How the U.S. Accounting Profession Got Where It Is Today: Part II by Stephen A. Zeff

1
How the U.S. Accounting Profession Got Where It
Is Today Part II by Stephen A. Zeff

• By Gabby Arciba and Kendra Hoffman

2
Gradual Degeneration of Professional Values

• Stephen Zeff discusses in his article over the
  past few decades the factors that have led to the
  modern day decline in the Accounting profession
• He theorizes that CPA firms increased focus on
  consulting services has compromised independence
  of Accountants in auditing their clients
  financial statements.

3
Implications of Firms Move Into Consulting
Services

• Consulting fees as a percentage of gross firm
  fees
• 1977 from 5 to 19
• 1984 from 11 to 28
• Arthur Anderson was number one in the list of
  the top U.S. consulting firms. In 1990 consulting
  was 44 of total gross fees

4
Non-CPAs on the rise

• 1974 1 out of two consultants are CPAs
• 1988 1 of 4 consultants were CPAs
• Due to
• The hiring or takeover of boutique consulting
  firms non-CPAs increasingly were brought into
  the firms consulting practices.
• By the 1990s non-CPAs were well represented in
  the top management of the Big Six firms.

5
Firms Expansion

• 1950s and 1960s aggressive expansion overseas to
  reach a broader clientele
• 1970s audit market becomes saturated then it
  became necessary to expand their scope of
  services to increase the firms revenue
• The firms gross fees shifted from auditing and
  accounting to tax and consulting services

6
Pressures from Competition

• A competitive environment led to Audit fees being
  driven down among firms.
• In the struggle for profitability and growth
  business aims not professional aims.

7
(No Transcript)
8
Impact of S L and Bank Failures The Dingell
Hearings

• 1985-Representative John D. Dingell launched
  three years of hearings into the adequacy of the
  accounting professions self-regulatory system
• Due to
• 1980s S L failures and auditor fraud
• E.S.M. Government Securities
• Wedtech Corp.
• ZZZZ Best

9
Regulator Pressures

• A major source of pressure on audit firms was
  that Regulators advocated the use of deceptive
  accounting practices in order to rescue failing
  institutions in the name of public interest

10
Do whatever the hell you have to do and do it
quickly and discreetly

• During the 80s Financial Reporting is
  Compromised
• Industry Regulators using financial reporting to
  achieve public interest goals
• Companies are lobbying FASB for preparer-friendly
  standards

11
Mergers Lead to Earnings Pressures

• Mergers lead to a loss of clients
• Increase emphasis on analysts earnings forecasts
• Adds to pressure on CEOs to meet earnings targets

12
Impact of Heightened Client Pressure

• the Auditor today is often a participant in
  aggressively seeking loopholes (on behalf of
  corporate clients)
• Arthur Wyatt 1988

13
The SEC and Others Voice Concerns about Auditor
Conduct

• Business relationships with audit clients
• Expectations of auditors are low
• is there a role for auditors in the private
  sector

14
The Kirk Panel on Auditor Independence

• Growing cynicism at the SEC about performance of
  the public accounting profession.
• Consulting fees are outpacing audit fees for Big
  Six accounting firms

15
Tensions over Compensation Litigation and Scope
of Services

• Private Securities Litigation Reform Act of 1995
• Led to aggressive accounting in the 1990s
• Audit market is saturated must increase scope
  of services

16
Conclusion

• Mergers and loss of clients audit market is
  saturated
• Focus on earnings targets
• Consulting revenues outpacing audit revenues
• Protection from litigation
• These factors have led to a compromise of
  independence and objectivity in the accounting
  profession