This is “Challenges Facing the Accounting Profession”, section 12.5 from the book An Introduction to Business (v. 1.0).
This book is licensed under a Creative Commons by-nc-sa 3.0 license. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms.
This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz in an effort to preserve the availability of this book.
Normally, the author and publisher would be credited here. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Additionally, per the publisher's request, their name has been removed in some passages. More information is available on this project's attribution page.
For more information on the source of this book, or why it is available for free, please see the project's home page. You can browse or download additional books there. You may also download a PDF copy of this book (13 MB) or just this chapter (1 MB), suitable for printing or most e-readers, or a .zip file containing this book's HTML files (for use in a web browser offline).
Had you visited St. Charles, Illinois (about fifty miles southwest of Chicago), back in 2001, you would have noticed an impressive training and conference center owned by Arthur Andersen (then one of the so-called “Big 5” public accounting firms). Had you gone in, you could have toured a room dedicated to the history of Arthur Andersen, a proud firm with eighty-nine years of corporate history. You’d have learned how a company started by a young accounting professor from Chicago grew into one of the world’s largest public accounting firms, with twenty-eight thousand employees and annual revenues of over $4 billion.
Had your travels taken you to Houston, Texas, you might have passed a glass-fronted high rise with a tilted E designating the home of one of the country’s largest energy-trading companies—Enron. Though its history was short, its accomplishments were already impressive. In the mid-1980s, Enron had begun transforming itself from a relatively small natural-gas-pipeline company to a diversified energy business that was the darling of Wall Street. During the second half of the 1990s, it was constantly mentioned among the most innovative companies in the United States. By early 2001, it was the seventh-largest company in America, with revenues of over $100 billion. Under the management of founder and CEO Ken Lay, President Jeffrey Skilling, and CFO Andrew Fastow, Enron’s stock price skyrocketed. Unfortunately, the company’s performance on the stock market was due to management’s practice of making it look financially better off than it was, primarily by overstating income and hiding liabilities.
In summer 2001, the financial practices of these two giant corporations—Enron and Arthur Andersen—would come together to bring about permanent changes to the accounting profession.Much of the discussion in this section is adapted from Mike Brewster, Unaccountable: How the Accounting Profession Forfeited a Public Trust (Hoboken, NJ: John Wiley & Sons, 2003). Volumes have been written about what went wrong, but it can be boiled down to this: Enron executives behaved unethically and Andersen auditors looked the other way. Instead of exercising its role as public watchdog, Andersen was watching its own pocketbook. The accounting firm protected its own revenues from lucrative consulting contracts with its client instead of protecting the client’s stakeholders. Andersen not only shirked its fiduciary responsibilities as a public auditor but also was willing to cover up evidence of its own inappropriate actions and those of its client.
What had taken years to build took only a few months to destroy. Within a relatively short time, Enron went from apparent prosperity to bankruptcy and Andersen from renowned accounting firm to butt of David Letterman jokes. All its twenty-eight thousand employees and partners, the vast majority of whom had no involvement in the Enron mess, lost their jobs. Moreover, the accounting profession lost the trust of the public, which perceived auditors as typically corrupt, incompetent, or both. An accounting firm’s stamp of approval on financial statements (which should have provided assurance to investors and other stakeholders) was viewed skeptically.
From these problems and public embarrassments, however, came some corrections to the professional course—or at least a plan to make things better in the future. Most people, including accountants, were convinced that the profession was broken and needed to be fixed. Congress passed the Sarbanes-Oxley Act, which severely restricts the ability of accountants to serve the same clients as both auditors and consultants. The Public Company Accounting Oversight Board was set up to take over from its members the task of regulating the profession. To underscore management responsibility for a firm’s financial statements and accounting records, new regulations require CEOs and CFOs to sign statements attesting to their accuracy. Finally, auditors have to be more vigorous in detecting and reporting fraudulent activities.
So, will things get better? The raft of scandals of which the Enron debacle was perhaps the most notorious was not solely the fault of the auditors. Granted, they were supposed to be looking for managerial fraud, and clearly they were performing this job with a good deal less than due diligence. Under new guidelines, auditors must perform the fraud-detection responsibilities on which stakeholders and the public depend. But as a big part of the problem, management also has to be part of the solution. Needless to say, managers must display more integrity in reporting on the financial conditions of the companies for which they’re responsible. Members of the accounting profession hope that as a broad range of new regulations and other guidelines are put into action, the profession (along with corporate America) will slowly regain some of the public trust that’s been squandered in the last decade.
You may know that Phil Knight is the founder of Nike. But you may not know that he began his business career as an accountant. Another thing that you may not know is that accounting is a “people profession.” A lot of people think that accountants spend the day sitting behind desks crunching numbers. This is a misconception. Accountants work with other people to solve business problems. They need strong analytical skills, and they must be able to analyze financial data, but they must also be able to work effectively with colleagues. They need good interpersonal skills, and because they must write and speak clearly and present complex financial data in terms that everyone can understand, they need excellent communication skills, as well.
Accounting graduates have always faced a favorable job market. According to a survey conducted by the National Association of Colleges and Employers, accounting firms headed the list of top employers in 2009.National Association of Colleges and Employers, “Salary Offers to Class of 2009 Are Flat (from the Winter 2009 Salary Survey),” NACE WEB, http://www.naceweb.org/salarysurvey/sscover0109.htm (accessed January 31, 2009). Moreover, with starting salaries averaging $48,000, accounting graduates are among the highest-paid entrants into the workforce. If you choose to begin your career in accounting, you have two career options: work as a public accountant (whether for a Big Four public accounting firm or for a smaller company) or work as a private accountant for a business, a not-for-profit organization, or a government agency.
Public accounting firms provide clients with accounting and tax services in return for fees. Most members of such firms are certified public accountants (CPAs)Accountant who has met state-certified requirements for serving the general public rather than a single firm. who have met education and work requirements set by the state and passed a rigorous exam. Though public accounting firms offer both consulting and tax services, the hallmark of the profession is performing external auditsAccountant’s examination of and report on a company’s financial statements.: the public accountant examines a company’s financial statements and submits an opinion on whether they have been prepared in accordance with GAAP. This “stamp of approval” provides the investing public with confidence that a firm’s financial reports are accurate. Typically, public accountants are self-employed; or work for small, sometimes regional firms; or are associated with one of the Big Four public accounting firms—Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers.
Often called management or corporate accountants, private accountantsAccountant who works for a private organization or government agency. work for a single company, a not-for-profit organization, or a government agency. A firm’s chief accounting officer is called the controller and occupies a position at the vice-presidential level. The jobs of private accountants vary according to the company or industry in which they’re employed. Most private accountants record and analyze financial information and provide support to other members of the organization in such diverse areas as marketing, strategic planning, new product development, operations, human resources, and finance. Private accountants also conduct internal audits. In this capacity, they ensure that accounting records are accurate, company policies adhered to, assets safeguarded, and operations efficiently conducted. Finally, they may also provide a variety of specialized services:
Accountants who pass a special exam and meet other professional requirements in the field of management accounting are designated as certified management accountants (CMAs). Typically, CMAs have greater job responsibilities and receive higher compensation than other accountants.
What actions have been taken to help restore the trust that the public once had in the accounting profession? Do you believe these actions will help? Why, or why not? What other suggestions do you have to help the accounting profession and corporate America regain the public trust?