This paper examines the key forces reshaping the accounting profession in the wake of high-profile scandals such as Enron, WorldCom, and the Madoff fraud. It analyzes the growth of regulatory oversight — including the Sarbanes-Oxley Act and the establishment of the PCAOB — and asks whether further regulation is inevitable. The paper explores how accounting education is evolving to meet new professional demands, including the rise of ethics coursework. It also addresses structural challenges such as the limitations of GAAP in capturing intangible assets, the impact of public access to financial statements, the separation of auditing from accounting, and the push toward internationally harmonized accounting standards.
In the midst of scandal, the accounting profession finds itself under scrutiny — perhaps more than it ever has in the past. Accounting and auditing scandals have become less frequent since WorldCom and Enron, but that does not mean the profession is now immune. High-profile cases continue to haunt the media. As Bernard Madoff was whisked off to jail, the American public remained dumbfounded at how he could fraudulently convert $50 billion in customer assets to personal use. One must also ask how $1 billion in cash could have escaped the watchful eye of Satyam Computer Services.
Since the Enron scandal, the processes of accounting and auditing have been converging, all while trying to absorb the economic shocks in the capital and mortgage markets. The profession is plagued by controversy over the application of proper valuation techniques to both assets and liabilities. These are the most pervasive questions facing the market, but there are still others. This paper examines current issues in the accounting profession and attempts to provide a forward-looking picture of what the profession will look like in the future. It considers currently proposed changes and trends within the profession as the basis for that projection.
The accounting profession has undergone more fundamental changes in the last ten years than it did during the entire first half of the twentieth century. Aside from changes in the complexity of accounting techniques and tools required in today's world, the accountant is under constant scrutiny. Accounting and auditing activities used to be separate functions. Now, however, accountants must often perform auditing activities in addition to their traditional role in order to avoid criticism. In the wake of Enron, WorldCom, and Madoff, the public demands far more from accountants in order to continue trusting them.
The public demands standards, transparency, and accountability from accountants today. In the past, those things were expected as a matter of course — honesty was assumed. Now, almost the opposite is true, and the public views the profession with an air of distrust. This is a highly reactionary society, and even though most accountants are probably honest, the few bad actors caused considerable damage, largely due to media coverage and the high-profile nature of the cases. The Sarbanes-Oxley Act was adopted as a direct reaction to public demands for transparency and higher levels of standardization.
Sarbanes-Oxley was only the first of many new standards that would affect the accounting profession. The Public Company Accounting Oversight Board (PCAOB) was established as a result of the act. The accounting profession is becoming one of the most highly regulated in the country, and this trend can be expected to continue. Public trust in the honesty and integrity of accountants has been shaken. To restore that trust, the public must be assured that accountants and the information they supply are reliable. Accounting has been called the bedrock of our commercial system.[i] The question is whether regulation stops with Sarbanes-Oxley and the PCAOB, or whether even more oversight is on the horizon.
In the past, accountants knew who their client was and were often pressured by managers to paint the most favorable picture of the company possible.[ii] It was all about preserving the appearance of success and keeping the share price high. Accounting is not an exact science. Although there are certain rules and principles that must be observed, there is more than one way to represent the financial status of a company. There are many judgment calls and a great deal of subjectivity in the accounting profession.[iii] It was possible to depict a company in many ways — all of them technically accurate — while leaving the reader with an entirely different impression of the company's health. Subjectivity combined with managerial pressure created the conditions that eventually led to scandal.
At the time of Sarbanes-Oxley and the PCAOB, quick action was needed to restore public confidence in the accounting profession. The government felt compelled to step in rapidly to reassure investors in the companies that hired accountants. According to the American Assembly, the stock bubble of the 1990s was a key contributing factor to the conditions that led to accounting scandal. When the bubble burst, it left managers struggling to meet stockholder expectations. They needed to assure investors of an ever-increasing stream of quarterly profits.[iv] In their urgency to deliver what shareholders wanted, managers lost sight of their responsibility to present information in the most honest manner possible.
