Polk, M 11/11/2002 2:37 PM
Building on Our
Core Values
The State of Our
Profession …
Preparing Today
For Tomorrow
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Building on Our
Core Values
The State of Our
Profession
Barry C. Melancon, CPA
Melancon,
AICPA President & CEO
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Agenda
How did we get to where we are today?
The provisions of Sarbanes-Oxley
The cascade effect – what’s the next front?
Overview of other significant professional
initiatives
Hard questions for the profession to ponder
Building on Our Core Values
The Year in Perspective
Clearly, Enron and Worldcom repercussions
dominated the past year.
But we cannot and should not overlook our
successes and the good work undertaken on
behalf of this profession.
Building on Our Core Values
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The Year in Perspective
The AICPA has walked a difficult road this year,
determined to do right by the public and the
honorable men and women of the profession.
We have called for meaningful reforms that
– Strengthen the capital market system.
– Protect the public interest.
– Increase confidence in the accounting profession.
– Improve audit quality
Building on Our Core Values
What went wrong – corporate culture and reporting
model
Simple greed or arrogance
Market pressure on short term earnings
Lack of transparency or timely disclosures in the
reporting model
Lack of mandated disclosures on managements
accounting policies
Too many rules leading to connect the dots
accounting
Building on Our Core Values
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What went wrong – the work of auditors
Standard setting - lack of input from investors and
market pros
Some auditors did not step up to their
responsibilities
Some auditors assuming good intent on part of
management –‘trust but verify”
Inherent weaknesses in our disciplinary and
monitoring processes
Auditor dependency on fees from major clients
Building on Our Core Values
What is needed?
Stand up for what we stand for
From Bill Ezell’s Inaugural speech:
– Restoring our belief in ourselves and in our connection
to our core values.
– Restoring our reputation with those we are committed
to serving.
– Restoring a sense of shared purpose in this profession
and the AICPA.
A reasoned approach to reform on a multitude of
fronts.
Building on Our Core Values
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Building on Our
Core Values
The Sarbanes-Oxley Act
Sarbanes-Oxley
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Key Issues in Sarbanes-Oxley
Sarbanes-Oxley
Public Company Accounting Oversight
Board
Registration of audit firms
PCAOB to set audit, quality monitoring,
ethics and independence standards
Building on Our Core Values
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Key Issues in Sarbanes-Oxley
Sarbanes-Oxley
Inspections of all registered firms and
annual inspections for largest firms
PCAOB to investigate and discipline audit
firms and individuals
Limitations on 8 non-audit services
All other non-audit services to be pre-
approved by audit committee
Building on Our Core Values
PCAOB Appointments-Announced October 25
Appointments-Announced
Chair, William Webster, former judge and head
of both FBI and CIA
Kayla Gillan, former general counsel of California
Public Employee’s Retirement System
Daniel Goelzer, CPA & attorney, former SEC
general counsel
Charles Niemeier, CPA & attorney, current chief
accountant of SEC’s enforcement division
Willis Gradison, former Ohio congressman (R)
Building on Our Core Values
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SEC Implementation Proposals
-- to date --
Improper Influence on Conduct of Audits
Internal Controls, Ethics & Audit Comm Expertise
Pro-Forma Info. & Off-Balance Sheet Disclosures
Insider Trading During Pension Blackout Periods
Could have scope of services rules next week
__________________________________
Harvey Pitt & Bob Herdman resign
Building on Our Core Values
Implications of Sarbanes-Oxley
Sarbanes-Oxley
for Profession
Potential for loss of audit standard setting
for public company audits
Changing role for SECPS
Disciplinary tie-in to the inspection process
Inspections/peer review coverage of
nonpublic companies
International compliance issues
Building on Our Core Values
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Implications for Profession
Cascade to non-public audits - Kathy Eddy
will cover later this morning
Potential for limitations on other non-audit
services
New relationship with audit committees and
management
Further consolidation of public audits
Participation in audit of issuer-uncertain
registration requirements
Building on Our Core Values
New Special Committee on State Regulation
Chaired by Kathy Eddy
Mission:
– Provide input to the AICPA and assist states with
addressing the state issues and implications associated
Sarbanes-
with the passage of the Sarbanes-Oxley Act of 2002.
– Recommend positions to the AICPA Board.
– Draft and/or review materials to communicate the
issues and the positions taken to states, the AICPA and
State Society members.
