US survey: The quest for growth continues overseas

Carlos Martin Tornero talks to members of the US profession about their response to the challenges of increasing globalisation

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Data: Non-audit services monitor

Data: Partnership and staff monitor

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The US profession seems to be fully aware that a navel-gazing mentality is only a recipe for disaster in today’s heavily globalised accountancy industry.

An inward-looking strategy where domestic affairs overshadow international ambitions would just clip the wings of American accountants, at a time when global professional bodies leave no stone unturned in trying to dominate the accountant-hungry emerging markets.

Their colleagues in the UK understood this some time ago, and it may be no coincidence that the two main US professional bodies have forged alliances across the pond with British counterparts.

But the international aspirations of the US’s Institute of Management Accountants (IMA) and the American Institute of Certified Public Accountants (AICPA) also stand in their own right, separate from their respective UK bedfellows: the Association of Chartered Certified Accountants (ACCA) and the Chartered Institute of Management Accountants (CIMA).

IMA’s membership growth to nearly 78,000 members is primarily attributable to its interaction on the international stage. As IMA president and CEO Jeff Thomson explains, the US is "just about flat" in terms of growth.

"That’s probably relative to other accounting bodies," Thomson continues. "The AICPA has a bit of a drop in US candidates for the CPA exam. IIA [Institute of Internal Auditors] has dropped membership over the last few years, and likewise FEI [Financial Executives International]. The fact that we have been stable in the US is, in a relative sense, a good performance."

In contrast, Thomson offers the example of China, where IMA reached 5,000 certified members before their partners did, although ACCA has been in the country for a longer period of time.

AICPA has not disclosed membership figures in specific countries. However, vice-president of firms and global alliances Mark Koziel tells The Accountant that the American institute maintains an active international strategy to serve its members abroad.

"Giving back to our international community is important to us," he says. As such, Koziel highlights the strong relationship with IFAC, where AICPA participates on all committees, as well as its active involvement within the Global Accounting Alliance, an international group of 11 bodies.

AICPA was also seen at one of the major accounting events of 2015, the third Africa Congress of Accountants in Mauritius, attended by Jim Knafo, AICPA director of international relations.

"For us it was more attendance of observation," Koziel says. "It’s good to see how strong and how sophisticated the African markets are becoming."

Another highlight of 2015 has been the restoration of diplomatic relations between the US and Cuba. Right in the US’s backyard, the Cuban national professional body has almost 34,000 registered accountants. And the accountancy path for the degree in economics at Cuba’s 17 universities (one per province) continues to be a popular choice among students.

So are the US neighbours interested in having a presence in Cuba?

"Not yet," says Koziel. "We’re looking to hear more from what comes out from our State Department, with the US embassy opening. That’s the first step.

"There’s still a long way to go before we would be able to see any big changes there. But when the time comes, we’ll be ready".

Similarly, at IMA US-Cuba relations are being monitored. IMA vice-president of international business development Jim Gurowka says: "It’s fair to say that we’re watching what’s happening with interest. Our first international chapter was actually established in Cuba [before the revolution]."

However, IMA’s policy is not to serve members directly in any country that’s embargoed.

"Well, Cuba is technically an embargoed country, along with Syria and others," continues Gurowka. "The US State Department could moderate that over time and then, of course, we’d look at it, but not now."

Gurowka adds that IMA keeps receiving enquiries from countries such as Syria, Sudan or Myanmar. "And Iran, sooner or later sounds like it’s going to open up. So there are interesting possibilities because we’ve done well in the Middle East."

To the south, IMA has opened a chapter in Mexico, which is the first step in the institute’s entry strategy. In Brazil, IMA and the University of São Paulo have signed a partnership whereby the university received endorsement of its education programme to prepare students for the CMA designation.

"The endorsement provided by our higher education programme is kind of a foot in the door in that market," Thomson says. However, a more sophisticated deal was achieved in India, with the opening of eight chapters and a partnership with a review course provider.

While AICPA signed a deal in Colombia to offer its IFRS certificate, Koziel says other countries, which can’t be disclosed at the moment, will follow. He also mentions that AICPA has finished a project to develop the accountancy profession in Kosovo, however despite requests by this publication, further details about this were not provided.

International issues
Yet another year has passed in which no major progress has been observed between the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB).

