“Progress is impossible without change, and those who cannot change their minds cannot change anything.”
— George Bernard Shaw
Is the CPA profession declining in relevance as business and industry change dramatically? If so, what needs to be done to keep the profession relevant long into the future? Accounting and financial reporting as practiced today were developed during the industrial age, and changed somewhat to recognize technology that allowed the determination of more precise values, and to account for new transactions nurtured by the increasing use of continually improving technology. Historical cost is fading into the past, and current value accounting in current financial reporting is closer to true value than ever before. But are these changes to financial reporting enough, or even relevant in today’s business world? Intangible assets now account for 84% of the total value of S&P 500 companies, according to intellectual property merchant bank Ocean Tomo (2015 Intangible Asset Market Value Study). Sustainability reporting and other required or voluntarily reported data about a business enterprise’s behavior influence the public’s view of the enterprise and its viability as an investment or business counterparty in a rapidly changing environment. Add to this mix the advent of cryptocurrencies and blockchain as a medium of exchange and accounting methodology. How will all of this change the profession? What does the profession need to do to meet these challenges?
The profession must first recognize that changes will be required to meet the needs of parties-in-interest for more analytical information about an entity in a world with rapidly accelerating data accumulation and accessibility. Studies have found that many Americans own stock in U.S. corporations through mutual funds and do not vote for those responsible for an entity’s governance, the compensation of its executives, or its independent auditors. This reflects on the expected sophistication of the decision maker—financial analysts at the mutual funds versus individual investors—and the need for more credible information outside of the financial statements. Who is better qualified to add credibility to the evolving nonfinancial data contained in other representations by a entity outside of its financial reporting than the “trusted professional?” Who better to pick the important data out of a mass whose sheer volume can be a distraction and obfuscate an evaluation of the enterprise’s performance?
The training, experience, data parsing ability, and regulatory and ethical structure of the profession gives CPAs a unique opportunity to take the lead in adding high, but reasonable, credibility to this new reporting dynamic. The application of the CPA skill set goes far beyond the recording and accumulation of numeric amounts; it encompasses inquisitiveness, business systems knowledge, evaluation of judgments, knowledge of performance metrics, ability to focus and concentrate disclosures, and verification skills and techniques.
The Changing Nature of Current Financial and Enterprise Reporting
Baruch Lev and Feng Gu, in their book, The End of Accounting and the Path Forward for Investors and Managers (Wiley, 2016) state that:
Based on a comprehensive, large-sample empirical analysis spanning the past half century, we document a fast and continuous deterioration in the usefulness and relevance of financial information to investor’s decisions. Moreover, the pace of this usefulness deterioration has accelerated in the past two decades.
The changing nature of the economic environment also demonstrates the changing nature of business and the need for more creditable public disclosure by commercial enterprises. For example, various studies, depending on their motivation and criteria, have found that approximately 50 of the top world economies are multinational corporations, not sovereign nations.
While FASB, the PCAOB, the AICPA, and other professional standards and ethics setters have done a commendable job updating the rules and standards that govern the profession, the business environment related to accounting and reporting relevant data is changing at a more rapid rate. Financial analysts and those interested in the operating statistics (past and projected) and the environmental, political, and social conduct of an entity can and do scour the Internet and other data sources for this information. Historical financial statements reflect on past operating performance and make up only a small part of the information available about an entity’s past, present, and anticipated future prospects.
Accounting versus Enterprise Data Compilation and Reporting
Entries in an entity’s financial records reflect the culmination and valuation of business transactions. The amounts recorded for many of these entries are the result of valuations done by others, rather than the entity itself. For example, oil producers may use outside professionals to determine the amount of oil an entity owns in underground reserves that can be economically extracted, refined, and sold. There are, of course, standards that relate to the existence, ownership, rights, obligations, and disclosure requirements that underlie the recording of a transaction. Estimates and reasonable judgments are also part of many entries in the entity’s records. CPAs in private practice are proficient at analyzing and reflecting business-related activities in the records of an entity and reporting them to interested parties.
While the measurement and disclosure milieu may be different—i.e., financial data displayed in financial statements expressed primarily in numerical form with note disclosures related to the entity’s operations, assets, and liabilities expressed in words, versus primarily written explanatory data related to the entity’s sustainability and corporate citizenship that may contain some quantified data—the same knowledge of the entity and its business, environmental, and social activities is essential to proper recording and reporting.
Financial Attestation versus Enterprise Data Verification
CPAs are skilled in the application of attestation procedures to financial statement data and reporting on the fairness of the data presented both on the face of the statement and included in the notes thereto. This is the hallmark of the profession and the basis of the designation of its members as trusted professionals.