Building on Our Core Values
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Other Continuing Concerns
GAO reaction to legislation
DOL reaction to legislation
Banking and other regulators’ reaction
Tax shelter focus by Congress
Pension reform initiatives
Building on Our Core Values
Building on Our
Core Values
Overview of Other Significant
Professional Developments
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GAO Independence Rule
GAO issued rule
AICPA engaged affected members in dialogue
and communicated concerns to GAO
GAO released implementation guidance in late
June
Building on Our Core Values
All non-audit services must meet overarching
non-audit
principles
Auditors should not perform management
functions or make management decisions
Auditors should not audit their own work or
provide non-audit services in situations where the
amounts or services involved are
significant/material to the subject matter of the
audit
Building on Our Core Values
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Once these are met then non-audit services are
non-audit
subject to supplemental safeguards, including:
Personnel who perform non-audit services would
be precluded from performing any related audit
work
The auditor’s work could not be reduced beyond
the level that would be appropriate if the non-
audit work was performed by another unrelated
party
Plus, certain documentation and quality
assurance requirements must be met
Building on Our Core Values
Enhanced Business Reporting
Reliable Systems
Financial &
Corporate
Non-Financial
Accountability
Measures
Understandable Informative
Disclosures Dissemination
Current Model is the Foundation
Building on Our Core Values
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Value Measurement and Reporting
Collaborative
A collaborative with accounting profession and information
users to create a framework for better reporting.
Initiated by the AICPA and Canadian Institute of Chartered
Accountants
Primary purpose is to enable investors to see more
pertinent information about what makes a company
successful.
Building on Our Core Values
XBRL
real-
With its promise of real-time financial reporting, the
AICPA-
AICPA-founded XBRL moves to center stage in business
world
Moody’
The Federal Deposit Insurance Corporation, Moody’s,
Microsoft, Reuters, NASDAQ and Deutsche Bank,
among many others, announce they are using XBRL in
their financial disclosures
More than 150 international companies and
organizations now belong to consortium that is
XML-
developing XML-based business reporting standards
Building on Our Core Values
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Building on Our
Core Values
XBRL Video
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Building on Our
Core Values
What about the
Next Generation?
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New CPA Forum -
What Do They Want?
Low-cost, industry-specific, high quality CPE
Career guidance
More focus on image enhancement
Freshman orientation
Building on Our Core Values
How Do We Get Them More Involved?
Target Employers and Managing Partners
– Volunteering Not a Priority: “What’s the Benefit to the
Firm or Employer?”
– Membership in Professional Societies Not a Priority
Forced Choices -- Often the Company or Firm Will Reimburse
Just One Membership
Establish System of “Firm Administrators” or
Contacts
Building on Our Core Values
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Building on Our
Core Values
Image Enhancement and
Student Recruitment
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Image Enhancement - Ongoing
Working closely with state CPA societies
Bridge advertisements currently focused on
Enron and Worldcom response
Editorial board meetings
Electronic communications
Building on Our Core Values
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Student Recruitment
Reached 8.5 million+ high school
students in 95% of US schools
Reached over 1.2 million college
students
More than 50,000 students responded
Building on Our Core Values
Revised CPA Examination
Aligned with “real world” requirements of entry-
level CPA work
Uses current tools for technologically driven
business world
Recognition of increased complexity of
business transactions
Ensures uninterrupted protection of public
interest
Building on Our Core Values
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CPA Exam
Collaborative Effort
Historic change – final paper and pencil exam in
November 2003
CBT effective in early 2004
Cooperative effort from:
– NASBA
– State boards of accountancy
– AICPA
– Prometric
All parties committed to meeting the needs of
state boards
Building on Our Core Values
Building on Our
Core Values
CPA Exam Video
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Member Outreach and Engagement
Targeted toolkits - on legislative proposals and now - on
implementation
Electronic “News Update”
– Concerted effort to acquire members’ email addresses.
Spotlight areas on AICPA.ORG
Full engagement of member firms on cascade.
Board outreach to state societies
Building on Our Core Values
Building on Our
Core Values
The AICPA’s
Six Major Roles
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Highlights of the Yale Speech on Revitalized
Accounting Culture
If we’re serious about restoring our image, we
need to drive a revitalized accounting culture
Image enhancement. Requires enormous
resources, collective effort.
Shore up foundation of this profession
and protect the CPA (small firms)
Minimize cascade effect:
– Protect small business and smaller CPA
firms from inappropriate or unintentional
consequences of Sarbanes-Oxley.