The adoption of IFRS by the US seems now like a hollow promise that will surely never be fulfilled; and when it comes to convergence, no tangible fruits seem to have been reaped. Just as an example, the IASB and FASB recently announced that the application of their converged revenue recognition standards will be deferred at least until 2018.

The times of IFRS euphoria in the US are long gone, which coincided with Christopher Cox’s chairmanship of the Securities Exchange Commission (SEC) from 2005 and 2009, who once said: "The stars were aligned to make it not impossible that the US could actually join and perhaps even lead this global effort."

But as he told The Accountant some time ago he remains a supporter of the IFRS mission, although he is "disappointed things have come to this pass" regarding the stalemate reached in the adoption of international standards by the US.

At the moment, as Thomson puts it, IFRS is a "non-event" in the US. "It’s not even on the agenda of the SEC," he says. "There are still foreign [IFRS] filers and the option to do it, but in terms of the SEC mandating IFRS and convergence, that’s not an issue".

At AICPA, Koziel’s observations on IFRS are similar to his IMA counterpart: "There’s nothing new on adoption. The current SEC chief accountant James Schnurr said it’s not going to happen. But there’s constant dialogue between the IASB and FASB on convergence projects, and that’s important".

AICPA has traditionally been a supporter of the international standards, a stand which contrasts with the US’s generally lukewarm attitude towards the international standards.

However, the opposition to IFRS doesn’t stem from American CPAs. An interesting fact, Koziel notes, is that the AICPA certificate on IFRS was a demand from their members in order to serve US companies who are either a parent with foreign subsidiaries or a subsidiary of a foreign parent.

Koziel says: "Today our member firms need to understand both [IFRS and US GAAP], so I can’t say they are opposed to it. It can be a challenge to understand two different set of standards, but they are doing well with it."

He also draws attention to the conversion practice some US companies undergo when their financial reporting is predominantly international: "[They] actually keep their records on IFRS and convert back to US GAAP. It’s now pretty systematic".

The shock waves of the EU audit reform haven’t landed yet on US shores. Sooner or later, though, they will. By June next year EU member states will have to incorporate the EU legislation into their national laws. By then, among other measures, mandatory rotation and restriction on the provision of non-audit services will be in place (see TA issue 6136 March 2015 for more information on the reform).

In August, KPMG US published a policy paper analysing how the reform may affect US companies. In particular, the Big Four firm’s analysis outlined the types of companies that may be affected, pending the final implementation of the EU rules on each member state. They are:

*US domestic registrants under SEC rules that have an EU-based holding company as the ultimate parent, and have their securities dual-listed on a US exchange and an EU-regulated market.
*US-based companies if their group structure includes an EU public interest entity.
*EU branches of US-based credit institutions and insurers, if a member state decided they are subject to the reform.

Koziel says that so far he hasn’t heard of any issues from AICPA members attributed to the EU reform, but expects to hear "within the next five years of so".

The Public Company Audit Oversight Board (PCAOB) triggered the debate about audit rotation through public consultations in 2011 and 2012. However, in July 2013 the US Congress amended the Sarbanes-Oxley Act (SOX) to prohibit the PCAOB from implementing mandatory firm rotation.

Nonetheless, could the imminent application of the EU audit reform reopen the debate about rotation in the US?

Koziel remains sceptical about that possibility: "I’ve not heard that to be at the top of the agenda of PCAOB. Currently, that conversation in the US is not really important and there hasn’t been any reason to debate that issue."

Integrated reporting
Another topic in which the US seems to go against the flow is Integrated Reporting (IR). Yet IMA and AICPA are both active members of the International Integrated Reporting Council (IIRC).

IMA joined the IIRC more recently, in December 2014, as the American institute felt it "needed to be at the table and have a voice" in the development of IR.

However IMA had already been vocal on the debate about this issue prior to joining the IIRC.

"We believe in a balanced debate to move the topic forward," Thomson says. "I think there’s a lot of piling into IR without thinking through the needs of investors. Everyone says it’s a wonderful thing without any clarity on why; who is benefitted; who are the ‘investors’; and what are they asking for."

IMA maintains the position defended at the time when the IR framework was subject to public consultation.

