Burgess, Carole

Killough, Larry N.

English

eGrove (Univ. of Mississippi)

Woman C.P.A. Volume 47 Issue 2 Article 3 4-1985 Self-Regulation vs. Public Regulation Profession Under Attack Carole Burgess Larry N. Killough Follow this and additional works at: https://egrove.olemiss.edu/wcpa  Part of the Accounting Commons, and the Women's Studies Commons Recommended Citation Burgess, Carole and Killough, Larry N. (1985) "Self-Regulation vs. Public Regulation Profession Under Attack," Woman C.P.A.: Vol. 47 : Iss. 2 , Article 3. Available at: https://egrove.olemiss.edu/wcpa/vol47/iss2/3 This Article is brought to you for free and open access by the Archival Digital Accounting Collection at eGrove. It has been accepted for inclusion in Woman C.P.A. by an authorized editor of eGrove. For more information, please contact egrove@olemiss.edu. Self-Regulation vs. Public RegulationProfession Under AttackBy Carole Burgess and Larry N. KilloughOver the last several years the ac­counting profession has come under attack from public interest groups, con­gressional committees, the press, and business writers. However, accounting is just one of several professions be­ing beseiged by the advocates of public responsibility. To better under­stand accounting’s problems, it is im­portant to take a broad look at the nature of American professions in the late 20th century.A profession is an institution and possibly a monopoly; it must have a definite purpose and require special training. In order to comply with socie­ty’s requirements for a profession, educational standards are established, competency examinations are ad­ministered, and various codes govern­ing behavior are required. However, below the surface, the professions suc­cessfully create a guild calling for restraint of competition in the name of better service to the public. The public often views this as a move toward elitism. Thus, the profession’s members are set apart from the general public and a monopoly is created.1Because a profession’s functions center on public service, its members are necessarily at the mercy of the public’s will. Society allows the profes­sion a limited set of privileges expec­ting the members to perform these functions efficiently and effectively. However, expecting a profession com­posed of individuals to act in a uniform­ly expert manner is unrealistic. There will, inevitably, be superior perfor­mance by some members of a profes­sion, failures by others, and much performance which falls into the me­dian between these two. Failure to meet a changing society’s standards leads to public displeasure and sometimes distrust endangering the profession’s privileges.2The current public assault on the ac­counting profession is an outgrowth of the Watergate investigations, cor­porate failures, frauds, and briberies encountered in the early 1970s. These events brought the attention of the public and government to the business community in general, and specifical­ly to the accounting profession. As a result, Congress conducted several investigations into the Securities Ex­change Commission’s (SEC) manage­ment of matters involving corporate accountability, accounting, and auditing.The first Congressional report came from Congressman John E. Moss’s subcommittee in October 1976. They concluded that the SEC should not continue to rely on self-regulation in the accounting profession because of the Financial Accounting Standards Board’s (FASB) tarnished image. Similarly, the staff report prepared by the late Senator Lee Metcalf for sub­committee hearings on the accounting profession was critical of the SEC’s oversight; it proposed that more legislation was needed to regulate accountants.While Metcalf and other critics of the accounting profession and the FASB discussed federal standards for ac­counting and auditing, the American Institute of CPA’s (AICPA) Commis­sion on Auditors Responsibilities (The Cohen Commission) concluded that the present combination of private and government regulation effectively maintained audit quality. However, the Cohen Commission documented that there was substantial room for im­provement in the area of self­regulation. As a result of the SEC’s continued support of self-regulation, the Metcalf subcommittee’s recom­mendations issued in November 1977 emphasized self-regulation for the ac­counting profession with SEC oversight.Structure For Self-RegulationFollowing the 1977 Senate Subcom­mittee hearings, the accounting pro­fession was faced with either the pros­pect of revising its present regulatory processes or submitting to public regulation. The profession chose the former option and formulated a self- regulatory plan through the AICPA. The principal elements of the plan were a SEC Practice Section monitored by non-CPAs and peer review.The SEC Practice Section (SECPS) is one of two sections created in 1977 when the AICPA established a Division for CPA Firms. Membership in the SECPS dictates that a firm follow rigid quality control standards and meet numerous requirements, including peer review. An Executive committee oversees the Section’s activities; it can impose sanctions such as additional continuing education requirements, special peer reviews, censures, fines, and expulsion from membership. The Public Oversight Board (POB), in turn, oversees the Executive Committee of the SECPS.6/The Woman CPA, April, 1985Another element of the SECPS is a special investigations committee (SIC). The SIC examines evidence of al­leged audit failures and makes recom­mendations concerning further investigation and sanctions to the Ex­ecutive Committee.Members of both the SECPS and the Private Companies Practice Sec­tion (PCPS) are required to undergo a peer review every three years. The purpose of peer review is to evaluate a firm’s quality control system and determine if there is reasonable assurance that the firm is meeting pro­fessional standards. Accordingly, the peer review process is the foundation of self-regulation.Before the peer review can begin, the firm being reviewed prepares a quality control document which describes their quality control system and checks for compliance with prescribed measures by examining working paper files and reports. Com­pliance with membership requirements of the division for firms is also exam­ined during the review. At the conclu­sion of the review, a written report is presented at a meeting called an exit conference. Both the SECPS peer review committee and the POB are notified of upcoming exit conferences involving members of the SECPS.For self-regulation to be effective, more than the self­interest of those regulated must be considered.Several rules have been estab­lished to govern the composition and qualifications of those conducting reviews. Review teams may be pro­vided by the AICPA, an association or a state CPA society or one firm may engage another. However, reciprocal reviews are not allowed; the two firms must be independent of each other. Members of the review team must be CPAs and be highly knowledgeable in the reviewed firm’s specialty areas. In addition to the work of the SECPS peer review committee, the POB monitors the peer review process.The POB was forced to oversee the activities of the SECPS. The composi­tion of the POB reflects the profes­sion’s desire to represent the users of financial statements and to improve public service. Of its five members, four must be nonaccountants. Because of the profession’s desire to maintain a self-regulation program, the POB has line authority. Its real power results from the right to attend the meetings and activities of every sec­tion committee and the duty to report to the SEC and the public on the ade­quacy of the profession’s self- regulatory program.3 Specific POB duties include consulting with SECPS executive committee on current issues, overseeing the peer reviews of member firms, attending exit con­ferences, examining the investigative efforts resulting from the SIC, and con­sulting with the SEC.The AICPA’s formation of an SEC practice section, a peer review pro­cess, and a POB has illustrated the profession’s commitment to oversight and quality control. However, the over­sight and peer review process require that disciplinary bodies penalize those who perform substandard work. The failure of the oversight and peer review process to adequately discipline the profession is just one of the self- regulatory problems that remains to be solved.4Self-Regulation Problems and ConsiderationsIn order for self-regulation to be ef­fective, more than the self-interest of those regulated must be considered. A problem facing self-regulation is that of overcoming the reservations of both members of the profession and the public. A few members of a profession naturally resist all forms of regulation while some citizens see private regula­tion as a collusion of members aiming to deceive those who are supposed to be served.5Other matters which must be con­sidered are the misconceptions on the part of the public and members of the profession concerning self-regulation and public regulation. Some in­dividuals expect to see a great deal of activity, indicating that self-regulation is functioning properly. However, the activity level in a self-regulatory pro­cess is a less useful measure of con­trol than in public regulation. As mentioned earlier, some members of Public regulation emphasizes punishment; self-regulation stresses remedies and avoidance.the regulated profession will not perceive a change from their unregulated state and will be un­cooperative regarding new or formal regulation.6Further, problems can occur in the relationship between the profession being regulated and the group who is responsible for oversight. A lack of at­tention to oversight leads to unques­tioned self-regulation; too much atten­tion can lead to public regulation.7Perhaps, the biggest problem in the current self-regulatory system is the failure of the AICPA to make member­ship in the SECPS or PCPS man­datory. This failure is especially noteworthy in light of the recent decline in SECPS membership. Reasons cited for this decline include peer review costs and unwillingness to undergo peer review.8 Without in­creased involvement in the division, the profession’s commitment to over­sight and quality control is questionable.A final consideration involves the level of competition in the profession. While the number of accounting firms has increased, the client base has re­mained essentially at the same level. The result of firms’ efforts to maintain or expand their client