During Philip B. Chenok’s tenure, the PC, the service economy,
globalization and expanded legal liability transformed the profession.

Prelude to the Millennium

BY ROBERT TIE

When Philip B. Chenok's watch at the AICPA began in July 1980, he had no way of knowing it would last through a decade and a half of tumultuous change. But even in the first days of his presidency, Chenok saw the importance of maximizing the Institute's ability to anticipate events and deal with them more effectively.

In his new book, Foundations for the Future: The AICPA From 1980 to 1995, Chenok examines the economic, governmental and political forces that emerged during his years in office, compelling the Institute to rethink its traditional methods of serving the public interest and the accounting profession.

Chenok's memoir recounts how, in response to those trends, he and his colleagues continued developments initiated by their predecessors and devised new innovative planning techniques of their own.

Their efforts took place against a backdrop of dramatic change and growth in the Institute's membership, which almost doubled--to nearly 325,000 in 1995, from about 161,000 in 1980. During the same period, Chenok writes, the share of members working in business and industry leapt to 41.7% from 35.5%, for the first time outnumbering those from public accounting firms.

Recently, Chenok spoke with the JofA about his book, the dynamic events it chronicles and how individual practitioners collaborated to keep the profession in step with the times. This set the stage for CPAs' successful embrace of the New Finance and the expanded, more creative role they have come to play at the highest levels of corporate management.

[Editor's note: The New Finance—a term coined by the AICPA's Business and Industry Executive Committee—encompasses a broad range of subjects, including competitive intelligence, benchmarking and cross-functional teamwork, about which CPAs on senior management teams must be knowledgeable if they are to serve as effective technical advisers for strategic and tactical decision-making.]

"We introduced the idea of strategic planning as an ongoing process," Chenok said. "Every three years we would revisit our assumptions and re-evaluate them to see if they should be revised."

Chenok also spoke of the message he wants his book to convey. "More than a history of what happened during those 15 years," he said, "it's a background document for corporate board and audit committee members, students and anyone else who needs to understand the role of accountants and auditors and how current issues in accounting evolved."

Foundations for the Future contains numerous firsthand accounts of behind-the-scenes diplomacy and mediation. In 1985, Chenok recalls, the FTC's Bureau of Competition investigated the AICPA's ban on contingent fees and commissions. Because such forms of compensation could impair accountants' independence, the Institute adamantly maintained that a prohibition of them was an important part of its code of professional conduct, especially for firms serving attest clients. A stalemate developed and, Chenok says, Institute staff worried it would not end satisfactorily. Ultimately, however, the FTC blinked first, allowing the AICPA to preserve its ban on contingent fees and commissions for all attest clients and permit them only for nonattest clients.

"We argued that the ban was essential to preserving auditor independence," Chenok told the JofA, "and that helped them see the light. We learned that if you think you are right, it is better to fight than to quit."

In addition to refining their negotiation skills, Chenok and his colleagues established productive alliances with state societies and accounting organizations to influence legislators and other key officials. They also negotiated with regulators and federal and state governments to meet the needs of the public and the profession.

Sometimes plain luck worked in their favor, but other times their persistence carried the day. In an effort to reduce accountants' exposure to unfair liability, the Institute conducted an effective campaign of instruction for judges, which explained the responsibilities of CPAs under the securities acts of 1933 and 1934.

"The program for educating judges was designed to help them do their jobs better," Chenok told the JofA. "We walked them through several audit issues involving difficult questions about materiality. We felt that getting judges to understand the complexities of the audit process would better enable them to apply the law." The judges agreed.

Although Chenok and the Institute did not always prevail, they steadily shaped the debate on major issues, such as professional conduct and legal liability, all the while building the profession's political influence.  

NEW ATTITUDES AND APPLIED SCIENCE

In 1986 the AICPA received a much-needed wake-up call. It came in the form of feedback gathered during an Institute-commissioned survey of how business leaders and members of the financial press perceived CPAs in comparison with other professionals. While respondents ranked CPAs highest in terms of their ethics and moral practices, they also criticized CPAs for their relative lack of creativity.

