Franklin Strier: CPAs Due For Image Overhaul

Franklin Strier, professor of accounting, had his article, “Proposals to Improve the Image of the Public Accounting Profession,” published in the March issue of The CPA Journal. The article is available online at http://www.nysscpa.org/cpajournal/2006/306/essentials/p67.htm.

He cites the impact on investor confidence as the main reason to salvage the industry’s image.

“Certified public accountants (CPAs) in some of the biggest of the recent financial reporting scandals, most notably Enron, were either complicit or grossly negligent,” says Strier. “When investors cannot trust public auditors to catch fraudulent financial statements, then the investors don't know the value of the reporting corporations, which can have a chilling impact on all prospective investors.”

According to Strier, the opportunity for such scandals to occur is due to the requirement that public corporations have their financial statements audited by CPAs.

“Beginning 10 or 20 years ago, CPAs began selling their clients lucrative non-auditing services, such as financial consulting,” he says. “Eventually, the fees from these services surpassed those from auditing, creating a conflict of interest. As a result, CPAs began looking the other way when their audit clients engaged in aggressive, questionable reporting in order to not jeopardize the consulting fees from the same client.”

Strier feels that the profession needs to return to a policy of acting for the benefit of the public by maintaining complete independence from its audit clients.

“Although the auditor is paid by the client, CPAs are licensed by the state, and owe it to the government granting its license and the investing public to perform its audit with no concern for losing lucrative consulting fees if it does not condone or ignore questionable financial reporting.”

Strier says that a tightening of the Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform, and Investor Protection Act of 2002, would be instrumental in preventing further scandals.

“If Congress makes such a credible threat, then the profession would probably be responsive, because most professions would prefer self-regulation,” he observes.

The Sarbanes-Oxley Act was sponsored by Senator Paul Sarbanes (D–Md.) and Representative Michael G. Oxley (R–Oh.) in the wake of a series of corporate financial scandals, including those involving Enron, Tyco International, and WorldCom. The legislation establishes new or enhanced standards for all U.S. public-company boards, management, and public accounting firms concerning corporate board responsibilities to criminal penalties. Covering issues such as establishing a public company accounting oversight board, auditor independence, corporate responsibility, and enhanced financial disclosure, the Act was designed to review the dated legislative audit requirements.

- Joanie Harmon