Jurisdictional Disputes Are Creating Accounting Wars

Jurisdictional Disputes Are Creating Accounting Wars

UNIVERSITY PARK, PA-Jurisdictional disputes are common in many industries and accounting is no exception. A growing issue in the accounting profession is the outsourcing of internal audit services to international external audit firms.

"This issue is impacting the relations among the Big Five accounting firms, the American Institute of Certified Public Accountants, the Institute of Internal Audits, the Securities Exchange Commission and even the U.S. Congress," says Mark Dirsmith, professor of accounting in Penn State's Smeal College of Business.

During an internal audit, the auditor is an employee of the company and it is generally used to ensure that employees are following the company's accounting policies, but not to determine the fairness of financial presentation. An external audit, on the other hand, is an analysis of the acceptability of a company's financial records provided by an outside firm, generally a CPA firm.

"With outsourcing, the obvious problem for the internal auditor is the loss of a job. For the CPA firm, the benefit is providing more services for the client though at the possible loss of the firm's independence as it becomes more deeply involved with the client," says Dirsmith.

For the client, he adds, the benefit is gaining access to a more wide-ranging knowledge and a variety of perspectives, though at the cost of not having as much localized knowledge applied to solve its problem.

"The Securities and Exchange Commission is concerned about impaired confidence on the part of investors due to questions as to loss of CPA independence balanced against the potential for more robust internal auditing services," says Dirsmith.

Dirsmith traces the conflict in a paper, "Going Global: Transformation of the Accounting Professional from Information Service Provider to Knowledge Expert," which was presented at the Global Business and Technology Association international meeting that took place July 11-15 in Istanbul, Turkey. He co-authored the paper with Mark Covaleski, professor of managerial accounting at the University of Wisconsin-Madison, and Larry Rittenberg, professor of accounting at the University of Wisconsin-Madison.

"We find that the transformation of the jurisdiction of internal auditing to be rife with conflict, characterized by a heated drama of exchange relations among the Big Five public accounting firms, the American Institute of Certified Public Accountants, the Institute of Internal Auditors and the Securities Exchange Commission," says Dirsmith.

The outsourcing of the internal audit is just one of several changes in the profession.

"Firms are putting more technology into audits, which is standardizing the profession and eroding the power of auditors. Knowledge is a strategic resource for gaining power. However, once a knowledge base becomes standardized and rendered into a commodity, a profession can no longer earn high profits by applying it."

Dirsmith, the Deloitte & Touche Professor of Accounting, explains that auditing is not solely about conducting specific tests and completing checklists. Auditors, Dirsmith notes, are increasingly seeking to become "knowledge experts" and rely heavily on developing, deploying and displaying a highly unique knowledge tailored to confront the nagging problems faced by clients.

Based upon a series of field studies of the accounting profession, Dirsmith contends their knowledge was traditionally located in the minds of the licensed professionals--Certified Public Accountants.

"But, with time, CPAs are becoming a sophisticated combination of theoretical knowledge, analytical power, technology and judgment skills," says Dirsmith.

Now, due to the convergence of economies as well as socio-political forces, technology plays a larger role in auditing, and appears to be chewing up lower level value platforms of service. CPAs must leverage their knowledge to better serve their clients and add value.

Dirsmith has been researching the issue and notes that a "knowledge economy demands a knowledge leveraging, global credential."

"We can expect to see a new professional credential or 'brand' as the need for new forms of knowledge grow," says Dirsmith. Hence, he notes, expect to see the development of multidisciplinary practices (MDP). In and MDP, accounting firms include other professionals in order to provide one-stop shopping to clients.

"This could be anything from lawyers, intellectual property experts, human resource professionals, or information technology experts. These types of firms are already popular in Europe where some of the largest law practices are part of the Big Five public accounting firms," says Dirsmith.

Multi-disciplinary firms may facilitate the need for a new "global credential" in place of the Certified Public Accounting credential. The CPA professional credential is regulated at the state level through licensing procedures and is not global in nature. In addition, the CPA brand could not be "stretched" far enough to incorporate the global knowledge worker, says Dirsmith.

"The bottom line is the more technology that is put into the auditing profession, the more commodified it becomes. The more commodified it becomes, and the less value it offers to clients, then the less money the profession can charge," says Dirsmith. "CPAs and accounting firms don't want to render data services. They want to evolve into becoming knowledge experts and can do so by developing new forms of higher order services and rendering these services as multi-discipline service organizations on a global scale."