Encouraged by this evidence of growing public confidence in the accounting profession's integrity and competence, the Institute determined to focus equal attention on spreading awareness of CPAs' ability to "think outside the box." Chenok describes the Institute's subsequent progress in reshaping the popular image of CPAs from honest but unimaginative number-crunchers to team players with a broad range of skills essential to a company's success and profitability.

Besides giving the profession valuable feedback on its reputation, this survey also made it clear to CPAs that their clients' and employers' needs and attitudes were changing. Never before had the business community's need for innovative strategies been so great. And that emerging need created opportunities.

Chenok writes that as CPAs learned more about a particular industry, their clients expected them to provide a wider range of services. This made consulting the fastest growing segment of the profession, Chenok says.

Another revolutionary development had been predicted in a report the Institute issued in 1984, which foresaw how computers would make it possible to perform audits more easily, economically and perhaps continually.

The report, issued by the AICPA future issues committee, demonstrated the profession's ability to anticipate and influence its destiny, even in the face of forces not under its control, such as the advent of cheap, convenient personal computers and software. Establishing this committee was one of Chenok's first orders of business after he took the helm at the Institute.

While the profession was adapting to a changing environment, Chenok had to do the same. "I had my work cut out for me," he writes, "but was fortunate during those early months to have the benefit of the guidance of my predecessor, Wally Olson." As it turned out, Olson believed the profession had been forced to play catch-up in the 1970s in response to social and political trends that emerged in the 1960s. "By anticipating events," Chenok continues, "I hoped we could in some way guide them, or at least be prepared for them as they arrived."

In 1982 the future issues committee identified 14 top issues to which it assigned the highest priority and recommended that the Institute apply resources to their analysis. (See sidebar, "Looking Ahead in 1982," above.) The committee also proposed the institution of a formal strategic planning process to assess issues that could affect the Institute, the public or the profession and to develop goals and strategies for addressing them in the most effective way possible. Although the Institute and the profession made considerable progress on these issues, it took years to resolve some of them and others continue to develop today.

The list of challenges was to be formidable. As Chenok says in the introduction to his book, "The computer revolution, the transformation from an industrial economy to a service-oriented one, the globalization of business and the expansion of legal liability were only a few of the variety of major shifts that occurred during my watch."

During Chenok's term, a host of committees and commissions issued ground-breaking reports and recommendations, including the Anderson committee's 1985 report on the standards of professional conduct, which advised the AICPA council that it had evaluated the present code of ethics and found it wanting. "Commercialism is winning out over professionalism," the report warned. To improve accountants' performance, the committee recommended "better education for entry-level [accountants], lifelong education, peer review of accounting and auditing practices and a revised code of professional conduct supported by more effective enforcement." Chenok's account provides substantial detail on how the committee's recommendations were ratified by the AICPA governing council and membership and subsequently implemented.

Foundations for the Future also contains extensive background information on the establishment of and reaction to other groups assigned to

• Root out fraudulent financial reporting (the Treadway Commission, appointed in 1985, and the Committee on Sponsoring Organizations of the Treadway Commission, which was formed to monitor compliance with Treadway's recommendations).
• Evaluate auditor independence (the Kirk panel, appointed in 1993 by the Public Oversight Board).
• Determine whether the current financial reporting model met the needs of investors and creditors (the Jenkins committee, which, also in 1993, issued a comprehensive report concerning the need for improvements in business reporting).

NEXT STOP: THE WORLD

As improvements in communications and other technologies made it more feasible for U.S. companies to effectively manage their operations over great distances, production was increasingly shifted to foreign shores, where labor and associated costs consumed a smaller share of revenue.

Chenok observes that the growth of multinational companies, coupled with events such as the emergence of capitalist governments in Eastern Europe, created a global economy in which even small companies were subject to the unpredictable movements of international financial markets.

"No profession is more international in scope than accounting, but differences in how countries regulate accounting have resulted in barriers that prevent the profession from meeting the needs of an increasingly global economy," Chenok notes in the book. While this issue has yet to be resolved, during Chenok's tenure the profession was encountering and overcoming other problems closer to home.  

