This category covers establishments primarily engaged in furnishing accounting, bookkeeping, and related auditing services. It includes those businesses that use data processing and tabulating in connection with these services, but those whose primary aim is to provide such data processing and tabulating are classified in SIC 7374: Computer Processing and Data Preparation and Processing Services. Establishments providing tax preparation services without also providing accounting, auditing, or bookkeeping services are covered in SIC 7291: Tax Return Preparation Services.
541211 (Offices of Certified Public Accountants)
541214 (Payroll Services)
541219 (Other Accounting Services)
Accounting, auditing, and bookkeeping services serve key functions in America's (and the world's) economic engine. In such publications as The Bottom Line, the global significance of the accounting profession has long been confirmed: "The world's capital markets rely on financial statements certified by independent auditors. If the integrity of those statements could not be trusted, investment would come to a halt and economic growth would be paralyzed." The close relationship between the accounting industry and the economy as a whole became increasingly apparent in the early 2000s as a wave of corporate scandals not only rocked the U.S. accounting industry but also undermined an already weakened economy. The Enron bankruptcy, that resulted in the demise of Big Five accounting firm Arthur Andersen in 2002 was followed by admissions of fraudulent accounting by WorldCom Inc., the criminal indictment of Tyco International Ltd.'s CEO and CFO, and various other accounting impropriety charges levied against firms like Kmart Corp., Adelphia Communications Corp., and Merrill Lynch & Co. As scandals mounted, investor confidence waned, pushing the already beleaguered stock market down further.
In response to the growing number of high profile corporate fraud cases, the Bush administration passed the Sarbanes-Oxley Act in 2002 as part of an effort to crack down on fraudulent accounting practices and to bolster investor confidence. The United States Congress also stripped the American Institute of Certified Public Accountants of its regulatory duties, granting auditing oversight responsibilities to a new federal board.
Different fields in the accounting profession represent different degrees of affiliation with the world of commerce. Public accountants run their own businesses or are employed by accounting firms to meet the particular accounting needs of their clients. Accountants employed by companies to record and summarize financial data are known variously as management, industrial, corporate, or private accountants. Internal auditors are employed by companies to check records for signs of inefficiency, mismanagement, or fraud. Accountants and auditors employed in government not only produce and check the financial records pertaining to the institution for which they work, they also audit persons or businesses regulated and taxed by government. Each of these broadly defined fields is further subdivided by choices of specialization, yielding a wide variety of niches for accountants to fill.
Associations. Numerous organizations within the accounting profession cater to the specialized needs of different groups of accountants, ranging from the Association of Black CPA Firms to the American Women's Society of Certified Public Accountants to the National Association of Accountants. By far the largest and most important of the organizations within the profession, however, has been the American Institute of Certified Public Accountants (AICPA), which not only represented more than 330,000 CPAs at the beginning of 2000, but also served as the voice of the profession as a whole through its activities, recognized by the Securities and Exchange Commission (SEC) as a self-regulating body and setter of standards until 2002, when the federal government took over those responsibilities. The AICPA's three special member divisions neither monitor competency nor provide accreditation, but serve as outlets for volunteer members with particular interests; they are the Federal Tax Division (dating from 1983), and two divisions created in 1986—Personal Financial Planning, and Management Advisory Services.
In addition to the standards established by the AICPA's Auditing Standards Board (ASB) and by other standards boards, the standards that have governed the accounting profession are those known by the acronym GAAP—Generally Accepted Accounting Principles. According to Principles of Accounting, "The general acceptance of accounting principles is not determined by a formal vote or survey of practicing accountants. An accounting principle must have substantial authoritative support to qualify as generally accepted. References to a particular accounting principle in authoritative accounting literature constitute substantive evidence of its general acceptance."
Through the earliest financial record-keeping dates back to the very origins of international trade—modern accounting methods developed with the introduction of the double entry technique, whereby debits are assigned to the left side of a ledger and credits to the right. The value of this fundamental method seems to have been grasped first in the commercial republics of Italy at some point before the fourteenth century.
More sophisticated accounting techniques were not needed until Great Britain's industrial revolution and ascent to global pre-eminence created business conditions of hitherto unprecedented scope and complexity. As noted in Modern Accounting Theory, "from about the beginning of the nineteenth century the rise of manufacturing, trading, shipping, and all the various subsidiary services (such as the provision of the many kinds of insurance), the vast ramifications of the London money market, and the opening of world markets (such as the Liverpool Cotton Exchange) made accurate financial accounting and reporting a prime necessity for the maintenance of Great Britain's commercial empire." With the exception of the field of consolidated accounting, where, "practice in the United States developed before it did in Great Britain and was to provide the leadership for the latter," the early history of American accounting was therefore defined by the adaptation of British innovations and precedents to the novel conditions of business development in the United States.