base has often led to price cutting. Unfortunately, a decline in the quality of service offered has frequently accompanied these price cutting measures.Need For Proper BalanceAlthough public regulation and self­regulation are directed toward similar ends, they vary significantly in the means used to achieve those ends. For example, requirements dictated by public regulation are enforced through state and federal authority; self­regulation can only invoke sanctions or exclude members from group benefits.9The Woman CPA, April, 1985/7If self-regulation is to work, a moral regeneration is needed.While public regulation emphasizes punishment for misconduct, self­regulation stresses remedies and avoidance. One reason for this dif­ference in methods is that the public demands intensified public regulation after it perceives misconduct; in their eyes punishment is viewed as a strong deterrent. Self-regulation’s emphasis on remedy is based on a desire to treat the profession’s members fairly, in ad­dition to serving the public. It is felt that the public is best served by dealing with the cause of the problem.10Prospects For the FutureA balance of private rights and public responsibility is necessary to measure how well professions meet standards. According to Jacques Bar­zun in “The Professions Under Siege,” long-time monopoly status has caused professions to forget that their privileges were given in return for public benefit. In order to achieve a balancing of private rights and public responsibility. Barzun proposes that a moral regeneration is needed. Moral regeneration will not develop as a result of internal minimum standards or policing from the outside; it “can come about only when the members of a group feel once more confident that ethical behavior is desirable, wide­ly practiced, approved, and admired.”11 Self-regulation of the ac­counting profession will be successful only when it embraces these condi­tions wholeheartedly and unre­servedly.Despite skepticism about regulation and the quality of service offered by the profession, the public and govern­ment want accountants to take more responsibility to ensure the accoun­tability of major institutions. Thus, the role of the accounting profession has 8/The Woman CPA, April, 1985expanded as corporate and govern­mental accountability have come under the scrutiny of public interest groups. The greater influence of the accounting profession further arouses its critics to demand stronger supervi­sion from the outside. “Thus, the ma­jor challenge facing the profession in the next decade is to remain a self­regulating entity in the private sector even as its public mission and respon­sibility grow.”12Summary and ConclusionsIn recent years there has been a change in outsiders’ views of the ac­counting profession. No longer seeing the profession as an institution dedicated to quality service and in­tegrity, public interest groups, the press, and congressional committees have threatened the profession with much more stringent regulation from external sources. The accounting pro­fession has responded to such threats by revising its self-regulatory program to include the SECPS, peer review, and the POB. Despite the various con­cerns from external sources about this form of self-regulation, its goal of ser­vice parallels goals usually cited for public regulation.The accounting profession now finds itself at a juncture. The FASB con­tinues to be criticized; self-regulation has probably not worked as well as it should because of practitioners’ resistance; and increased competitionCarole Burgess is currently a staff accountant with Deloitte Haskins & Sells in San Diego. She received a BS from Virginia Polytechnic and was vice-president of Beta Alpha Psi.has led some to conclude that many members have forgotten their primary service responsibility.If self-regulation is to work, a moral regeneration is needed. Members must once more believe that ethical behavior is essential, that service is far more important than market share or profits, and that inferior performance cannot be tolerated. ΩNOTES1Jacques Barzun, “The Professions Under Siege,’’ Harper’s, October 1978, pp. 62-63.2lbid., p. 63.3J. Michael Cook and Haldon G. Robinson, “Peer Review — The Accounting Profession’s Program,” The CPA Journal, March 1979, p. 12.4John C. Burton, “A Critical Look at Profes­sionalism and Scope of Services,” Journal of Ac­countancy, April 1980, p. 55.5Robert K. Mautz, “Self-Regulation — Perils and Problems,” Journal of Accountancy, May 1983, p. 78.6lbid., p. 78.7lbid., p. 80.8John J. McCloy, “Accomplishments of the SECPS: the POB’s Assessment,” Journal of Ac­countancy, August 1983, p. 60.9Mautz, p. 77.10lbid., p. 78.11Barzun, p. 68.12Gilbert Simonetti, Jr., “Remaining Self­Regulating,” The CPA Journal, February 1980, pp. 5, 7.Larry N. Killough, Ph.D., CPA, is professor of accounting at Virginia Polytechnic Institute and State University. He has a Ph.D. from the University of Missouri. He is a member of the Virginia Society of CPAs, the AICPA and the AAA.

Self-Regulation vs. Public Regulation Profession Under Attack

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Self-Regulation vs. Public Regulation Profession Under Attack

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