Spending a week in August at a convention of three thousand accounting professors would not be just everyone’s idea of a good time.
But as the 2008 meeting of the American Accounting Association winds down in Anaheim, California, the phrase “where fun goes to die” would be more than a little harsh.
To some, the mind-numbing acronymic jargon of IFRS and ERM and XBRL might yield to the near-by temptation of Disneyland or the division-leading Angels playing baseball just down the road. But the topic and speaker quality has been high, and the attendance both loyal and durable.
A high point for me was the opportunity to be part of a panel that took up the compelling question, “Is the Current Business Model of the Audit Firms Sustainable?”
The quality of the public dialog has left open to question the seriousness of the lip service being paid to the audit profession, and the ostensible importance of large-firm assurance to the world’s capital markets. Tom Selling has been sharp-edged and perceptive in The Accounting Onion – here – in his criticism of the SEC’s Committee on Improvements to Financial Reporting. I’ve raised my own issues over the flaccid performance of the US Treasury’s Advisory Committee on the Audit Profession -- some both here and here.
Credit for convening the AAA panel goes to Gary Previts, historian and professor of accounting at Case Western University and, probably not coincidentally, a member of the Treasury Committee. Wearing a third hat as president of the AAA, Previts reasoned correctly that the accounting academics have their own “skin in the game” on the sustainability issue.
That’s for at least two reasons: First, the universities are called upon to provide the intellectual horsepower, research platforms and ivory-tower resources that support the profession’s capacity and relevance in a complex global society. Second, it’s these professors’ students who are the very feedstock into the gaping pipeline of personnel needs of the large and small firms, industry and government.
Despite being assigned the death slot on the meeting’s 150-page schedule -- after lunch on the last day of the program -- turn-out for the session was robust and energized.
On the table were the academics’ reasons why the current reporting and assurance structure requires evolution – ranging from the impact of information handling technology on the firms’ partner:staff leverage, to doubts about audit methods to verify intangible assets, to skepticism that audit risk models can deliver quality results because they are ill-suited to assess either management’s major areas of judgment or the deliberate acts of fraud or manipulation.
Bolstering these professorial perceptions were the observations from “the street” – the hazards and risks that must be part of any serious sustainability discussion:
• Litigation with claims exceeding $100 billion loom over the large firms, with the immediate potential to overwhelm the modest level of their partners’ capital.
• There are no achievable survival strategies, either singly or in combination – whether liability caps, insurance, new competition, ownership changes or outside capital.
• The players in the public discussion, all acting in presumed good faith but with antagonisms and limitations of vision, include the firms themselves, with the weakness of their focus on improvements when their performance remains subject to criticism, and the issuers and the regulators with their own interests being served by the preservation of the status quo.
• The next large-firm collapse will take the system down, not from four firms to three, but all the way to zero, for reasons of overwhelming concentration, inability to absorb the work demand, and predictable risk avoidance in a dysfunctional system.
• Finally, the reporting and assurance model coming down from the 19th century is obsolete and unsatisfactory in a modern context -- but cannot evolve, under the existing legal and regulatory constraints, into new forms of assurance that the capital markets would value and be prepared to pay for.
What the AAA session could only touch on – and what remains as the next step – is a serious and comprehensive effort to do the “blank page” design work for an assurance model responsive to the needs of the 21st century.
That delivery model will evolve, for certain, because change cannot be stopped. The only question is whether it will occur before or after the collapse of the current system, with the attendant market cost and disruption and the dispersion of the large firms’ personnel, reputation and financial and intellectual resources.
So here’s a message from academia, to the regulators, politicians, think-tank leaders and the large firm managements alike – all sitting there, heads down in denial, confusion or resistance:
There is a lot of hard but rewarding work that has to be done to avert a catastrophe. Is anybody listening?
Who is listening, and what if anything are they writing? Is there any international body working on a solution?
Posted by: j. r. adams | March 23, 2009 at 01:28 PM