"We said the end in mind is not an integrated report," Thomson notes. "What we said very clearly and consistently is the end in mind is to better inform investors and other stakeholders as to the value creation capacity and sustainability of the organisation, in an efficient and effective way. Now, that’s a mouthful, but it may or may not mean an integrated report."

He goes on: "It might mean interlinked reports, it might mean more robust MD&A, it might mean something like the [directors’] strategic report in the UK. It could be an emphasis on integrated thinking and balanced scorecards that companies in the US and around the world already do for internal management purposes."

One of the reasons that hinders IR, and more broadly sustainability reporting, is the risk of litigation according to Thomson. "We are, unfortunately, a very litigious society. Non-financial data has different levels of materiality and assurance, and by definition it doesn’t have the same level of confidence. Yet [non-financial data] is captured as a requirement, and that could be an issue."

At AICPA, Koziel acknowledges the challenges that IR faces in the US. However, he sees some instances of success, with interest driven by firms which are making demand on their suppliers around sustainability issues and thus pushing for more non-financial information.

Yet Koziel perceives that the US being a "compulsory-driven reporting country", there won’t be widespread sort of adoption experienced in Europe unless IR is mandated or regulated.

In other jurisdictions the debate is moving forward towards the provision of assurance services on IR. Here’s where Koziel foresees formidable opportunity for American CPAs.

"Here in the US market profession, CPAs are the trusted business advisor for attestation," Koziel says. "I don’t see IR being any different [than other auditing processes]. It’s the natural skill set for CPAs just to move from financial audit into programmatic audits around issues involved in an integrated report."

Self-regulation initiatives
On the national front AICPA is involved in two ambitious projects, both touching on its self-regulatory activities.

First is an initiative to revamp the peer review of audit firms. Despite the creation of the PCAOB in the post-Enron era, the US profession remains self-regulated outside the scope of publicly traded companies, whose numbers have declined over the last decades.

According to data by the World Bank, the number of US listed companies has decreased from 4,279 in the period 2000-2004, to 4,102 in the period 2010-2014. Those figures don’t include investment companies, mutual funds and other collective investment vehicles.

This downtrend has been studied by three academics (Craig Doidge, Andrew Karolyi and René Stulz) who described it as the "US listing gap" in a paper of the same title published in May. The authors of the study argue that this phenomenon is not due to the changes in the early noughties brought about by the Regulation Fair Disclosure and SOX, as the "US listing gap" had already started in the late nineties.

They take into consideration a longer period of time: From 1996 to 2012 the number of US listed companies fell from 8,000 to 4,000, while in the rest of the world numbers went up from 30,700 to 39,400 in the same period.

Whatever the reasons explaining this predominance of private firms over listed companies in the US, the fact is that it will keep the AICPA busy. In the context of self-regulation, the AICPA is aiming at triggering the debate on how the peer review can evolve through the use of technology.

Koziel says: "The peer review process as a whole has gone relatively unchanged in the last 40 years; we want to look at it from a technology standpoint. There are about 29 million businesses in the US; not all of them need an audit, but there’s a lot happening outside of those publicly traded companies."

The second project related to these self-regulatory activities, is an initiative to validate the authenticity of CPA firms which have audited the financial statements of a company. Conceived as a clearing house for audited financial statements, AICPA hopes it could be launched in 2016. At the moment is in a pilot phase being tested by a number of accounting firms and banks.

The idea behind the clearing house is to create greater reassurances, particularly in bank confirmations, with AICPA coordinating a triangle between the lender bank, and the audit firm which audited the financial statement of the borrower, typically a small business.

"[It involves] a verification process through the use of technology to assure that financial statements came from a real CPA firm, licensed to practise in a particular state, which has actually attested those financial statements," Koziel explains.

If successful, the CPA firm validation initiative might have a positive impact on the financial reporting culture and practices of SMEs, which tend to produce financial statements with the taxman in mind, rather than taking into account the needs of investors and providers of capital.

In the US, as in other jurisdictions, the tax returns of SMEs are said to be preferred over financial statements as the main proof of financial health in banking transactions to access credit.

Apart from speeding up bank confirmations, a clearing house of audited financial statements might reinvigorate assurance practices and more ambitious financial reporting among SMEs, which are thought to be the backbone of the economy in every country.

Another aspect impacting the regulation of the American profession is the CPA licence itself. AICPA and the National Association of State Boards of Accountancy worked during the last five years to achieve what is often referred to as CPA individual mobility.