Managerial pressure weighed heavily on accountants, pushing them to employ "creative" techniques to make the numbers appear better than they were. The audit came to be viewed as a commodity with a certain degree of intrinsic value.[v] When an audit confirmed increasing revenues, it had a positive effect on earnings per share.[vi] Accountants were not the only ones to blame; managers, lawyers, and boards also approved of and pressured accountants to paint a rosy picture, on pain of risking their livelihood and reputation. Many accountants began to bend, and the line between right and wrong blurred. Eventually, this became the new norm in accounting practice.
When the scandals began to surface, auditors and accountants bore the brunt of public blame, even though others had pressured them into their actions. They were an easy target because their actions could be directly linked to the numbers in question. Regardless of the true role accountants played, the profession would never be the same again. Accountants and auditors would be required to comply with an ever-growing burden of government regulation and oversight.
Members of the profession feel that these regulations have decreased the quality of their work.[vii] Adhering to regulations and forcing non-standard assets into standardized formats has changed the field to the point where it barely resembles what it was before oversight arrived. As for whether even more government oversight is in the profession's future, one must understand the general philosophy of US regulatory policy. Historically, the United States has preferred to leave industries alone as long as they are acting honestly and in the public interest.
However, when something threatens the foundation of the capital market or places the economy in danger, the government steps in with regulation aimed at resolving the current crisis and preventing its recurrence. Policy has always been to provide just enough regulation to address the crisis without being unnecessarily intrusive. As long as conditions are favorable, markets are generally left to manage themselves.
This same reactionary philosophy was evident when the government intervened to address the banking crisis. One can similarly expect more bank regulations in the future, comparable to what Sarbanes-Oxley imposed on the accounting industry. In light of this attitude, further accounting regulations are unlikely unless a new crisis demonstrates the need for tighter rules. If current standards prove sufficient and no new scandals emerge, no major new regulations should be expected. When things go wrong, Americans look to the federal government for leadership and action — but when things are going well, they do not welcome further restrictions.
New accounting regulations are both a burden and a benefit to the profession. They have provided a level of standardization and created a common language among professionals and laypersons alike. However, they have also changed the face of accounting in ways that will affect the education and conduct of accountants going forward. The accountant of the future will need to do more than balance the books.
The profession of accounting has existed almost as long as economic trade itself. An intimate relationship exists among accounting, finance, and the economy. Accounting differs from bookkeeping: bookkeeping refers to the recording of transactions, while accounting goes further and attempts to paint a picture of the overall health of a company. Modern accounting arose out of the industrialization of the early twentieth century. As manufacturing systems grew more complex, accountants had to devise new ways to describe them. Throughout the years, the definitions of terms such as "assets" and "cost" have evolved.[viii] Cost accounting has been an important part of the global success of technology in the latter part of the last century.[ix]
Technology has also transformed accounting. Accountants now use spreadsheets and algorithmic tools for rapid analysis, freeing them to focus more on forecasting, interpretation, and other analytical functions. The accountant now plays a much more active role in management decisions than in the past — no longer simply generating reports, but contributing to strategic planning.
Reflecting this shift, accounting curricula now offer a far more diverse range of courses than in the past. Programs at various universities have incorporated marketing, operations management, corporate law, international accounting, and ethics into their accounting degrees.[x][xi] The inclusion of ethics courses is a particularly notable and recent development. Until the outbreak of major accounting scandals, professional ethics were largely assumed. They are no longer taken for granted. The addition of ethics instruction is a direct, reactionary response to the scandals, and it can be expected that ethics coursework will become a standard — eventually mandatory — component of accounting education.
"GAAP limits, intangible assets, and lay investor risk"
"New disclosure formats, transparency debates, global standards"
[vii] Ibid., p. 9.
[viii] Giroux, G. (n.d.). American Big Business and Cost Accounting.
[ix] Ibid.
[x] [University]. (2009). Overview. Accounting Major.
[xi] [University]. (2009). MS-Accounting Program Curriculum.
[xii] Wallison, P. (2004). The Future of the Accounting Industry.
[xiii] Ibid.
[xiv] Ibid.
[xv] Ibid.
[xvi] Ibid.
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