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Three Challenges of the Accounting Profession

INTRODUCTION
Historically, the perception of accountants has been one of integrity, ethics, and assurance. In recent years, however, several high profile accounting scandals have shaken this reputation, casting a less then positive light on the profession as a whole. While accountants are considered an integral part of the capitalistic system, many outsiders now look at the profession with disdain as a result of Arthur Anderson et al. Increased scrutiny, tighter regulations, and decline in graduates entering accounting has created several challenges that must be solved in order to maintain the distinguished reputation of the profession. These challenges include: combating the decreased number of graduates by changing the perception of accountants, re-establishing the professions integrity and ethical reputation, and effectively dealing with the increased risk as a result of new regulations.

FILLING THE EMPLOYMENT GAP
In recent years the number of accounting graduates has been in decline (WSJ, 1996). New regulation has increased the demand for accountants and many of the baby boomer generation of accountants are retiring; consequently, there is an impending shortage of accountants (Locke, 2004). In discussions with university students, a common perception of the accounting profession that has arisen is that it is limited in opportunities, not interesting, or that complex mathematics is needed. Furthermore, accounting majors at universities complain that the course work is boring and that the career work must be similar. Finally, many students still believe a career as an accountant is for introverted types of personalities. These negative and ill-advised perceptions are a challenge for the accounting profession because they are contributing to the decline in graduates.



Marketing the Profession
The accounting profession must effectively demonstrate to students that the profession does not limit the career path. Furthermore, steps must be taken to ensure students realize that the Chartered Accountant profession is more than just a number cruncher position, rather a well rounded businessman that has practical knowledge in many areas of business. Although a marketing campaign has been undertaken by accounting bodies to highlight the benefits of being accountant, they focus primarily on the accounting profession, not the importance or demand for accountants within industry. In fact, a Chartered Accountant designation is often the most sought after employee in industry (Deloitte & Touche LLP). Currently, most students do not realize how important the CA designation is outside of the accounting profession. In order to change this perception the accounting profession must promote itself as a professional businessperson in industry. If students are aware that a C.A. designation represents not only an accredited accountant but also a professional businessperson, then more students would likely want to enter the profession because of its broad appeal. Marketing the accountant as a professional businessman will assist in changing the image of the profession because students will not consider accountants only as number crunchers, rather diversified business persons who skills are in demand in every area of business.

Modernizing Education
Universities should reform their methodology of teaching accounting in this technological era. From a student’s perspective, the coursework involved for an accounting major is often seen as boring. This perception is a reason why many students do not enter the accounting faculty when they enter business school. While it is important to learn the technical skills of accounting, too many classes do not relate to what the job actually entails. In today’s business, accountants use computer software to complete much of their work. For example, in tax class, a student is taught how to calculate a tax return by hand, but later on in their career, those same students utilize computer software to calculate the actual tax return. While it is important to understand how the tax return should be calculated, many accountants in this era will never calculate a tax return by hand. Therefore, the teaching should focus more on what can and cannot be deducted, for example, rather then how to calculate these tax returns. Teaching the students how to utilize and apply technology is more practical then teaching students pure technical skills. It is obvious that an accountant who has superior computer skills will be of higher demand than an accountant that does his calculations by pen and paper .

Higher Salaries
Another reason why many students choose career choices other than accounting is the higher starting salary offered by other professions. Although many accountants earn a higher salary in the later stages of their careers, many entry level accountants are paid a low salary, this combined with long hours, often equals minimum wage – this is not appealing to students. Most students enter a faculty or profession for the high salary that they will earn when they graduate, not what they will earn in ten years. The beginning salary offered to 2005 graduates from the U of A is thirty-three thousand dollars, and this salary hasn’t increased since 2001. However, a graduate of engineering from University of Waterloo is nearly double that. Students live on low income during their university career and there is no incentive for students to enter a profession only to suffer a few more years on a low salary. Low entry level salaries are a contributing reason why many students do not enter the profession.

REAFFIRMING THE INTEGRITY OF THE PROFESSION
For years accountants’ have provided assurance to investors who demanded validity in financial reporting, and in the process, accountants established the trust needed in order for the free market system to operate. However, after the accounting scandals of WorldCom, Enron, and Arthur Anderson, the accounting profession’s reputation was tainted. When these scandals took place, the accounting profession was largely blamed for the criminal actions of a small group of accountants. In fact 89 percent of accountants polled believe that the Enron scandal has hurt the image of accountants. Therefore, in order to reestablish the perception of ethics in the profession, accounting bodies must attempt to harmonize its accounting principles into a larger, global body, rather then the current regional structure currently in place, also, auditor independence must further be enhanced, and increased controls on fraud must be enacted.

