CPAs: Bloodied and Bowed

In 2000, the accounting industry's potent Washington lobby trained its big guns on Securities & Exchange Commission Chairman Arthur Levitt Jr.--and blew him out of the water. Marshalling dozens of members of Congress, the accountants easily turned back Levitt's proposal to rein in their lucrative practice of consulting on the side for the companies they also audit. But now, barely two years later, they find themselves in disarray. Shunned by politicians who once courted them and stripped of their cherished right to regulate their own profession, they've become the butt of jokes by late-night comics.

What changed? Enron (ENRNQ

), WorldCom (WCOEQ

), and other massive audit failures clearly damaged the profession. But more and more accountants are blaming their precipitate fall on the industry's most important group, the 340,000-member American Institute of Certified Public Accountants. Under CEO Barry C. Melancon, they charge, the AICPA neglected its duty to police auditors and enforce financial discipline on Corporate America. Worse, when the Enron Corp. scandal struck, the accountants' lobbyists were among the last to recognize that the world had changed. They steadfastly opposed reform. The hard-line strategy backfired big time when the Sarbanes-Oxley Act of 2002 snatched away one of the AICPA's main reasons for being: oversight and discipline of auditors.

Now, the New York-based AICPA is struggling to salvage its influence. It wants to continue to write audit standards--the rules that accountants must follow when they audit a public company's books. The AICPA argues that its members have the front-line expertise needed to write the rules. But critics--including three former chief accountants of the SEC--contend that the AICPA has consistently tilted its standards to shield big auditing firms from liability when they fail to detect financial fraud. Both sides are lobbying intensely at the SEC and the new Public Company Accounting Oversight Board, and the outcome will have major consequences for investors and companies. "This will be the bellwether of whether the new board is an effective oversight group," says Douglas R. Carmichael, an accounting professor at Baruch College and a former AICPA staffer.

The anger over the AICPA's fading role and influence is focusing on Melancon. Critics charge that the 44-year-old Louisianan neglected the AICPA's professional mission in favor of disastrous business ventures that have driven the association's $171 million annual budget into the red. "There has been a tone at the AICPA that emphasized consulting and other services," says Robert Israeloff, a former AICPA chairman and a partner in Israeloff, Trattner & Co., a midsize New York firm. "The franchise that should have been defended was the audit."

Israeloff, who nominated Melancon as CEO in 1995, now says it's "a fair question" whether he should be replaced. Another AICPA ex-chairman, J. Michael Cook, former CEO of Deloitte & Touche LLP, goes further: "We need major change in the leadership if it is going to be an effective professional organization. The people there today do not have credibility." At the same time, the New York State Society of CPAs and a band of individual CPAs with a Web site called cpas4reform.com are pushing for changes in how the AICPA is run that would reduce Melancon's power.

Melancon, whose contract as CEO runs to 2005, counters that the profession has steadfastly worked to improve audits and that he should certainly keep his job. "There is no one who works harder at making sure the profession is successful than I do," he says.

But in fact, Melancon's ambitions for the AICPA have hurt him greatly. He championed an ill-fated Internet foray in late 1999 called CPA2biz.com, a for-profit venture to sell accounting and other business services online to members and their clients. But in some cases it competed with members; the portal lost money and had to be restructured. Melancon also pushed a new credential for non-CPAS that would certify them as business advisers with "breadth of knowledge, strategic focus, and professional rigor." The credential--variously called "XYZ" and "cognitor"--was intended to broaden the institute's ranks when accounting enrollment in business schools was plummeting. But members rejected the idea 2 to 1 in a vote early last year and the AICPA dropped it, after spending $4.7 million on its aborted launch.

Meanwhile, the AICPA failed to defend the integrity of audits and financial statements, the very underpinning of the profession, says William D. Travis, managing partner at McGladrey & Pullen LLP, a midsize auditing firm based in Bloomington, Minn. The AICPA is only now beefing up efforts to train auditors to detect fraud, he says. The institute also failed to defend accounting standards from corporations that wanted to twist the rules to hide debt and inflate earnings. Adds Travis: "The profession should have stood up and said, `We're going too far."'

Instead, the AICPA used its massive political capital to defend the management- and computer-consulting practices of its biggest members--the Big Five until Arthur Andersen LLP collapsed last year. Melancon led the charge that defeated Levitt's 2000 proposals to restrict firms from consulting for companies they also audited. But that victory proved pyrrhic when Enron and then WorldCom Inc. reported huge frauds that were missed by auditors. Blame focused on the auditors' dual roles and conflicts of interest.

Worse, the accounting lobby's 2000 success emboldened it to take a similar tough stand against reforms last year--a strategy that backfired. To head off reform, the AICPA negotiated with SEC Chairman Harvey L. Pitt to propose turning over auditor discipline to a board with a majority of non-CPA members. Critics quickly concluded that this board would be easily manipulated by the accountants. Still, the AICPA's once-feared lobbyists figured they could halt Senate legislation that would install a tougher, more independent overseer.

WorldCom's admission last June that it had overstated its results by billions of dollars changed that. The CEOs of the Big Four realized that Congress was certain to act and hastily arranged a meeting with Senator Paul S. Sarbanes (D-Md.), then chairman of the Senate Banking Committee, who with Congressman Michael G. Oxley (R-Ohio) sponsored the reform bill. After the CEOs pleaded for easier provisions in the bill, Sarbanes reached for a stack of printed e-mails and faxes that the AICPA had sent to mobilize its members. The missives consistently opposed any legislation. Sarbanes' message: The AICPA's stiff opposition had wiped out any influence the accountants might have had over the final bill.

Now, the AICPA's influence has dimmed even further. In the wake of its defeats, members cut back sharply on donations to its political action committee. The PAC raised $881,235 in the 2002 election cycle, down from $1.38 million in 2000. The PAC was forced to dip into its reserves to maintain its contributions to candidates.

Still, Melancon and AICPA Chairman William F. Ezzell Jr. hold out hope that the AICPA can keep the job of writing auditing standards for the new oversight board. Ezzell points to 1,000-plus pages of standards that the AICPA has developed as proof of its qualifications. "With sunshine on the process, I see no reason why it wouldn't make better sense to have people who know how to do audits leading the effort," he says.

No doubt the oversight board will need professional expertise. But given the present state of the AICPA, the board is likely to look for it elsewhere. By David Henry in New York and Mike McNamee in Washington