how to prosper during an economic downturnlege interns. leading the implementation of new software...

NOVEMBER 2012 / THE CPA JOURNAL6

Although such challenges are oftenshort-lived, some have longer dura-tions. Variations exist in the magnitudeof their impact, and there are regionaldifferences in the severity of a down-turn and the strength of a recovery.According to an economist’s strict def-inition of declining gross domesticproduct (GDP) for two or more con-secutive quarters, the last U.S. reces-sion officially ended in 2009, but busi-ness and economic challenges remain.The country’s current prolonged peri-od of slow growth and cautious con-sumer spending—combined withunemployment, rising fuel prices, slow-er business activity, and a housingoversupply—is definitely a challengefor all businesses, and accounting prac-tices are no exception.

Exhibit 1 illustrates that accountingemployment generally follows thesame pattern as overall U.S. employ-ment. The primary difference in the trendlines is the higher rate of increase inaccounting employment from 2003 to2006, following the passage of theSarbanes-Oxley Act (SOX) of 2002. Itis clear that the accounting field, likeother sectors, is subject to the fluctua-tions of the business cycle, althoughnot as severely. The 2010–11 edition ofthe Bureau of Labor StatisticsOccupational Outlook Handbook calls

for national job opportunities foraccounting and auditing to grow 22%from 2008 to 2018 (http://www.bls.gov/ooh). Because current challenges exist,strategies for surviving in a still–weaklyrecovering economy continue to haverelevance. Regardless of the economy,business best practices deserve continu-ous review.

Responses to a DownturnThe primary response to reduced rev-

enues is to cut costs by a proportionate,or even greater, amount. Typicalretrenchment responses include delayingexpansions; deferring maintenance andspecial projects; freezing training, busi-ness travel, and nonessential spendingfor supplies and services; and decreas-ing expenses. Other tactics include elim-inating waste, monitoring receivableswith more frequent billing, or offeringdiscounts for immediate payment. Somehard-hit industries are also limiting oreliminating raises for employees. Othersare using unpaid days off, or furloughs,as a short-term solution.

Although variety of cost centers canbe affected, depending upon a business’stype or industry, personnel reductions aretypically part of an overall response ina downturn. But because businesses needaccountants for compliance filings, theaccounting departments of corporationsdo not usually reduce staff at the samerate as other functional areas of the orga-nization. Maintaining morale and pro-ductivity becomes an added responsi-bility for managers. According toLindsay Blakely in “How to Managein a Recession,” employees are underincreased pressure to produce more with

By James Byrd, Douglas Smith, and Marilyn M. Helms

ough economic times have occurred periodically throughout history;

according to the National Bureau of Economic Research, there have been

10 recognized U.S. recessions that covered approximately nine years in

a nearly sixty-year period (1953, 1958, 1960–61, 1969–70, 1973–75,

1980, 1981–82, 1990–91, 2001, and 2007–09). A recession, or even an

economic slump, is not an unusual event; for one quarter of the twenti-

eth century, the United States was in an economic downturn.

How to Prosper during an EconomicDownturn

T

P E R S P E C T I V E S

v i e w p o i n t

(Continues on page 8)

Strategies and Opportunities for Accounting Firms

NOVEMBER 2012 / THE CPA JOURNAL 7

p u b l i s h e r ’ s c o l u m n

HeadlineHeadline

fewer resources (CBS News, June 23, 2008,http://www.cbsnews.com/8301-505125_162-51208896/how-to-manage-in-a-reces-sion/). Productivity is critical, but continuingto increase productivity at the same rate asbefore a recession is not feasible.

Public accounting firms might findthemselves with fewer clients as their busi-ness customers retrench. In an article oncross-discipline training, Max Messmersuggested that cross-training employeesto perform multiple job functions can bean option even during retrenchment(“Cross-Discipline Training: A StrategicMethod to Do More with Less,”Management Review, vol. 81, no. 5, 1992).This approach has an additional benefit: itallows workers to understand how differ-ent functions in a company fit together.

Understanding how the entire companyoperates can improve functioning, reduceduplication, and increase satisfactionamong workers. Increased knowledgeamong workers can lead to more efficientoperations that will strengthen the companythrough cost reductions, making it moreresilient in a downturn. This can alsoimprove competitiveness and profitability asthe economy improves. If reducing the work-force becomes necessary, a multifunctionalgroup of employees will be better able tocope with the new environment. Cuttingprices is typically not recommended foraccounting practices, because clients equateprice with the quality of such expert services.

Stability with Minor ChangesAccounting functions are better pro-

tected from the level of employee cutsexperienced by line operations becausemore information is often needed in chal-lenging times. Accounting groups are need-ed to retrieve the data used for decisionmaking and for fulfilling several functions,including financial transparency, financialreporting, and business accountability. Ifbusiness fluctuates wildly, accounting firmscan utilize a mixture of both full-time andtemporary employees. A large pool of tal-ented workers is usually available for tem-porary and part-time employment.

