit clients, and consulting services continued to grow.

Is the accounting industry better off today with its focus on consulting services??Absolutely yes, as it presents incredible career opportunities for people which also aids in recruiting the best people into the profession.??As to audit quality and independence, the restrictions put in place after 2002 eliminated the concerns arising from “multi- service” audit clients.

Interestingly, we are now again witnessing the possible sales of consulting segments from audit firms.?Firms had spun off consulting segments in the past, notably in the early 2000s, only to build them back up again.?Will we return to the predominantly audit and tax firms of the earlier era??Possibly.?Stay Tuned.

Accounting Standards Codification

When I started in the profession, accounting guidance came from numerous sources, because there were various rule making authorities. ??To research an issue, one followed a hierarchy of sources starting with statements and interpretations by the FASB, rules and interpretive releases by the SEC (for SEC registrants), and accounting research bulletins and opinions issued by the AICPA.?

Next one would check FASB Technical Bulletins and, if cleared by the FASB, the AICPA Industry Audit and Accounting Guides and Statements of Position.?Plus, we had AICPA Accounting Standards Executive Committee Practice Bulletins, consensus positions of the FASB Emerging Issues Task Force (EITF), and topics discussed in Appendix D of EITF Abstracts.?Not done yet, there were FASB implementation guides, AICPA Accounting Interpretations, and AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB. ?Finally, one could consider accounting practices that were widely recognized and commonly used, either in general or within a given industry.

Then on July 1, 2009, life changed in the accounting industry when the FASB presented the Accounting Standards Codification which became the single official source of authoritative, nongovernmental U.S. generally accepted accounting principles (GAAP).?The codification, organized by financial statement line item and other categories, is structured to make research simple and coherent.

Other than the technological advancements, which also made this change possible, the codification may be the most remarkable change in the profession during my 40 years.??Please understand that in the “before” codification world, the guidance came from numerous books depending on the source, while the codification is an on-line tool at the FASB website and with an easy search feature.??Is the accounting industry better off with the codification??No room for debate on this one, yes.

Audit Industry Self-Control Changed to Independent External Oversight

For many decades, the audit profession performed an intramural firm quality inspection process.?Firms would be assigned to inspect each other’s quality compliance programs, and then rotate who inspected who over time.?One could view the process cynically as lacking real substantive testing but in my opinion that would be unfair based on the professionals that I knew who did some of the inspections.??In addition, auditors controlled the Auditing Standards Board which wrote the auditing standards.?

This all changed following the audit failures and accounting irregularities that occurred in 2001 and 2002, with the passage of Sarbanes Oxley Act of 2002 which created the Public Company Accounting Oversight Board, commonly referred to as the PCAOB.

The PCAOB was a radical change for the audit profession that served public registrants. The PCAOB, an independent quasi-governmental body, would now have control over auditing standards, firm quality inspections and enforcement actions against auditors of public registrants.?To be qualified to audit a public registrant, a firm must register with the PCAOB.?

Is the industry better off with the PCAOB???Yes, and for one primary reason, the public perception of independent oversight for an industry that operates as an oligopoly.

Investors in Accounting Firms, the Emerging Trend to Watch

Over the last several years, private equity firms have realized that CPA firms have recurring revenues, high growth consulting services and that with “alternative practice structures”, investments can be made while still maintaining adherence to the AICPA’s code of conduct rules regarding firm ownership.??For firms, this is a means to secure growth capital, and create liquidity for partners who can benefit from future monetization events when the private equity investors sell their interests. ?

Alternative practice structures is a fancy way to say split the firm into legal entities, so that the attest function complies in form with the professional rules for ownership by CPAs.?Contractual arrangements connect the “separate” new legal entities.?For example, attest client’s will be served by entity A, possibly using the workforce from entity B for a fee, and consulting services will be performed from entity C. Private equity or other investors can own interests in B and C, without being subject to the profession’s ownership restrictions.

When structuring the entities, partners can own shares in B and C, and if a sale occurs, will benefit from the monetization.??Based on the current trend, the word “alternative” may become obsolete, and this may be the structure for the firm of the future.

Is the profession better off having private equity investors??There are certainly benefits as well as concerns to consider.?A significant concern is whether investors will have short term time horizons and profit incentives that will change the culture of the firms.?If the investors understand the need to invest in people, then this could be a significant positive for the future growth of firms, and the incentive systems for professionals in the firms.

The Best Parts Remain Exactly the Same

The accounting profession provides rewarding and fulfilling career opportunities.?That hasn’t changed at all.?The ability to team and interact with incredibly bright people is the same.?The ability to make a difference serving and helping clients remains as motivating today as it did 40 years ago.??Every project creates new opportunities to learn.?And even with flexible work environments, the commitment to sharing, training, mentoring and personal development, all remain exactly the same.

As I prepare for my 40th year and hopefully many more years to come, it’s a privilege to be part of such a tremendous profession and am thankful every day for my career as a CPA.

?In closing, thank you to my professors at the University of Massachusetts at Amherst for inspiring me to be a CPA including Professors Simpson, Asebrook, Mannino, O’Connell, Krystofik, Lentilhorn, and others, and to my mentors in the profession for their guidance and leadership.??