This past year the CPA Profession has been in the news headlines almost everyday. The CPA profession is under regulatory scrutiny. Arthur Anderson, one of the largest and most prestigious CPA firms is out of business as a result of its involvement as the "auditors" in the Enron debacle. Now another one of the "big 4" firms is under attack by the SEC for its conduct with its former client Xerox. What's going on? Most people really don't understand what the role of the CPA is all about. This article will explain some things to you in plain English.
What does "audit" actually mean and what's so important about auditing?
The CPA firm provides auditing services to validate the fair presentation of a Company's Financial Statements. These are the services that the SEC is concerned with. While the CPA is retained and paid by the Company, its duty as auditor is to provide reasonable assurance to third party users of the Company's financial statements that in fact the financial statements prepared by the Company provide an accurate snapshot of the Company’s financial condition. The CPA's role as an auditor requires a CPA firm to be independent and provide the attest function on these financial statements. To do this it must perform certain procedures, which includes independent verification and testing.
The CPA is the only licensed professional that is authorized and licensed by each of the individual 50 state licensing boards to perform this unique "auditing" function. This is what ultimately distinguishes CPAs from other "accountants". The independent perspective of the CPA is what is supposed to keep the Company honest. It is this attest function is what bankers; lenders and investors rely on when making a financial decision.
When CPAs are providing this attest function, they should not put themselves in a position where their independence could be compromised. In many instances the income derived from providing audit services was small in comparison to the income the CPA firm derived from consulting and management advisory services which may have clouded the CPA firm's perspective during the audit process. With the passage of Federal legislation now in place, CPA firms will have to choose which hat they wish to wear.
Keep in mind that most CPAs today in public practice provide diverse services to their clients that do not require that they be independent. Tax preparation and advisory services do not require CPAs to be independent. On the contrary, clients want to know that their best interests are being looked after, not the Internal Revenue's!
What do CPAs actually do besides "auditing"?
It is important to understand that over 90% of the CPA profession does not provide "auditing" services for their clients. Even less provide such services for publicly traded companies. The nature of the CPA Profession has evolved. The general public unfortunately thinks of CPAs as synonymous as with tax prepares, which actually requires no license at all. Not all CPAs work for "public accounting firms" and not all public accounting firms perform "Audits". CPAs work in private industry, government as well as being employed in "public accounting firms".
There are over 450,000 individuals in the U.S. that are legally allowed to call themselves licensed CPAs. To be able to call yourself a CPA you must have a minimum of a four year degree in accounting, pass a uniform examination which is given only twice a year, obtain a minimum amount of public accounting experience in a "CPA firm" which must include "auditing experience", obtain their credential the from the licensing board in their respective state and fulfill a minimum continuing education requirement. The truth is that after obtaining their licenses, most CPAs go on to work in private industry and do not stay employed at public accounting firms but maintain their license because it took so much effort to obtain.
What all CPAs share, is a common foundation in financial education and training which makes them extremely valuable to their employers and clients. Their common background also includes a commitment to a uniform Code of Ethics that makes them valuable to our country as well as their employers and clients.