Accounting firms should focus on thebasic organizational goals of operating effi-ciently, providing high-quality products andservices, satisfying customers so that theyreturn, converting cash quickly, and max-imizing profits, while maintaining customerservice and quality. Demonstrating concernfor employees during these times will resultin employee loyalty, both in the presentand in the long term, and can increase thecapability of the accounting staff. Strategicgoals remain important, and top manage-ment should be careful not to engage inreactionary decision making; instead, man-agement should consider the long-termneeds of the organization because manag-ing the accounting practice efficiently isparamount. Just as accounting firms advisebusinesses about cost control, accountingorganizations must use good budgetingstrategies as well. Maintaining the firm’s

bookkeeping and monitoring cash flowsclosely is essential. Strong internal controlsshould be firmly in place to manage assets,particularly cash. An alternative to cuttingexpenses is to focus on building revenue.Debt should be controlled and used onlyas necessary. Adjusting compensation tothe current market for new hires, particu-larly as market salaries might have fallen,is also important. Reactivating dormantaccounts and calling on old leads can bea stability strategy to generate new busi-ness to replace lost customers. Postponingfee increases and improving work flow andefficient routing can also be important.

Employees often work longer andretire later during a downturn to compen-sate for the loss in their own investmentportfolios. Retaining these senior memberscan present an opportunity for a businessto benefit from their knowledge in men-toring junior employees or managing col-lege interns. Leading the implementationof new software and upgrades can beanother effective use of senior employ-ees’ leadership and expertise. Area busi-nesses may also benefit from the consult-ing expertise of senior staff.

Increased online work can be a cost-sav-ing measure for employers. In fact, manytax returns are done offshore in India; suchoutsourcing can help shrink labor costs.Automating processes through technologyis another way to save money and improveboth worker efficiency and business pro-cesses. If businesses want to retain cur-rent local employees, telecommuting canbe a perk, as well as a way to reducevariable overhead costs. Many accountingfunctions can be done from home, oranywhere that an employee has access toa secure computer.

Firms should increase their value to clientsduring tough times by becoming a strategicbusiness partner that helps clients solve theirfinancial problems. Successfully survivingthe economic downturn is possible, as is cre-ating new opportunities for the future. Someaccounting firms believe that they have aresponsibility to keep their employeesemployed, and this belief prompts them tocreate new lines of business. Keeping theemployee pool intact ensures that the firmwill not have to compete for talent once therecession ends. Firms—especially neighbor-


(Continued from page 6)

EXHIBIT 1Impact of Economic Downturns on Accounting Employment

(Percentage Change in Jobs Year over Year)

All Occupations Accountants and Auditors

10%

8%

6%

4%

0%

-- 2%

-- 4%

-- 6%1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Occupational Employment Statistics Survey, Bureau of Labor Statistics, U.S.Department of Labor, http://www.bls.gov/oes/ (accessed Jan. 5, 2012)

hood-based accounting practices—shouldalso enhance their reputations within thecommunity.

Proponents of an increased social con-sciousness in corporations present argu-ments that community involvement is aform of marketing—that is, building a rela-tionship and reputation with the commu-nity and customers translates into increasedprofitability. One of the important aspectsof a business’s responsibility is to make aprofit; profitable businesses increase thevalue of a community and allow it toaccomplish its other responsibilities, suchas providing jobs and engaging in com-munity service and leadership. In an eco-nomic downturn, accounting firms mighthave more difficulty fulfilling this respon-sibility, but it can be supplanted byexceptional performance in other areasforexample, the personnel and resources madeavailable in the firm by reduced businessdemand can be assigned to improve thecommunity and the economic environmentby following a heightened external socialresponsibility strategy for the organization.

Developing unique expertise can alsobenefit a public accounting practice. If thereis a business cluster or if the firm has ahigh concentration of clients in a particu-lar industry, it should work to develop addi-tional skills in this industry. Moreover,the firm should recruit competitors, sup-pliers, and even vendors and other entitiesin the industry’s supply chain as clients.

Some accounting firms have grown—orat least remained steady—in the slow econ-omy as a result of recurring annual tax andaudit work; even though clients are cautiousabout requesting additional services, assur-ance and tax services remain necessary.Firms could offer more value-added servicesfor clients in order to dissuade them fromtrading down in an attempt to reduce costs;these added services would give customersa reason to remain loyal to the firm.Lastly, although hiring at accounting firmshas been less aggressive than in the past,more firms are balancing employment needsand workloads by relying on college intern-ships and part-time staff.

Strategies for Growth Tough times precipitate dramatic chal-

lenges for all organizations, including

accounting firms; however, there are oppor-tunities to be seized. Although cost controland reductions are a normal first response,they are not always the appropriate one.Both public and corporate accounting orga-nizations can provide valuable adviceduring times of economic hardship.Diversifying into new, related areas mightbe one option, along with serving smallerclients and repackaging fees for them.

