Financial Times article: A reshaped role accounted for
A reshaped role accounted for
By Andrew Parker in New York
Published: September 22 2005 03:00
Barry Melancon is in many respects the great survivor of the US accounting profession. As the president and chief executive of the American Institute of Certified Public Accountants,he has spent the pastthree years reshaping the profession's main representative body, whose most important regulatory function was stripped away by Congress after accounting scandals, such as at Enron and WorldCom.
At the same time he fended off attacks on his own position. Some of the big four accounting firms - Deloitte, Ernst & Young, KPMG and PwC - called for his resignation after the scandals because they thought new leadership at the AICPA would help efforts to restore the profession's battered reputation. But last year the AICPA's board, which is dominated by accountants who do not work for the big four, voted to give Mr Melancon a third five-year term of office.
"I am very passionate about our profession, and about the AICPA," says Mr Melancon, when asked why he was re-elected. "I work very hard at it, and I am proud of that."
But the post-Enron world is very different for the AICPA. One of the central tenets of the Sarbanes-Oxley legislation, approved by Congress in July 2002in response to the wave of corporate scandals, was the creation of the Public Company Accounting Oversight Board.
The PCAOB, an independent watchdog, scrutinises auditors of public companies. The task was previously organised by the AICPA through a system of peer review. But Congress decided the self-regulatory model was no longer tenable.
Mr Melancon admits the AICPA considered whether, in these changed circumstances, it should confine its role to being a purely educational and representative body. Some in the big four favoured this, but the AICPA decided it should retain a self-regulatory role.
That role focuses, for example, on auditors of private companies. The AICPA continues with its system of peer review for these, and also writes practice rules for them. "There is no national regulator of private company activities," says Mr Melancon. "So there is a role that needs to be filled."
In February, an AICPA taskforce recommended that private companies should comply with a different financial reporting regime to their public counterparts. The initiative was a response to concerns that the US system of Generally Accepted Accounting Principles, or GAAP, does not suit the needs of private companies and imposes unjustified costs. Discussions about how to consider such reform have been held with the Financial Accounting Standards Board, the independent body that writes accounting standards.
But some leaders of the big four and the PCAOB are sceptical about the AICPA's initiative. They fear the emergence of two sets of accounting standards that would only add to the complexity of financial reporting. They also say the initiative could serve as a barrier to private companies going public.
Mr Melancon argues it is not pushing for "differences for differences' sake". "It is just something that is designed to be as relevant as it possibly can be for the facts and circumstances that are different for private companies versus public."
He believes private companies should have the right to choose between GAAP and an alternative financial reporting regime. "I would envision that companies on the upper end from a complexity or maybe size perspective might well choose to continue to report on the basis of public company GAAP, if there were two different GAAPs," he says.
The AICPA's initiative may be assisted by the Securities and Exchange Commission, the chief US financial regulator, which has commissioned a study on whether small public companies should have a different financial reporting regime to large ones. If an advisory committee created by the SEC recommends that innovation, it could also be used by private companies.
Meanwhile, Mr Melancon says it is "still a little early to tell" whether the right regulatory model for auditors of public companies has been put in place. Although the AICPA supported the creation of the PCAOB, it opposed the watchdog setting practice rules for ÂÂauditors.
Mr Melancon, however, is anxious not to pick a fight with the PCAOB, and refuses to criticise its practice rules on how auditors should implement section 404 of the Sarbanes-Oxley legislation, which requires companies to test andreport on the effectiveness of their internal controls against fraud. Section 404 has proved to be the legislation's most expensive provision, partly because auditors must also report on the controls.
The big four firms doubled their fees at many companies that had to comply with section 404 for the first time last year. But auditors were subsequently accused of doing unnecessary work, and the PCAOB issued guidance in May that stresses the importance of them exercising judgment as to which controls they should test.
Mr Melancon defends the auditors, insisting they were doing their best to comply with the PCAOB's "very detailed" standard on internal controls. He plays down the idea that accounting firms were over-charging clients in 2004.
While Mr Melancon seeks to nurture his relationship with the PCAOB by not condemning the teething problems with its rules, he also appears keen for a rapprochement with the big four. The AICPA's members in public practice work mainly in small accounting firms or as sole practitioners, and their agendadoes sit easily with theglobal concerns of the big. However, Mr Melancon says: "The big four are very active in the profession. Theyrecognise today - not that they did not before, but they are certainly committed today - the need to be sensitive to the profession as a whole."
So given the supposed new-found unity, and while anxious to avoid charges of triumphalism, Mr Melancon is bullish about the profession's public standing and future prospects. He says progress to restore trust in it has been "dramatic".
He also appears confident about his own prospects. "Just like anyone else, I am not perfect," says Mr Melancon. "It was a very tough time for the profession, but I think we did some things right."