The result was a change in the Uniform Accountancy Act granting CPAs the privilege to practise the profession across the borders of American states. Subject to a number of requirements, the rationale behind CPA mobility is the mutual recognition of individual licences between states, taking into account that businesses also operate across the states’ borders.

The next challenge, Koziel says, is CPA firm mobility, although that’s not a free-for-all: "Firm mobility doesn’t mean that you can just go anywhere around the country and start practising," he says. "Where you have an office, you have to be registered -period! However there are occasions where you have to step across borders to do certain pieces of work, and then you should be able to do that with no fee or notice."

In addition, the liability of CPA firms doesn’t slip through the borders of states. "If the firm does something wrong in that state, that state can come back to the firm," Koziel explains.

Overall, CPA firm mobility is still in the first stages of development with just 14 states allowing for the privilege, and Koziel sees it as a long-term process. It will involve a joint effort between the state accounting societies and the states’ boards to prepare the changes in the law, which have to go through each state legislature.

Diversity and talent
More than a year on since the unrest in Ferguson, Missouri, the city has become a symbol of the still-unresolved racial tension in the US. The debate on diversity also features high on AICPA’s agenda. However, the focus has been extended to further stages of accounting career development, and not just initial efforts at the educational level.

Koziel explains: "We’ve done an OK job over the years at getting diversity into the pipeline, offering scholarships and working with high schools. But we haven’t focused much on attracting those diverse students into the CPA profession."

He recalls the AICPA chairmanship of Richard Caturano, executive managing partner of McGladrey in Boston, whose main theme for 2012-2013 was diversity.

On the back of Caturano’s term, the National Commission of Diversity and Inclusion was created. The commission is formed by representative from minorities such as the National Association of Black Accountants or the Association of Latino Professionals Accountants.

But overall, Koziel acknowledges that when confronted with the numbers, the profession needs to do a better job "to mirror the diverse population of the US".

And does AICPA advocate diversity within its own ranks? For Koziel that’s "a focal point" and offers some examples: in October 2016 the AICPA chair will be an African American female, Kimberly Ellison-Taylor, who’s in line to become vice-chair this October. She will become the third female to lead AICPA’s board of directors, after the current one Tommye Barie and trailblazer Olivia Kirtley, now IFAC president.

Government accounting
One of the main topics in public sector accounting nowadays is the adoption of an accrual-based system, with IPSAS [International Public Sector Accounting Standards] being the benchmark for that purpose.

When it comes to the US, the convention is to consider that the state level is closer to the accrual system than the federal level, where cash accounting is still predominantly used.

Advocates of accrual accounting say that the public sector should mirror private corporations and therefore produce accurate financial statements where liabilities are realised as soon as they are incurred and not when they are effectively paid.

When it comes to standard-setting, 2015 is the year in which state and local entities will have to address the issue of unfunded pension liabilities. At the state and local level governments will have to comply with GASB 67 and 68, the rules of the Governmental Accounting Standards Board. That means these entities should put their share of unfunded pension liabilities on their balance sheet.

The Accountant asked Kim Wallin for her views, who after eight years in public office as the Nevada State controller, returned to her CPA firm. She is also a former IMA chair as well as an AICPA member.

According to Wallin, while getting the numbers rights is important, she suggests there are other factors that should be addressed in order to bring more transparency to the public finances.

She recalls preparing the Nevada state’s Comprehensive Annual Financial Report (CAFR): "We would start in July, as we had a 30 June year-end, and our financial statements weren’t done until about December 15th. So the information is old and also very complex: the CAFR is meaningless to the average citizen, legislators and government officials."

Wallin highlights that state governments aren’t in the business to make money, and therefore financial statements don’t necessary capture the societal impact of their actions and policies. In that respect she says: "I’d really like to see governments embracing integrated reporting. That would be more meaningful, because we are talking here about non-financials too."

And at federal level there are also "disparate systems" and siloed approaches between accounting treatments among agencies which, according to Wallin, would be well addressed using integrated reporting.

"There’s the general push to make government run like a business," Wallin says. "But in the bad times government spends more to provide services – quite the opposite of businesses that would cut back on their expenditures."