In addition, rather than reducing staff,redeploying newly available staff to suchdevelopment yields opportunities to cre-ate new lines of business that could becomesubstantial sources of revenue even afterthe economy recovers. Hiring in carefullytargeted areas of current or future strate-gic need is one growth option; even intimes of high unemployment, it can taketime to find the right employee with a spe-cialized skill set. Another idea for growth,tailored for public accountants, is to includeadditional personnel in visits to job sitesand in sales calls to potential customers.This can help a firm gain a better under-standing of its customers, their needs, andthe types of reports that would better serveusers of accounting information.

Inevitably, the economy will rebound, socontinuing to invest in the future is impor-tant. Companies should continue doing thethings that made them successful in thefirst place, while acknowledging the mis-match between the timing of investmentsand the resulting cash flow improvements.

In the area of corporate and managementaccounting, most corporate operatingdepartments need more information tomanage during tough times. Accountingorganizations need to be responsive to theserequests. In addition, accounting organi-zations should be proactive in collaborat-ing with operating departments to recog-nize user needs, identify costs, and workwith other units and departments to comeup with improvements.

Public accounting firms should usetough times as an opportunity to assistclients in dealing with costs. Unique cor-porate challenges, which clients might beunfamiliar with, present opportunities forconsulting services. In addition, the lin-gering effects of the economy can presentopportunities for employment related toaccountability and compliance in many

industries. Sometimes, organizations fac-ing a downturn must trim their staffs to thebone in order to survive; however, muchcompliance work does not disappear, andstaff with expertise in areas of annualreporting or other seasonal regulatory orcompliance reporting can easily bedeployed as temporary staff to completespecial projects for clients like insurancecompanies, telecommunications firms, andhealthcare organizations. Public account-ing firms can even improve their bottomline by generating additional income.

Other types of consulting that couldbecome lucrative revenue sources, both inthe present and in the future, can be devel-oped during a downturn and be ready totake off when the economy improves. Forexample, project management is a naturalfit for many accountants. Certification inproject management is available throughthe Project Management Institute(www.pmi.org). Searching the broaderenvironment for regulatory changes canbenefit public accounting firms.

While not related to the economy, theimplementation of SOX provides a paral-lel. Requirements of the act includestronger internal controls and increasedresponsibilities of senior management foraccuracy of corporate filings.Implementation of these new requirementswas arduous and expensive for publiclytraded companies; thus, public accountingfirms experienced a tremendous increasein audit fees due to SOX requirements. ThePatient Protection and Affordable Care Actof 2010 provided opportunities for addi-tional fraud auditing and the implementa-tion of medical records and billing systems(www.healthcare.gov). The Dodd-FrankAct of 2010 also provided opportunities forprofessionals with financial backgrounds.

Building RelationshipsDeveloping and maintaining business

relationships is an important part of pub-lic accounting firms’ success. Sometimesthe pressures of getting the work donetoday can cause busy accountants tofocus more on their current tasks than ondeveloping new potential client relation-ships. A great time to pursue and nurturenew business relationships is when busi-ness is slow. When the economy improves,


these relationships can result in new busi-ness. Thus, a firm that has focused ondeveloping such new business during adownturn will be poised to rapidly growrevenues when the economy improves—and such a firm will do so more rapidlythan competing firms that have cut staffto reduce costs.

Marketing is another overlooked area. Inone CPA Journal article, Mary Kay Copelandoutlines for CPAs management ideas relatedto marketing, advertising, and customer rela-tionships that are relevant in growing a prac-tice (“Marketing and Advertising for CPAs:Leading-Edge Strategies,” Aug. 2010, pp.58–62) . Marketing a practice can be accom-plished by writing an accounting column fora local newspaper or business journal or byposting white papers about current topics onfirm websites for added client benefit, as wellas a potential way to attract new clients.Professional social networking sites, such asLinkedIn, are good avenues for accountingpractices to establish a broader Internet pres-ence. Conducting seminars for the businesscommunity is another suggestion. Firms canrecruit new clients from current entrepreneuri-al businesses by speaking to small businessdevelopment centers, business incubators,chamber of commerce groups, college busi-ness classes, and professional organizations.These activities can all increase professionalvisibility in the business community with lit-tle or no cost, and they are a good use of thetime of senior managers and partners.Newsletters, sent either by postal mail or elec-tronically, can help firms stay connected toclients and improve retention—and retainingcurrent customers is always less expensivethan soliciting new clients.

Looking to the FutureDeveloping new capabilities in the midst

of a downturn can prove to be profitablein the long run. For example, forensicaccounting has been growing despite—orperhaps as a result of—the current econo-my. The membership of the Association ofCertified Fraud Examiners (ACFE) grewby almost 10% during 2010 and nowincludes nearly 55,000 members (2010Report to Members, ACFE). Accordingto ACFE’s 2010 Report to the Nation,fraud costs businesses collectively about5% of their revenue. Despite SOX regula-

tions and efforts by many agencies andorganizations (e.g., the GovernmentAccountability Office, the ACFE), fraud isnot subsiding. A recession can contributeto an increase in fraud, and with businessslow, staff members and partners wouldhave time to train in a new specialty field.Forensic accounting could be a great newservice opportunity for many firms.(More information regarding the ACFEand certification in this specialty can befound at www.acfe.com.) Although otherfirms might cut training during a weakeconomy, it can be a smart businessmove to be ready for the upswing.