Harmonizing GAAP
Over the past several years the CICA has been attempting to harmonize its accepted accounting practices with those of the US. The problem with this, from an international viewpoint, is that these accounting bodies will still have different accounting practices than the rest of the world. Harmonizing the Canadian standards with the American standards only lowers the perception of CICA’s standards because of the AICPA’s implication in past scandals. A more effective way of increasing the ethical perception of North American accountants would be to harmonize its standards with a global accounting organization. This would ensure that every accounting body applies similar accounting principles to similar situations. Globally, the world’s perception on accountants’ ethics in Canada would be increased because the fear that Canada is implementing improper accounting practices would be eliminated. Recently, the CICA abandoned its plans of aligning itself closer to the American GAAP because the cost benefits of implementing the Sarbanes-Oxley controls have proven to be ineffective and too complex (French, 2005). This move will improve ethical perception for Canada’s accountants because separates the CICA from the AICPA, whose members have been largely responsible for the fraudulent activities in the past.

Auditor Independence
Auditor independence continues to be a large issue affecting the reputation of the accounting profession; and the reason it is still an issue is because the big accounting firms have failed to become fully independent. Therefore, a challenge to the accounting profession is to entirely eliminate non-audit work from all audit firms. It is imperative that the Big 4 accounting firms focus primarily on assurance work. Even if the lost revenue is material, it’s a small cost to pay for ensuring the integrity of the trillion dollar financial system in North America. Even after three of the big 4 accounting firms divested their consulting practice, many still offer services that are non-audit related. If the firms really want to demonstrate independence they should eliminate all non-audit work from their firms and let other, non-audit firms, provide tax, financial, and technological advice. For example, three of the big four accounting firms divested their consulting practice, yet some of the consulting firms did not even relocate offices, rather just changed the name on their stationary. Even worse, Deliotte did not even divest their consulting practice (Sweeny, 2004). Although Deliotte is allowed to provide professional services to non-audit clients, it does nothing to assist the professions goal of perceived auditor independence. The Sarbanes-Oxley Act places limits on what services accounting firms can provide, but perception that the Big 4 offer non-audit services is only hindering the independence that they are trying to portray. If accountants want to provide non-audit service they should to offer these services through an independent entity – not through an audit firm. The goals of growth, market share, and revenue are likely the main reasons the Big 4 firms have not entirely eliminated non-audit work. However, these firms provide an important service of ensuring integrity to the market and if that is their main objective then performing audits is all they should be allowed to do regardless of any rationale. The private costs of the firms losing non-audit revenue are a small price to pay for social benefit of the stability of our delicate financial system.

Fraud
The profession must ensure its members are trained to actively identify fraudulent activity while informing investors that audits are not implicitly designed to detect fraud; these are major challenges for the profession. A study commissioned by the CICA in 2001 concluded that 49% of investors believed that auditors were “fully responsible for detecting fraud in companies they audit” (Parks, Chan, 2004). However, audits are not primarily designed to detect fraudulent activity; the main focus is ensuring accuracy. The CICA handbook states that “the likelihood of not detecting a material misstatement resulting from fraud is higher than the likelihood of not detecting a material misstatement resulting from error” (CICA, 5135). This means that there is a higher chance of not detecting fraud while performing an audit than there is detecting errors. Because of the deceitful nature of fraudulent activity, detecting fraud is not easy and thus cannot be guaranteed to be exposed in an audit. The CICA offers several reasons why fraud is detected in only a small percentage of audits. They argue is that junior accountants may not have the experience to detect it but more importantly it’s mostly due to “a lack of training in the awareness of fraud [that] likely contributes to failure of detection” (Parks, Chan, 2002). Since then the CICA and its American counterparts enacted new standards to help auditors detect fraud. However, the main challenge for the profession is to ensure its accountants are trained in how to detect fraud using these new standards. Also, since many investors believe that audits are meant to detect fraud, the profession should make an effort to aggressively educate investors that audits are mainly to verify accuracy of financial information, not to detect systematic, fraudulent activity. But at the same time, the profession should make investors aware that it has enforced additional measures, new standards and new practices to further detect fraud during an audit. However, until investors are aware that audits are not specifically meant to detect fraud, the profession will continually be patronized when fraudulent activity is exposed.

DEALING WITH NEW RISKS AND REGULATIONS
The new regulations resulting from the scandals of the past several years have increased the amount of liability and risk each accountant assumes. Not only has this become an increasing challenge for accountants to adjust to, industry has also been affected. As a result of unforeseen implications of the Sarbanes-Oxley-Act, firms have had to increase audit fees, assume more risk, decrease profit margin, and be more selective of which clients they choose to accept. Also, many accountants have shied away from becoming partner because of the increased risk each firm must take. From the industry standpoint, firms have a more difficult time obtaining audit services while having to pay more for an audit due to the increased fees and decreased competition. These are all serious challenges for the profession that will take years to solve and adapt too.