And, following the analogy, should government go further in its intervention and rescue banks and financial institutions with taxpayers’ money? "Well, that’s happening in the state government. We’re not bailing business out like the federal government did, but giving tax breaks to companies to come in," Wallin says. She offers the example of some well-known companies that benefited from "tailored tax credits" to set up in Nevada.

"We had to give away a lot of money just to bring them in. And probably [they were] going to come to Nevada anyways," she says. Wallin believes there’s not enough transparency in such deals, in terms of opportunity cost for the taxpayer.

"That gets back to the idea of integrated reporting [in the public sector]," Wallin says.

"When we are giving tax breaks to a company we should report on how many jobs have been created, how much we are paying, and what taxes we are bringing in to go towards the general funds.

"[Now] there’s no real accountability for it."

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Prophetic warning from Jim Peterson

Jim Peterson was as a senior in-house lawyer at Arthur Andersen until he reached the firm’s retirement age in 2001, just a year before the firm disintegrated.

Over the years Peterson has seen the reduction of players in the industry from eight big firms, including some contenders within the middle tier, to the current Big Four scenario.

Peterson is about to publish a book entitled Count Down – the Past, Present and Uncertain Future of the Big Four Accounting Firms.

His hypothesis in the book is that the four surviving firms are just as exposed today as Arthur Andersen was in 2002 to the kind of shock that could make them susceptible.

"The surviving four firms are much less cohesively organised than Andersen was, whose governance and structure was much more powerful and strong to hold together [the network] and yet it disintegrated in about two weeks," Peterson tells The Accountant.

"Now, if that’s true, knowing what we know about how the four surviving firms are organised, the prediction would be that it would take any of them about six days to fall apart," he says.

Peterson argues that the Big Four operate in a very fragile environment and face existential threats working in their disputed portfolios: "Think about the big ugly cases that are out there. The Big Four have gigantic problems in many countries, not just in the US, which is the most dangerous jurisdiction for litigation and for enforcement fines."

The firms’ endurance to litigation risks is not the only threat they face. "These firms are trying to build up their non-audit practices as fast as they can, but they are reconstructing the problems that killed Andersen back at the end of the nineties, when it divorced its consulting practice and became Accenture".

Peterson believes that restrictions on the scope of services are anachronistic and that rules on independence need to be re-engineered. "That’s an unconventional topic on which people get quite excited," he says. "As soon as you say, as I do, that independence has basically no value and serves no purpose, then it is as if you were attacking motherhood."

But Peterson’s aim with his book is to spur debate on unconventional topics, which he says, should be faced candidly.

The European Commission published a green paper in 2010 (Audit Policy: Lessons from the Crisis) to restore investor confidence in the audit market in the aftermath of the financial crisis. In that green paper the idea was mentioned of having a contingency plan in the event of an international accountancy firm collapsing. Yet the topic seems to have disappeared from the agenda of media and policy makers alike.

"The world is in denial about this. No one want’s to talk about it because the real consequences are too disruptive to be palatable," Peterson says. However he appreciates a difference between the industry of 2002 with the Big Five and today’s environment.

"When Andersen fell apart the system adjusted and every large global company relocated to a new auditor. But today, if one of the Big Four firms disintegrates you have such an uneven distribution of skills, talent and resources around the world.

"And with the restrictions on the scope of services and independence and competing lines of work, firms cannot do audits for their big advisory clients. A three firm model can’t work. It’s not sustainable."

The Big Audit model, as Peterson calls it, is an anachronism that should be replaced with a type of assurance that serves the capital markets in the 21th century. "But it won’t be replaced until something dramatic happens, because everybody in the system likes it this way and there are incentives to keep it."

There are the leaders of the large firms in the first place: "All these senior guys, who are getting fairly close to retirement, if the gods smile on them they would cash out their capital, take their pensions and go away and pass the problem to somebody else."

And the same is true for regulators: "Each of them has a local country focus and looks at their own little patch," he says.

One of the quotes used at the beginning of Peterson’s book is from the first head of the PCAOB. When asked what the regulators would do if another of the large accounting firms went into a death spiral, his answer was more or less: "None of us has a clue what we would do." Peterson adds: "Since then no regulator has ever come forward with anything more substantial than that."

The scheduled release date of Count Down – the Past, Present and Uncertain Future of the Big Four Accounting Firms is 10 November.