The impending convergence of U.S.GAAP with IFRS provides another oppor-tunity for firms. Developing expertise in theconvergence area would enable a firm to pro-vide consulting and training on the new stan-dards to other firms and to corporate account-ing departments. Not only can providingthis training be a new source of revenue,but demonstrating expertise in teaching IFRScould be a productive business-developmentstrategy. Clients could have time to imple-ment new software, and accounting firms canhelp. Year-end reviews earlier in the fourthquarter might help clients (including S cor-porations) plan the timing of expendituresthat have flow-through tax implications forowners. Some accounting firms are moreinvolved with cash flow and budgeting issues.In some cases, the role of an accountant asa counselor has grown in importance, andfirms are working with clients to developways to help their businesses.

Cost accounting is growing in importanceas businesses work to determine their mostprofitable products lines, services, or cus-tomers, and accountants can assist in thisanalysis. Clients often need accounting firmsand their services more than ever in periodsof uncertainty, but accountants might haveto initiate the call and spend more time inthe field listening to clients before propos-ing new avenues of consulting.

Although tough economic times cer-tainly are not appealing to anyone,including accounting organizations, the pro-fession can play a major role in a weakand recovering economy, allowing it to notonly survive, but thrive. ❑

James Byrd, CPA, is a PhD candidate inhealth services administration at theUniversity of Alabama at Birmingham.Douglas Smith, PhD, CPA, CMA, is a vis-iting associate professor of accounting inthe Campbell School of Business at BerryCollege, Mount Berry, Ga. Marilyn M.Helms, DBA, CFPIM, CIRM, CSCP,CQM/OE, is the Sesquicentennial Chairand Professor of Management at DaltonState College, Dalton, Ga.


Evaluating theAICPA’s CPA

Horizons 2025A “Road Map for the

Future” or a More SociallyResponsible Path?

By Richard H. Kravitz

In late November 2011, the AICPAreleased the results of CPA Horizons

2025: A Road Map for the Future, a strate-gic look into the next 15 years of theCPA profession that built on its 1998Vision Project. With more than 5,600CPAs participating through over 75,000comments, in-person and online forums,focus groups, interactive surveys, and dis-cussions led by a 21-member advisorybody, the objective of this monumentalstudy was to examine “the current andfuture relevance of our Core Purpose,Values, Competencies, and Services”over the next 15 years (http://www.aicpa.org/Research/CPAHorizons2025/DownloadableDocuments/cpa-horizons-report-web.pdf).

The report provided many positive andmeaningful observations, recommendationson education and training, pride in theknowledge required to be a CPA, and pridein the CPA profession that builds on theVision Project. It also defined the profes-sion’s core purpose as “making sense of achanging and complex world,” which isrelevant today and will remain relevant inthe future.” The core values and compe-tencies identified in the report are shownin Exhibit 1.

In the spirit of open dialogue and intel-lectual honesty as this 15-year journeybegins, this author must say that, unfortu-nately, CPA Horizon 2025 failed to addressthe most fundamental issue facing CPAstoday: our role in society and the changesthat we will need to make in order toremain relevant in the future

The CPA profession faced almost exact-ly this same issue 100 years ago, whenGeorge May assumed legendary leadershipof the accounting profession as head of

Price Waterhouse in 1911. Should we fol-low in May’s footsteps and in his “zeal toprotect the public trust”? Should we takethis on as our principal obligation, ourresponsibility to protect the public? As Mayput it: “…the high-minded accountant whoundertakes to practice in this field assumeshigh ethical obligations. … Of all thegroups of professions … there is none inwhich the practitioner is under a greaterethical obligation to persons who are nothis immediate clients” (Twenty-five Yearsof Accounting Responsibility, 1911-1936,Price Waterhouse, 1936, p. 173). Shouldwe employ accounting as a “social force”or continue the status quo and place clientservice over public service? (See MikeBrewster, Unaccountable: How theAccounting Profession Forfeited a PublicTrust, Wiley, 2003, p. 98.)

Among investors, employees, share-holders, and the general public, the CPAbrand is still the most trusted financial pro-fessional brand in America. But we arenow at a crossroads. The question we needto ask is whether we should allow this fran-chise to be continually diluted by abdicat-ing all responsibility over financial report-ing and auditing practices to the federalgovernment and those bodies authorized tocarry out its statutory authority—theSEC, the Public Company AccountingOversight Board (PCAOB), and FASB.Is there not something more that a CPAshould embrace? Unfortunately, these crit-ical, pivotal issues were not addressed inthe AICPA’s CPA Horizons 2025 report.