In due course, as the United States increasingly assumed Great Britain's mantle as the world leader in economic affairs, still further developments took place in accounting methods. Many of the most important accounting principles were not introduced until the early decades of the twentieth century. These changes took place in response to the emergence of huge industrial firms, large stockholders' groups, government regulation, and continued economic growth. According to Principles of Accounting, all of these factors combined to help "create the large groups of interested parties who require a constant stream of reliable financial information concerning the economic entities they own, manage, or regulate," a type of information "meaningful only when prepared according to some agreed-on standards and procedures."
A further stimulus to the American accounting industry took place early in the twentieth century with the introduction of the national income tax in 1913. The American Bar Association took the position that income tax law fell entirely within the province of lawyers, and the resultant turf war between that association and the AICPA was not resolved until the mid-1950s, after a number of lawsuits, at which point the preparation of tax returns became solidly established as a key business area for American accountants.
The stock market crash of 1929 prompted the Federal Securities Act of 1933 and the Federal Securities Act of 1934. These pieces of legislation required that audits of the financial statements of public companies be made by independent certified public accountants, further bolstering the accounting profession. In addition to generating business for such accountants, these acts had the effect of raising the prestige of the accountancy profession, because the government neither insisted on providing auditors of its own nor set auditing standards, but rather accepted the integrity of the profession and the standards that it developed by means of self-regulation.
However, such self-regulation did not satisfy some critics, who took the view that government should play a more active part in such a highly critical area of the economy. Nor did it spell an end to controversy within the profession. At the end of the 1960s, especially, there was "a period of unprecedented stress for the individual members and institutions of the accounting profession," in the words of the March 1972 Report of the Study on Establishment of Accounting Principles, which cited the dramatic growth of accounting firms, new accounting issues and business practices, and corporate mergers as particular factors. According to The Bottom Line, that 1972 report proposed the establishment of an independent standard-setting body, the Financial Accounting Standards Board (FASB), whose scope was defined as follows by one of its former chairpersons: "FASB standards are binding on most companies and independent auditors, with stiff penalties for departures. The ethics rules of the American Institute of CPAs, the CPA licensing requirements of the 50 states, and the regulations of the Securities and Exchange Commission all mandate conformity with the Board's pronouncements."
But the establishment of the FASB in 1973 did not put an end to controversy, as it was a body perceived as having a bias in favor of business and the private sector. Therefore, the Governmental Accounting Standards Board (GASB) was instituted in 1984 for standard-setting in relation to state and local government, confining the FASB's jurisdiction to solely nongovernmental entities. Some analysts saw defects in this new arrangement, however, pointing out that institutions within the private sector and within the public sector were not always so different from each other as to justify the maintenance of different sets of standards for each, and that the entire idea of having different standards for the two sectors was by no means automatically a good thing—especially as still other sets of standards governed auditing procedures in federal government.
In recent years a number of the industry's largest companies have endured harsh criticism from some quarters. The savings and loan crisis of the 1980s, in which many of those institutions were felled by bankruptcy, tarnished the reputation of the industry-leading "Big Six" accounting firms, which were responsible for auditing most of the failed thrifts.
In the early 1990s, the accounting, auditing, and bookkeeping industry supported firms of vastly different economic status, from the giant accounting firms that comprised the Big Six to one-person operations. The difference in scale between the larger and smaller accounting businesses was so pronounced and led to such a difference in the type of services offered by each size of business that accountancy in the United States sometimes was viewed as "two separate and distinct professions," according to The Bottom Line, which noted that "major national firms were known for their audits of major publicly held companies and for the breadth of their management advisory services. The smallest firms, for the most part, emphasized personal attention to small businesses and individual taxpayers. The mid-size firms typically carved out a market niche in which they performed a variety of services."
In theory, such a division of labor should have guaranteed the peaceful coexistence of accountancy firms of varying sizes. However, tension between firms had long been a characteristic of the modern accountancy profession in the United States, and reflected a variety of factors. For instance, there was a suspicion among the smaller firms that the larger ones were exploiting to their own advantage their ability to offer financial services at a loss-leading discount, thereby attracting potentially lucrative new clients in a way impossible for businesses with fewer resources to match. Moreover, the intermediate position occupied by mid-sized firms was an inherently unstable one: with smaller firms becoming more specialized, and larger ones having a matchless range and depth, mid-sized firms risked being left with no niche at all, and often ended up merging with larger outfits.
In addition, mergers among clients had a profound impact on the relative fortunes of larger and smaller accounting firms, especially as such mergers, already a cause for concern in some quarters during the 1970s, became a far more prominent feature of the business scene during the next decade. According to a study undertaken by the Senate Subcommittee on Reports, Accounting and Management of the Committee on Government Operations (1976), "As a by-product of the corporate merger movement that has concentrated control over the Nation's economic resources among fewer and fewer institutions and individuals, small and medium-sized CPA firms have been displaced as independent auditors by large accounting firms."
Moreover, as this same study reported, such displacement also tended to occur when companies decided to sell shares to the public: "Underwriters and bankers often inform companies that a nationally known firm must be retained as independent auditor in order to sell securities to the public at the highest possible price, or obtain a necessary loan."
