1. BA 427 – Assurance and Attestation Services Lecture 9 Overview of the Public Accounting Profession

2.  What is a “Profession”? The Public Accounting Profession

3.  What is a “Profession”? A calling requiring specialized knowledge and often long and intensive academic preparation (Webster). Professional: characterized by or conforming to the technical or ethical standards of a profession (Webster). The Public Accounting Profession

4. The Independent Audit  The independent audit At the heart of the public accounting profession is the core service offered by the profession: the independent audit. “The independent audit fills an essential role for the investing public and creditors by enhancing the reliability of corporations’ published financial statements and giving assurance of that reliability to users of those financial statements.” (Advisory Panel on Auditor Independence, 1994)

5. The Independent Audit  The economics of the independent audit Demand for audits is largely regulatory- driven. There are significant barriers to entry It is a demand curve that is fairly inelastic to economic booms and downturns A commodity product? A loss leader?

6. History of the Big 8 / 6 / 5 / 4 1979 Arthur Andersen Arthur Young Ernst & Whinney Deloitte, Haskins & Sells Touche, Ross & Co. Peat, Marwick, Mitchell Coopers & Lybrand Price, Waterhouse Ernst & Young Deloitte & Touche 1989 KPMG 1987 (merged with a non-Big 8) PwC 1998 Failed in 2002

7. The Large Firms

8. How Large are the Large Firms?

9. The Large Firms

10. How Large are the Large Firms?

11. The Large Firms

13.  In 2006, excluding the 7 largest firms, the next 92 firms audited about 1,200 public company clients.  This is about equal to KPMG, the smallest of the Big 4.  In 2000, over 80% of SEC registrants were audited by the 8 largest firms. (So this statistic has not changed much.)  In 2006, the 93 rd largest firm audited 27 SEC clients.

14. Deloitte & Touche

15. Ernst & Young

16. PricewaterhouseCoopers

17. KPMG

18. RSM McGladrey (Chicago)

19. Grant Thornton (Chicago)

20. BDO Seidman (Chicago)

21. Moss Adams (Seattle)

22. Sample Client Fees  Data from the year 2000 Apple Computer  Audit$ 2.3 million  I.T.$21.5 million  Other$ 7.1 million General Electric  Audit$23.9 million  I.T.$11.5 million  Other$68.2 million

23. Sample Client Fees  Data from the year 2000 Weyerhaeuser  Audit$2.6 million  I.T.$4.8 million  Other$1.5 million Southwest Airlines  Audit$245,000  I.T.$0  Other$349,500

24. AICPA  The American Institute of CPAs 330,000 regular members  133,000 members in public accounting  141,000 members in industry  All regular members are certified to practice 16,000 associate, student and international members Founded in 1887  Current name was adopted in 1957

25. AICPA

26.  The AICPA’s Mission: Professional standard setting Advocacy Certification and licensing Continuing education programs Promotion of the profession to the public Promotion of the profession to prospective accounting students

27. AICPA  AICPA Senior Committees: Accounting and Review Services Committee Accounting Standards Executive Committee AICPA Peer Review Board Auditing Standards Board Board of Examiners (the CPA Exam) Board of Public Company Auditors’ Forum Consulting Services Executive Committee Information Technology Executive Committee Private Company Practice Section Exec. Committee Professional Ethics Executive Committee Four others

28. The U.S. Chamber of Commerce  Auditing: A Profession at Risk (2006) The auditing profession faces a number of significant legal challenges. It is subject to new regulation under the auspices of the PCAOB. More important, the profession finds itself the target of a difficult litigation and regulatory enforcement environment, where business losses by a client can result in lawsuits, and a single indictment—even without a conviction—can result in the destruction of thousands of jobs.

29. The U.S. Chamber of Commerce  Auditing: A Profession at Risk (2006) Because of SOX and other requirements, auditing expenses have increased tremendously. At the same time, many clients believe that they are receiving less overall advice and support from their auditors. Audit firms feel that they are caught in a no-win situation between the demands of regulators, law enforcement, the plaintiffs’ bar, and their clients.

30. The U.S. Chamber of Commerce  Auditing: A Profession at Risk (2006) The process of developing accounting principles remains in flux, even as business transactions become ever more complex. There remain significant misunderstandings about the meaning and nature of accrual accounting systems and the level of precision inherent in such systems.

31. The U.S. Chamber of Commerce  Auditing: A Profession at Risk (2006) The profession—through voluntary mergers as well as through the elimination of Andersen—is severely contracted, with only four major firms serving a large majority of the listed and actively traded public companies in the U.S. While four appears to be a sustainable number, any further contraction in this industry would present a major challenge to the viability of the profession.

32. The U.S. Chamber of Commerce  Auditing: A Profession at Risk (2006) William McDonough, former chair of the PCAOB, said “None of us has a clue what to do if one of the Big Four failed.”

33. The U.S. Chamber of Commerce  Auditing: A Profession at Risk (2006) Action Plan  Help the profession become insurable  Clarify PCAOB standards  Support expansion of and competition among the Big Four firms

34. The U.S. Chamber of Commerce  Auditing: A Profession at Risk (2006) Help the profession become insurable  Better define an auditor’s procedures for fraud detection, and the limits of an auditor’s responsibility.  Create an Alternative Dispute Resolution (ADR) system for disputes about audits. Permit auditors and clients to agree to ADR. (An accounting court)  Regulate threats of indictment against firms. (To prevent another Andersen scenario.)

35. The U.S. Chamber of Commerce  Auditing: A Profession at Risk (2006) Clarify PCAOB standards  Auditing Standard #2 … is a large, expansive, principles-based document. While it provides a great deal of room for auditors to exercise judgment … it doesn’t provide much guidance as to when “enough is enough” with respect to the auditing of internal controls.

36. The U.S. Chamber of Commerce  Auditing: A Profession at Risk (2006) Support expansion of and competition among the Big Four firms  … we need to remove nonmarket barriers impeding competition with the Big Four. Unfortunately, there are no easy means to that end, as there are tremendously high barriers for entry into this group.

37. The U.S. Chamber of Commerce  Auditing: A Profession at Risk (2006) Support expansion of and competition among the Big Four firms  Although the task of expanding the Big Four is difficult, it does not mean that it is impossible or unimportant. We call upon the SEC and the PCAOB, as well as the NYSE, NASDAQ, and FASB, to make long-term expansion of the Big Four a high policy priority.

38. The U.S. Chamber of Commerce  Auditing: A Profession at Risk (2006) The following changes might increase competition for the “Big 4”:  Policies that help the profession become insurable.  Simplified GAAP (so that it is less expensive to stay current)  Public companies should consider high- quality firms outside the Big Four, at least for nonaudit services.