Increased Fees
Because of the increased risk and additional work now required on an audit, firms have had to increase the fee’s they charge for audits. From an industry perspective, since many accounting firms have stopped performing audits, competition has dropped causing audit fees to further increase. When the Sarbanes Oxley legislation was implemented it assumed that the private costs born by the industry would produce a social benefit (Gifford, Howe, 2004). From an economics perspective, however, if the cost per audit increases materially, yet the resulting social benefit is only marginal, then the private costs born by industry are not worth the benefit. Since additional work required on audits is a requirement of the Act, the resulting costs to industry have been high; consequently, the private costs of the legislation and its resulting social benefit are now being questioned (Gifford, Howe, 2004). There is no doubt that the implementation of the Act has been a challenge for the profession as a whole; however, since the legislation is relatively new, the profession hasn’t fully adapted to it. Therefore, in the future, if the profession can learn to cut costs by becoming more efficient under the Act, then industry will be better off because of decreased costs. In this regard, the professions main challenge in the future is to adapt to this Act while attempting to lower private costs by becoming more efficient.

Diversifying Risk
Because of increased regulation more and more firms are declining to perform audits due to the high costs of insurance and increased liability; resulting in a decreased competition for audits (Alles, Kogan, Vasarhelyi, 2004). The negative affect of this is the larger firms are assuming more clients. This highlights a problem: a high concentration of clients spread between a small group of 4 four large firms. If one of the Big 4 firms finds itself in a scandal similar to Anderson, then the industry will be worse off due to decreased competition. Secondly, since the Big 4 firms select their clients based on risk, smaller firms are accumulating higher amounts of risky clients; this can cause a higher probability of a scandal because smaller firms may not have the resources to audit the company properly.



CONCLUSIONS
The market must become more diversified so the concentration of clients that the big four audit decreases. However, the only plausible solution to solving this problem would be for several mid-size firms to merge thus creating 5 “big” firms in the market; though the prospects of a merger are unlikely. This issue will be on the forefront of the accounting industry in the future. This is an important challenge for the accounting profession because another larger firm in the market place would ensure stability and risk would be further diversified. Also, the amount of work required per audit has increased due to regulations but the profession needs time so become more efficient and effective under the new regulations. Therefore, in the future, the profession should adapt practices that lower costs but maintain quality.

Major challenges for the accounting profession include increasing the graduate rates by changing the perception students have of the accounting profession. The profession has to aggressively compete for these intelligent, ethical students. Instead of losing these bright minds to other faculties, the accounting profession must do a much better job marketing itself to students; students should be educated of the benefits that an accounting career can entail. Another change is the need to modernize the course work in university. Currently, course work is often seen as boring and out of date with reality. Courses should focus on teaching students how to effectively utilize software and technology to assist them in their profession, not learning strictly pure technical skills that will rarely be used in their career. Finally, increased pay for entry levels is a necessity. Many students do not want to start a career with a low salary and long hours. Even lawyers make more money articling with a firm while working similar hours. In sum, increase in salary, technologically orientated coursework, and awareness of an accountants career paths will broaden the appeal of the profession and help reverse the trend in the declining number of accounting graduates. These changes will not only broaden the appeal to students in university, but also it will market the profession as a dynamic career path that offers a wide range of opportunities.

In order to re-affirm the professions integrity and ethical reputation the CICA should continue its transition into aligning its standards with those of Europe and lead the world in developing global accounting standards. This initiative will strengthen the reputation of the Chartered Accounting profession as investors will respect the positive steps the CICA is making toward ensuring ethical standards. Another challenge for the profession is to further create independence between auditors and consultants. Currently, some firms have yet to divest their consulting practice, or haven’t eliminated non-audit services from auditing firms, consequently auditor independence is not fully established and this could hurt the profession’s integrity. Finally, auditors must ensure their employees are trained to utilize the new measures enacted by the CICA to detect fraud during audits. As well, investors must be educated that audits are not supposed to detect systematic fraud; this will help auditors avoid blame when fraud is exposed.

If these challenges can be met then the accounting profession will solve a majority of the issues it currently faces. Erasing the memory of past scandals is unlikely, but creating new ethical standards and effectively working within the new regulations will help re-affirm the professions ethical reputation. Over history, accountants have provided assurance to investors and have added integrity to the financial system, obviously the need for accountants is only growing. Therefore, it is imperative the profession undertake the job of solving these challenges so that future scandals are avoided. By continuing to find new ways to ensure the validity of the nation’s finances, the profession will continue to uphold its reputation of ethics, honesty, and integrity.

Written by:
M.K. Braaten

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