Highlights of the Yale Speech on Revitalized
Accounting Culture
Build upon the profession’s
traditional values
– A rigorous commitment to integrity
– A passion for getting it right
– A commitment to principles and a
zeal for applying them
– Zero tolerance for those who break
from our core values
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Highlights of the Yale Speech on Revitalized
Accounting Culture
Auditors must be willing to say NO
Audit relationship issue
“Trust, but verify,” this is the true
spirit of the profession
Overview of The AICPA’s Roles
With the accounting culture as a base, I laid out six
roles for the AICPA:
– Standard-setter
– Liaison between market institutions and
corporations
– Research
– Educational role
– Advancing the level of financial reporting
– Promoting strong corporate governance and
internal controls
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Standard Setting
CPAs, like other professionals, have
a public-interest responsibility to set
standards
AICPA needs to obtain greater
involvement by users and market
professionals
Media issue
Advancing Financial Reporting
Initiating a dialogue on differentiating reporting
needs of public vs. closely held companies
Working with FASB on more timely and better
quality reporting – particularly for off balance
sheet, intangibles & liquidity
Transitioning SOPs to FASB
AcSEC continuing to provide value-added
services
Co-sponsoring Value Measurement & Reporting
Collaborative
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Fraud and Corporate Responsibility
Our top priorities:
– Rebuild the confidence of investors
in our capital markets
– Re-establish audited financial
statements as a clear picture
window into corporate America.
Rebuild the trust and confidence through a
new aggressive and comprehensive Fraud
and Corporate Responsibility Program.
Fraud and Corporate Responsibility
Presentation tomorrow by Chuck Landes
will discuss what AICPA is doing in area
SAS 99, new standard on fraud just
released
– In development: Tools and products to
help members understand the new fraud
standard
Special Anti-Fraud Resource Center on
AICPA.org- To be live in December 2002
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Fraud and Corporate Responsibility
AICPA has established an Institute for
Fraud Studies with the University of Texas
and Association of Certified Fraud
Examiners
– First Research Project - how can investors help
protect themselves against fraud?
An Anti-Fraud Summit
– Scheduled in early 2003
Fraud and Corporate Responsibility
New Fraud Specialist Competency
Model
New Free Training Course for
Corporate America: “How Fraud Hurts
You and the Organization”
New CPE, Conferences and Products
for Corporate Management for
auditors, CFOs, CIOs, etc.
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Fraud and Corporate Responsibility
Outreach to Academia
– Enhance and Expand Fraud Investigation
Courses
– Get business ethics programs adopted
by business schools
– Develop a strategy for fraud prevention
education curriculum
Fraud and Corporate Responsibility
Auditing Standards Board
– Anti-fraud criteria and controls
– Using standards to drive change
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Building on Our
Core Values
FRAUD VIDEO
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Building on Our
Core Values
Hard Questions for the
Profession
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Hard Questions for the Profession
Is it time to stop explaining what the audit is
designed to do and instead step up to the public’s
expectations?
What should be our responsibility for detecting or
preventing fraud?
Should the content of the auditor’s report or
Management Discussion and Analysis be
expanded and enhanced?
What kind of reports should be we issuing on
internal controls?
Building on Our Core Values
Hard Questions for the Profession
What will happen to standard-setting, and what
role will the profession have in restoring rationality
to the process?
How can we help firms and businesses as they
explore new revenue and business models?
What steps can we take NOW to begin healing
the profession and rebuilding our image?
Should we have new ethics processes and will
the profession support them?
Building on Our Core Values
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Polk, M 11/11/2002 2:37 PM
Hard Questions for the Profession
How can small firms remain competitive and what
service mix will they be allowed?
Is it time to bifurcate the rules for those auditing
private versus public entities?
What is the appropriate role and relationships
among audit committees, auditors and
management?
What is the impact to the profession if audit-only
firms are the result?
Diversity of the profession – challenges?
Building on Our Core Values
Challenge to Our Profession
"When written in Chinese the word 'crisis' is
composed of 2 characters. One represents
danger, and the other represents
opportunity." (John Fitzgerald Kennedy)
We're at a major turning point -- and we can
make the difficult decisions now to create a
sustainable and viable future -- or we can
let the opportunity go by and live with the
consequences.
Let’s seize the opportunity before us.
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Building on Our
Core Values
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