GETTING BETTER AT GETTING ALONG

Among the challenges facing the profession, burgeoning legal liability cast the longest shadow. As judges and juries grew increasingly sympathetic to the plight of investors and creditors victimized by the bold fraud that characterized the Crazy Eddie, Equity Funding Corporation of America and Miniscribe financial reporting scandals, the profession reeled from repeated blows to its prestige. Adding injury to insult, existing law permitted plaintiffs to recover damages from any defendant, including auditors, regardless of its proportionate fault.

"The accounting profession's most onerous legal exposure was due to the prevailing 'joint and several' liability rule," Chenok writes, "under which a plaintiff could collect all or part of his or her damages from any defendant found liable, regardless of that defendant's proportionate fault."

The book relates how the firm Laventhol & Horwath went bankrupt in 1990 because of its liability exposure, brought on in part as a result of the financial fraud committed by televangelist Jim Bakker. More than 3,500 Laventhol & Horwath employees, including 350 partners, lost their jobs and, the book says, some retired partners were forced into personal bankruptcy despite their lack of involvement in the related audits.

Many firms responded by forming limited liability partnerships. Later, at the urging of the board of directors, the Institute repealed its long-standing prohibition against practice in corporate form. But it also continued to support legal reform until, eventually, in the interest of fairness, the principle of proportionate liability became law, superseding joint and several liability.

Foundations for the Future provides an interesting history of the various factors (for example, the S&L crisis) that led Chenok and his colleagues to reorganize the Institute's Washington, D.C., office and turn it into a center for efforts to influence federal legislators and collaborate on state societies' relations with state and local lawmakers. Chenok describes how the Institute formed its key person program to inform decision makers of the AICPA position on important matters before Congress. He also relates the story of the growth in funding of the Institute's political action committee from $30,000 at the beginning of his presidency to $2 million (80% of which was distributed at the local level) just before he left office.

But Chenok told the JofA that successful lobbying is based on more than just money. "While PAC donations may give you access to legislators, at the end of the day, the story you tell has to make sense," he said. One of the AICPA's most effective lobbying efforts was in support of the Private Securities Litigation Reform Act, which became law, over President Clinton's veto, in 1995. This legislation protected auditors from being sued for libel if they reported to the SEC what they suspected was fraud on the part of an audit client.

THE PROFESSION'S HEALTH AND LONGEVITY

Chenok devotes a significant portion of the book to the Institute's efforts to ensure the profession offered equal opportunity for all current and prospective employees and that education for those already in and about to join the profession was of the highest quality.

When it became obvious in 1993 that enrollment in college accounting programs was declining, the Institute redoubled its efforts to attract students, especially those from minority groups, to the profession. Chenok reports that between 1980 and 1987 AICPA minority scholarships grew from over $1 million to more than $3 million, while at the same time, the largest firms increased their minority recruitment programs. Nevertheless, he admits, the Institute failed to fulfill its own desires in this regard and the profession continues to be in need of more minority group members.

Better results came from the AICPA's efforts to improve the standing of women in the accounting profession and the Institute. For example, in 1985 there was only one female member on the AICPA board of directors. By 1995 that number had grown to five.

To help the Institute manage its own educational resources effectively and coordinate them with those of the states, Chenok broadened the AICPA's financial commitment to education in 1988. At the same time, Chenok says, the Big Eight firms joined in a partnership with the American Accounting Association to form the Accounting Education Change Commission (AECC), whose members included AICPA representatives. In the following years, the AECC published a series of issues statements that identified ways to ensure new accountants had the skills, knowledge and attitudes necessary to succeed in the profession.

A STRONG LEGACY

Chenok sums up the profession's accomplishments during his tenure by saying that the accountant's purpose is to do "all we can to help our clients prosper, all within the strict standards of professionalism expected of certified public accountants. So far," he says, "we have been able to do this without sacrificing the objectivity, integrity and competence that the accounting profession has always held so dear. This, I believe, is the legacy that the years 1980 to 1995 bestowed on the profession."