The Economic Realities of RecessionCPA Horizons 2025 was issued against

the backdrop of the current prolongedrecession and the accompanying unprece-dented wealth destruction; between 2004and 2010, the median wealth of the aver-age American declined by 8% (“EconomicDownturn took a Detour at Capitol Hill,”New York Times, Dec. 27, 2011). Absentfrom the AICPA report is a discussion ofthe frequent revelations during the past fouryears of enterprise fraud, misstated or mate-rially misrepresented financials, and anexplosion of suspicious fraudulent activi-ties. (According to the FBI, 1,700 pend-ing corporate, securities, commodities, andinvestment fraud cases are under investi-

gation, an increase of 37% since 2001[http://www.fbi.gov/stats-services/publications/facts-and-figures-2010-2011/investigative-programs].).

Bankruptcies, insolvencies, and forcedmergers over the past four years havemeant frequent disclosures about FederalNational Mortgage Agency, Federal HomeLoan Mortgage Corporation, and MFGlobal—not to mention AmericanInternational Group (the largest corporatefailure in history), Lehman Brothers, BearStearns, Merrill Lynch, Washington Mutual(the largest bank failure in U.S. history),Countrywide Financial, Olympus,Westridge Capital, Sky Capital, and thedisgraced financiers Bernie Madoff andAllen Stanford, and lawyer Marc Dreier.

The Financial Crisis Inquiry ReportIn January 2011, Congress released

The Financial Crisis Inquiry Report—anemotionally charged but formal responseto the congressional investigation of thecauses of the economic downturn. Thereport vilified the banking and financialservice industry. It concluded: “The cap-tains of finance and the public stewardsof our financial system ignored warningsand failed to question, understand, andmanage evolving risks within a systemessential to the well-being of the Americanpublic. Theirs was a big miss, not a stum-ble. While the business cycle cannot berepealed, a crisis of this magnitude neednot have occurred” (p. xvii, http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf).

But absent from this 600-page reportwas any reference to auditors, who haveaudited banks and financial service com-panies for almost 100 years, and areresponsible for ensuring that the financialstatements of the companies they auditedwere accurate, truthful, and presentedfairly their operating results.

Socially Responsible AccountingThe question for the accounting profes-

sion—ignored by both the AICPA and theFinancial Inquiry Commission Report—is:what is our responsibility as CPAs to actin the public interest and safeguard the pub-lic trust? Certainly, we owe our certificateto the public and our license to the state.


f u t u r e o f t h e p r o f e s s i o n

But as the most trusted advisors in the finan-cial service industry, are we satisfied withour collective performance during these pastfour years? Are we not part of the chorusof discontent directed toward Wall Streetover these abuses? Are we, as accountingprofessionals, unimpeachable? In 2009,Louis Grumet, former NYSSCPA execu-tive director, asked, “When it comes toassigning blame, when do we stop lookingelsewhere and start looking in the mirror?”(“Losing Our Moral and Ethical Compass,”The CPA Journal, May 2009, p. 7)

The Expectations Gap: Is it Widening?Throughout the 20th century—and past

the Millennium, driven by the scandals ofEnron and WorldCom—government, theinvestment community, and the account-ing industry debated the role and respon-sibility of the accounting firm in Americansociety. Popularly termed the “expectationsgap,” the profession continues to be bur-dened with this gap between what the pub-lic perceives as accountants’ role in soci-ety and what the profession perceives asits role in service to clients. Study afterstudy defines and reaffirms this obligation:

We conducted our research over adecade after the release of the expecta-tion gap SASs and also after the issuanceof SAS No. 82 (AICPA 1997). Our find-ings indicate that an expectation gapexists; investors have higher expectationsfor various facets and/or assurances ofthe audit than do auditors in the fol-lowing areas: disclosure, internal con-trol, fraud, and illegal operations. We

also find that investors expect auditorsto act as “public watchdogs.” (John E.McEnroe and Stanley C. Martens,“Auditors’ and Investors’ Perceptions ofthe ‘Expectation Gap,’” AccountingHorizons, Dec. 1, 2001, pp. 345–358) In its simplest form, the public wants

outside auditors and internal auditors touncover fraud, and it wants CFOs not tobow under CEO pressure to commit it.CPA Horizons 2025 ignores this funda-mental issue, our raison d’être; ourunique value, and the contribution we maketo postmodern capitalism:

CPAs need to be watchdogs of the pub-lic trust. As auditors and financial managers,our principal responsibility is to ensure theintegrity, transparency, fairness, and accu-racy of the financial statements we review;to ensure that financial statements are notmaterially misleading or misstate the resultsthat others rely on (Richard H. Kravitz,“Socially Responsible Accounting: A Callfor Reform in the Profession,” The CPAJournal, Nov. 2009, pp. 16–22).

Measuring OutcomesHow well has the accounting profession

uncovered fraudulent financial reportingand protected the public interest over thepast four years? According to LeeSeidler, an NYU professor and a leaderof the profession, “no major fraud has everbeen discovered by auditors … the reasonwhy external auditors have a very poorrecord of uncovering fraud is that muchof the auditors work and examination timeis based on a faulty assumption that sepa-

ration of duties within the corporationprevents fraud” (Seidler, as quoted inForensic and Investigative Accounting, 4thed., by D. Larry Crumbley, Lester E.Heitger, and G. Stevenson Smith, CCH,Aug. 2009). In fact, the “many disclo-sures of cooked books … proved Seidlercorrect” (Crumbley 2009).