By Andrew Parker in New York
Published: September 22 2005 03:00
Barry Melancon is in many respects the great survivor of the US accounting profession. As the president and chief executive of the American Institute of Certified Public Accountants,he has spent the pastthree years reshaping the profession's main representative body, whose most important regulatory function was stripped away by Congress after accounting scandals, such as at Enron and WorldCom.
At the same time he fended off attacks on his own position. Some of the big four accounting firms - Deloitte, Ernst & Young, KPMG and PwC - called for his resignation after the scandals because they thought new leadership at the AICPA would help efforts to restore the profession's battered reputation. But last year the AICPA's board, which is dominated by accountants who do not work for the big four, voted to give Mr Melancon a third five-year term of office.
"I am very passionate about our profession, and about the AICPA," says Mr Melancon, when asked why he was re-elected. "I work very hard at it, and I am proud of that."
But the post-Enron world is very different for the AICPA. One of the central tenets of the Sarbanes-Oxley legislation, approved by Congress in July 2002in response to the wave of corporate scandals, was the creation of the Public Company Accounting Oversight Board.
The PCAOB, an independent watchdog, scrutinises auditors of public companies. The task was previously organised by the AICPA through a system of peer review. But Congress decided the self-regulatory model was no longer tenable.
Mr Melancon admits the AICPA considered whether, in these changed circumstances, it should confine its role to being a purely educational and representative body. Some in the big four favoured this, but the AICPA decided it should retain a self-regulatory role.
That role focuses, for example, on auditors of private companies. The AICPA continues with its system of peer review for these, and also writes practice rules for them. "There is no national regulator of private company activities," says Mr Melancon. "So there is a role that needs to be filled."
In February, an AICPA taskforce recommended that private companies should comply with a different financial reporting regime to their public counterparts. The initiative was a response to concerns that the US system of Generally Accepted Accounting Principles, or GAAP, does not suit the needs of private companies and imposes unjustified costs. Discussions about how to consider such reform have been held with the Financial Accounting Standards Board, the independent body that writes accounting standards.
But some leaders of the big four and the PCAOB are sceptical about the AICPA's initiative. They fear the emergence of two sets of accounting standards that would only add to the complexity of financial reporting. They also say the initiative could serve as a barrier to private companies going public.
Mr Melancon argues it is not pushing for "differences for differences' sake". "It is just something that is designed to be as relevant as it possibly can be for the facts and circumstances that are different for private companies versus public."
He believes private companies should have the right to choose between GAAP and an alternative financial reporting regime. "I would envision that companies on the upper end from a complexity or maybe size perspective might well choose to continue to report on the basis of public company GAAP, if there were two different GAAPs," he says.
The AICPA's initiative may be assisted by the Securities and Exchange Commission, the chief US financial regulator, which has commissioned a study on whether small public companies should have a different financial reporting regime to large ones. If an advisory committee created by the SEC recommends that innovation, it could also be used by private companies.
Meanwhile, Mr Melancon says it is "still a little early to tell" whether the right regulatory model for auditors of public companies has been put in place. Although the AICPA supported the creation of the PCAOB, it opposed the watchdog setting practice rules for ÂÂauditors.
Mr Melancon, however, is anxious not to pick a fight with the PCAOB, and refuses to criticise its practice rules on how auditors should implement section 404 of the Sarbanes-Oxley legislation, which requires companies to test andreport on the effectiveness of their internal controls against fraud. Section 404 has proved to be the legislation's most expensive provision, partly because auditors must also report on the controls.
The big four firms doubled their fees at many companies that had to comply with section 404 for the first time last year. But auditors were subsequently accused of doing unnecessary work, and the PCAOB issued guidance in May that stresses the importance of them exercising judgment as to which controls they should test.
Mr Melancon defends the auditors, insisting they were doing their best to comply with the PCAOB's "very detailed" standard on internal controls. He plays down the idea that accounting firms were over-charging clients in 2004.
While Mr Melancon seeks to nurture his relationship with the PCAOB by not condemning the teething problems with its rules, he also appears keen for a rapprochement with the big four. The AICPA's members in public practice work mainly in small accounting firms or as sole practitioners, and their agendadoes sit easily with theglobal concerns of the big. However, Mr Melancon says: "The big four are very active in the profession. Theyrecognise today - not that they did not before, but they are certainly committed today - the need to be sensitive to the profession as a whole."
So given the supposed new-found unity, and while anxious to avoid charges of triumphalism, Mr Melancon is bullish about the profession's public standing and future prospects. He says progress to restore trust in it has been "dramatic".
He also appears confident about his own prospects. "Just like anyone else, I am not perfect," says Mr Melancon. "It was a very tough time for the profession, but I think we did some things right."