The CPA profession is the logical group to meet the needs of stakeholders for reasonable assurance related to sustainability and corporate citizenship.
While other entity-related, noneconomic information may be different in origin and character, its fairness or reasonableness, in light of the surrounding circumstances, is still assessable. The currently accepted financial statement assertions (i.e., existence, completeness, rights and obligations, accuracy and valuation, presentation and disclosure) can be expanded to cover nonfinancial management disclosures. The underlying data, estimates, and judgments can be traced to documents or evaluated for reasonableness. As with the entity’s financial statements, absolute certainty is not attainable, but a high level of assurance and a confidence in its fair presentation can be attained by applying professional standards and adhering to applicable codes of professional conduct.
Considerations Required to Meet the New Reporting Needs
The CPA profession is the logical and best-suited group to meet the needs of stakeholders for reasonable assurance related to many reports on sustainability and corporate citizenship. Changes need to be made, however, to address the specific issues created by this expanded responsibility.
The current education requirements for obtaining a CPA license are focused on attaining the skill and knowledge to understand the standards for recording business transactions and the preparation and compilation of financial information and other financial disclosures. This basic objective of the academic curriculum must be expanded to include more study of the verification of other-than-financial data, focusing on obtaining an understanding of the disclosure and evaluating its basis and reasonableness using sources other than financial data records, including the work of third-party professionals and the actions and judgments applied by management in formulating relevant disclosures.
As more clients seek reports from the profession on the fairness of data outside of the traditional financial statements, CPAs will require more training on data verification beyond the regular financial data framework. While the data will be different, the methodology for assessment of fairness of disclosure will use the same strategies—somewhat expanded—to acquire a reasonable basis for issuing an assurance report. CPA firms will need to provide programs to educate their members and staff and expand supervisory guidance; sole practitioners will need to seek this training from sources such as state societies of CPAs. This will lead to more on-the-job training, which has always been an integral part of the development of professional competence.
Decision makers’ need for relevant credible information is quickly evolving, and the CPA profession is in the best position to address this need.
The organizational structure of CPA firms will need to change somewhat. Currently, firms have separate financial data attestation and management advisory sections. In the future, there should be an overall attestation section providing services related to rendering an opinion on the fair presentation of the client’s financial statements and other information in other disclosure formats that are subject to reasonable verification. As with the current delivery of attestation services and opinion support methodology, adherence to the related codes of professional conduct and government regulation is essential to protecting the reputation and relevance of the profession and meeting its obligation to the public interest.
Paramount to the competent delivery of attestation-related services involving multi-data verification is adherence to the related codes of professional conduct. This discipline distinguishes the accounting profession and leads to the trust the public has in CPAs’ opinions. The public trust takes precedence over the client’s or firm’s consideration. As stated in the AICPA Code of Professional Conduct (0.300.030.02):
A distinguishing mark of a profession is acceptance of its responsibility to the public. The accounting profession’s public consists of clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of members to maintain the orderly functioning of commerce. This reliance imposes a public interest responsibility on members. The public interest is defined as the collective well-being of the community of people and institutions that the profession serves.
The same general standards are effective and must be applied in rendering any service, including expanded assurance services. CPAs and firms should only accept those engagements they are qualified to perform, due professional care must be applied in performing the engagements, the engagements must be adequately planned and supervised, and sufficient relevant data must be obtained to afford a reasonable basis for any opinion and conclusion.
As always, CPAs and those with other special skills who are members of the engagement team must adhere to all of the profession’s related standards, be independent and objective, and maintain integrity when rendering all services. Also, where appropriate, all the relevant regulatory requirements must be considered in performing these expanded assurance services.
Putting It Together and Moving Forward
Decision makers’ and stakeholders’ need for relevant credible information is quickly evolving, and the CPA profession is in the best position to address this need. The appropriate procedural and reporting skills currently exist in the profession; its structure, related standards, and past performance, coupled with ethical behavior, have created a high level of trust in its opinions on third-party assurances.
Some changes will need to be made. A strict adherence to the appropriate codes of professional conduct must be applied when performing these expanded services. Also, the service needs to be treated as an assurance service, not an advisory service, and the structure of the firm, or mindset of the sole practitioner, needs to protect the objectivity and integrity of the practitioners performing these services. The public interest must be upheld. The CPA profession, more than any other, is uniquely qualified to render attestation opinions on the fair presentation of nonfinancial, business-related representations of an entity’s management. CPAs and firms should take the steps necessary to provide this expanded attestation service by expanding its competency, changing its structure, and gaining the support of regulatory agencies, including the SEC and state and jurisdictional regulators.