The discussion in CPA Horizons 2025focuses on outcomes; the expectations gapwas not explicitly addressed, and one ofthe few times the subject is discussed isonly to extent that “the profession muststay vigilant in defending its unique roleas providers of audit and attest services”(p. 24). The issue, according to CPAHorizons 2025, appears to be one of self-protection rather than self-improvement.

Growing Loss of TrustThe growing loss of trust in our institu-

tions has been chronicled in public surveysover the past four years. But the surveyswithin the accounting profession are evenmore interesting: ■ Of 221 CFOs surveyed, 62% believedthat they could intentionally misstate finan-cial statements, representing a 10% increaseover the prior year (Financial NewsNetwork, Smart Pros, Aug. 2011; AlanRappeport, “Is the Auditor the CFO’sFool?” CFO.com, Nov. 15, 2007, http://www.cfo.com/article.cfm/10131484/c_10132205?f=TodayInFinance111507). ■ More than 83% of the chief financialofficers in the same survey believed it wasnot possible for outside auditors to detectfraud in all cases (Financial News Network2011; Rappeport 2007). ■ In 72% of fraud cases occurring over a10-year period, the CEO was implicated; andin 23% of the cases, the outside auditors wereimplicated (Mark Beasly, Joe Carcello, andDana Hermanson, “Fraudulent FinancialReporting: 1998–2007,” Committee ofSponsoring Organizations of the TreadwayCommission (COSO), May 2010, http://www.coso.org/documents/COSOFRAUDSTUDY2010_001.pdf). ■ A 25-year study by the ConferenceBoard of accounting and auditing enforce-ment actions revealed that CFOs who wereimplicated in the action had an even big-ger risk of litigation in accounting manip-ulation cases than CEOs, yet did not have


Core Values Core Competencies

Integrity Communications skills

Competence Leadership skills

Lifelong learning Critical-thinking and problem-solving skills

Objectivity Anticipating and serving evolving needs

Commitment to excellence Synthesizing intelligence to insight

Relevance in the global marketplace integration and collaboration

Source: AICPA, CPA Horizons 2025: A Road Map for the Future, AICPA, 2011

EXHIBIT 1CPA Horizons 2025: Core Values and Competencies

the immediate personal financial benefitsof cooking the books (Universal Conduct:An Ethics and Compliance BenchmarkingSurvey, September 2006).

CPAs had the most to lose and theleast to gain. Whether it is the revelationsof the Bernard Madoff scheme, recentinvestigations of feeder funds, the disclo-sure of $1.2 billion missing in custodialaccounts at Jon Corzine’s MF Global, orthe SEC’s new civil and criminal investi-gations of alleged massive fraud inbundling mortgage obligations at FannieMae and Freddie Mac (Franklin Yu,“Former Fannie CEO takes Leave AmidSEC Charges,” Epoch Times, Dec. 21,2011), it is undeniable that over the pastfour years, clean audits were rendered onenterprises that subsequently became insol-vent, that practically seized up the globalfinancial markets, or that were forced tomerge (Merrill Lynch, Countrywide) or liq-uidate (Lehman Brothers). We should bebetter than this.

Who Will Fill the Leadership Gap?It is said that abuse invites regulation.

What might shape the accounting profes-sion over the next 15 years, absent theadvocacy of the AICPA, is sobering.Politically motivated solutions are usuallynot optimal; they lead to political overre-action; punitive government oversight; andsubstandard, politically motivated regula-tion. Just look at the Sarbanes-Oxley Act(SOX) of 2002 and at the PCAOB—theworld’s largest frauds were committedunder their watch.

If current direction is an indicator offuture direction, look no further thanPCAOB Chairman James R. Doty’s pre-sentation at an NYSSCPA conference; hehighlighted the fundamental conflictbetween a company and its auditor, andnoted that in its roughly 3,000 audits, thePCAOB found hundreds of flaws that “cutto the heart of an audit’s fundamentalobjective of obtaining reasonable assurancethat a financial statement is free of mate-rial misstatement” (Chris Gaetano, “DotySeeks Shift in the ‘Culture of the Audit,’”The Trusted Professional, Dec. 2011, p. 8).

Would CPAs prefer their profession tobe “restructured” as a service provider tothe federal government? Would they pre-

fer to be paid by a government trust fundthat would hire outside auditors to auditpublicly traded enterprises under strict reg-ulatory oversight? Or, as some have sug-gested, would CPAs prefer that profes-sional liability insurers hire the outsideauditors in an attempt to reduce their ownliability? Would this improve financialreporting and transparency for the public,or would it be self-serving for insurers?Would insurance companies and risk man-agers establish audit procedures and pro-cesses in the same way that they do formedical procedures? Would CPAs acceptthe legitimacy of nonauditor, third-partyadministrators to determine the necessityof certain audit procedures and eligibilityfor subsequent reimbursement?

Why Accountants Need to Step Up tothe Plate

The practical reality is that there aremany more accountants and auditors thanthere are PCAOB inspectors and SEC staff.Regulatory staff number in the hundredsof thousands, but there might be nearly 1million CPAs and Chartered Accountantsin the world. Public accountants work year-round in the offices of the largest corpo-rations in the world. While LehmanBrothers was on the brink of destruction,at least three of the Big Four were alleged-ly working in the firm, performing taxpreparation work, advisory (consulting) ser-vices, and auditing services. Because oftheir industry footprint, CPAs constitute thelargest body of independent observers ofcorporate behavior.

The services provided by public account-ing firms to their clients are extensive.Ernst & Young, Lehman’s principal audi-tor that was recently charged with civilfraud, actually has a staff of 350 forensicaccountants within the firm who “focus onfraud and investigations” (Jeff Stimpson,“Forensic Accounting: ExponentialGrowth,” Accounting Today, Feb. 1, 2007,p. 3). It also has a special advisory groupin the financial services sector that handlesfinancial risk management.

The SEC and similar state and govern-mental watchdogs lack not only the legalmandate to “live” in companies, but alsothe staff, depth, competency, organizationalbreadth, flexibility, and structural ability to

provide this kind of coverage, which, whenbest employed, has the potential to pre-scriptively uncover fraud before it getsout of hand and forces the entity to fail.

There are few alternatives. Seidler, oneof the founding fathers of forensic account-ing, remarked that:■ Internal auditors put disclaimers in theircharters. Management looked to audit com-mittees. Audit committees looked to inde-pendent auditors. Independent auditorslooked to management. Were it not for thephenomenal amount of investment fundsand jobs lost by innocent individuals, thewhole business would remind one of the“who’s on first” classic comedy routine(Crumbly 2009).

The public accounting firm must there-fore assume its role as a check-and-balanceenterprise of the sort inherent in a demo-cratic society in order to meet the needsof the public and to reduce the expecta-tions gap. There are no other legitimateglobal institutions that can observe and orpolice corporate enterprise as effectively.

This author argues that now more thanever—in these politically, socially, and eco-nomically troubled times—CPAs, as themost trusted advisors and in conjunctionwith the profession’s most trusted institu-tions, must reassert their leadership, ethi-cal guidance, and moral compass in orderto protect the public interest and insure thepublic trust. ❑

Richard H. Kravitz, CPA, MBA, is a fel-low of the American College of ForensicExaminers, and founding director of theCenter for Socially ResponsibleAccounting. The above is adapted fromPost Modern Capitalism: A Reassessmentof the Institutions, Advisors, and Modelsin a Period of Unprecedented WealthDestruction, slated to be published in 2012.


p r a c t i c e m a n a g e m e n t

Five Steps to GrowBeyond the $5Million Mark

Escaping the Black Hole of Business

By Greg Crabtree

Anatural no-man’s land for privatelyowned businesses exists between $1

million and $5 million in annual rev-enues. But companies stuck in this “blackhole of business” should be assured thatthere are reasons for this challenge.Moreover, there is hope for a successfulescape, and the discussion below can actas a practical guide for businesses togrow beyond this zone.

Challenges for Business OwnersIt is likely that a business owner who

started a company from scratch not onlymanaged all the functions of the business,but was its sole employee and executed allof its functions. As the owner learned towork “on” the business, rather than “in”the business, it climbed up to that symbolic$1 million in revenue and hit its first majortransition point, where the owner most like-ly had to give up either sales (businessdevelopment) or operations.

Most entrepreneurs are naturally gifted ateither sales or operations, but rarely both.Those gifted in operational knowledge getstuck at $1 million because they have sold toall of the people they know or can easily con-tact; however, they are more likely to be prof-itable at this point. Those gifted in sales oftenblow through the $1 million mark as theymake their way to the $5 million mark, butthey will have likely depleted their fundingresources—and they are also likely losingmoney while holding on to the belief thatmore sales will make them profitable.

Both entrepreneurial types need to beginby learning simple lessons: the operations-gifted entrepreneur needs to find a way tocreate sales, while the sales-giftedentrepreneur needs to get operationsunder control and exercise financial disci-pline (because not every sale is a goodsale). The true challenge for both is rec-

ognizing that the $1 million sales mark isthe first time in the business cycle whenthey must hire employees to create thebusiness’s infrastructure without being ableto easily afford it. This challenge is exac-erbated because the owner has to truly del-egate to this key hire. The newcomer mighthave experience, but the owner will stillhave a nagging thought: if new hires areso experienced, why were they available?If they show skill but have limited expe-rience, the owner could be turning the busi-ness over to someone who might risk theowner’s reputation and limited capital.

Five Steps to SuccessStep 1: drive to 15% pretax profit by

the time the business reaches $1 millionin revenue. It always sounds great to glo-rify the success stories of thoseentrepreneurs who threw caution to thewind, grew their business exponentially,and only then figured out how to fund it.Unfortunately, the stories of how manymore businesses failed by growing fast andunprofitably often remain unheard.Unless an investor or buyer can figure outhow to make a fast-growing business prof-itable, the company will be of no interestto them, and the owner will be left pick-ing up the pieces of the business’sbankruptcy.

Step 2: include the owner’s market-based wages in calculations of profit. Ifa business gets to a 15% pretax net income,it is only real if the owner is receiving amarket-based wage and is able to meethis living expenses off of net pay. Thismeans that there are no distributionsbeing taken out of the business, exceptfor covering the taxes on business profits(assuming that the business is an S corpo-ration or a limited liability company[LLC]).

Step 3: take no distributions of after-tax profits until the business has met itsgrowth goal. The easiest way to measurethis is for a business owner to build thecompany’s cash balance up to at leasttwo months of operating expenses with-out drawing on lines of credit; this isreferred to as the “core capital target.”

Step 4: build the business using the“salary cap” concept. Once a business hasreached a 15% pretax profit, the owner can

make the next key hire and allow the com-pany’s profit to drop, but to no less than a10% pretax profit. Then, the owner shouldhold salaries constant until the business onceagain reaches a 15% pretax profit. After this,the owner should add another one or twokey hires and repeat the process. Theowner might not be able to fund the busi-ness’s growth completely out of pocket,but the owner’s line of credit balance shouldgenerally remain less than 50% of accountsreceivable during this process.

Step 5: manage the “cash reward”when growth levels off. Once the businesshas had a period of three to six months oflevel sales and has maintained 10%–15%profitability during this growth cycle, theowner will experience a great cashreward—because she will not have to rein-vest her profits. It is critical for an ownerto not become a “professional consumer”at this point and develop obligations (e.g.,a new house with a big mortgage) or badspending habits (e.g., exotic cars, vaca-tion homes, recurring expensive vacations).It is all too easy to fall into the habit ofspending the early fruits of one’s laborrather than stockpiling to weather theinevitable down cycle of the business mar-ket. That’s not to say that business own-ers shouldn’t enjoy their success, but theymust remember that, too often, this enjoy-ment gets in the way of good judgment.

OpportunitiesWhen the silently successful entrepreneurs

do to tell their stories, it is revealed that moreof them followed a path similar to the oneoutlined above—rather than those por-trayed in flashy stories of high risk andhigh return. Both methods can work, butthere are many more business casualtiesusing a method of high growth withoutsteady profitability. Advisors who becomefamiliar with the steps described above canguide business owners in becoming betterequipped to escape from the black hole ofbusiness into a new universe of possibilities.

Greg Crabtree, CPA, leads the businessconsulting team at Crabtree, Rowe &Berger PC, Huntsville, Ala., and is theauthor of Simple Numbers, Straight Talk,Big Profits.


The Importance ofEducation in Building theProfession

Iwas pleased to read Joanne Barry’s pub-lisher's column, “A Pathway for

Access to the Profession,” in the Septemberissue of The CPA Journal. It dealt with theneed to teach accounting at the high schoollevel and at the advanced placement (AP)level, and I am a long-time supporter ofthat view.

I am a full-time instructor at BerkeleyCollege, a proprietary business college inthe metropolitan New York/New Jerseyarea. I usually teach the basics ofaccounting and business law, both to stu-dents who plan on majoring in account-ing and to those who don’t, because knowl-edge in these areas is required for mostbusiness-related degrees.

From time to time, I have been giventhe opportunity to speak and work withhigh school administrators and faculty, withregard to the teaching of accounting in highschool. My own personal observation isthat the offering of accounting courses tosome students should be “broadened” atthe high school level through the manda-tory teaching of at least one basic book-keeping course to all students.

Currently, only the better-qualified stu-dents are typically given this opportunity,and only if they prefer to learn accounting,especially at the AP level. In her column,Barry discusses offering accounting as anAP course. Many students today need todevelop a better command of English—both spoken and written—and math.Clearly, advanced students who seeklearn accounting already have such a com-mand, but these students are in the minor-ity. This knowledge of English and mathis needed by the majority of today’s stu-dents—and requiring all students to takebookkeeping courses is one way to achievethis goal, regardless of whether a studentplans on becoming a business major.

Perhaps this idea is not perfect, but it isbased on my recollection of the time whenstandardized tests began to incorporatequestions that dealt with graphs of varyingdegrees of complexity, therefore inter-twining English comprehension and math

comprehension. To learn bookkeeping isto learn basic English and basic math.Many of my better students have indicat-ed that it was their introduction to book-keeping—whether because it was offeredin their high school or in a part-time jobthey held while they attended school—thatled them to major in accounting.

Thoughts like those expressed in Barry’scolumn help to further develop the account-ing profession, and I thank her for them.

Philip Levine, CPA, JDBerkeley College ❑


i n b o x : l e t t e r t o t h e e d i t o r