Industry receipts grew by roughly 30 percent from 1992 to 1996, when they surpassed the $50 billion milestone. Annual growth in the 1990s was slower, however, than the double-digit percentage increases of the late 1980s. In the mid-1990s accounting firms moved toward confronting the ethical and legal problems of their clients, including such issues as corporate governance and accountability, according to Oregon Business.
Large international firms branched out into management consulting services. However, according to The CPA Journal, the attractive consulting fees may have led many firms to ignore potential conflicts of interest in serving as an auditor and as a management consultant to the same client. The profession's standards also were said to be jeopardized by the entrance of non-CPA partners and owners into influential accounting firms. Many companies facing these problems, like Arthur Andersen, split their accounting and management consulting operations into separate divisions or companies to avoid accusations of impropriety.
During the mid to late 1990s, accounting firms evolved by restructuring their services and offering new services such as attestation and other assurance services, according to The CPA Journal. The growing internationalization of business was another important factor in changing the way the industry functioned. According to Oregon Business, international bookkeeping operations grew at a faster pace than domestic operations. The restructuring proved to be favorable for the continuation of mergers among accounting firms. By 1998, the Big Six had been reduced to the Big Five, with the merger of Price Waterhouse and Coopers & Lybrand.
Aside from the trend toward mergers among large national accounting firms, there was a movement during the late 1990s for other businesses, such as financial institutions, to acquire CPA firms, according to an article in the July 1999 issue of the CPA Journal. This had the potential to allow services traditionally offered exclusively by CPAs to be offered by non-CPAs. In the late 1990s, many issues concerning regulation, licensing, state laws, and peer reviews remained unresolved. The AICPA continued working to clarify and develop guidelines for some of these issues.
The U.S. accounting industry was rocked by scandal in the early 2000s. Arthur Andersen, one of the Big Five accounting firms, was convicted of obstruction of justice in 2002; the charges related to its work for Enron, which had stunned Wall Street a year earlier with an unexpected bankruptcy. Also in 2002, WorldCom revealed that it had improperly accounted for $4 billion in expenses; Tyco International CEO Dennis Kozlowski and CFO Mark Swartz were indicted on charges of embezzling a total of $170 million and engaging in illegal sales of Tyco stock; and Merrill Lynch was investigated for auditing conflicts of interest.
In an effort to protect investors and to increase the accountability of the accounting industry, the U.S. federal government signed the Sarbanes-Oxley Act into law in July of 2002. The act called for the formation of a federal board to oversee corporate auditing activity, a task formerly handled by the American Institute of Certified Public Accountants. It also increased the fines and changes levied against businesses and individuals convicted of corporate fraud.
When Arthur Andersen shut its doors in 2002, the remaining Big Four players scrambled to secure the business of Andersen's largest clients. According to a March 2003 Business Wire, this was likely to have specific ramifications for accounting firms serving smaller clients. "The expectation is that the large international and national firms will be looking at the clients at the bottom of their client lists and deciding which ones might be a better fit for a local or regional firm. These large firms need to keep their most profitable clients happy and to do that they need to manage their resources appropriately." This trend was expected to provide an unprecedented opportunity for smaller firms to secure new business. However, the regulations put in place by Sarbanes-Oxley were also expected to make it more difficult and costly for small companies to perform SEC audits. As a result, many industry analysts predicted that small and medium-sized firms would begin to consolidate in 2003 and beyond.
After Arthur Andersen began phasing out operations in the wake of a criminal indictment related to the Enron scandal, the Big Five accounting firms became known as the Big Four—KPMG International, Ernst & Young, Deloitte Touche Tohmatsu, and Pricewaterhouse-Coopers. While these firms were the most well-known in the profession, the American economy also supported regional and local firms, as well as thousands of accountants who maintained their own small businesses. Other industry leaders of the early 2000s included American Express, H&R Block, Merrill Lynch, and Oppenheimer.
Because every state established its own licensing requirements, there were some differences in the type of education and experience required of a person seeking to become a CPA. Essentially, the requirements consisted of a four-year college degree, one or two years of on-the-job experience, and a passing grade on the CPA examination.
The shortage of teachers with doctoral degrees in accounting—largely attributable to the higher pay available to talented accountants in public and industrial accounting—presented a major hurdle to those who advocated the desirability of requiring a fifth year of education for CPAs, and prompted the AICPA to institute a financial aid program for doctoral candidates, in hopes of boosting the number of faculty in accounting.
Any student capable of meeting the existing educational requirements faced good prospects because of the anticipated healthy state of the American accounting profession in the twenty-first century. Through the year 2005, job growth in accounting was predicted to be higher than the average for all occupations tracked by the U.S. Department of Labor—and this in a context where the numbers of students graduating with degrees in accounting had remained essentially stable.
Though CPAs were expected to have a better choice among a greater range of employment activities, other accountants and accountants without college degrees could be expected to find niches in a growing market. Moreover, accountants of all levels of training and experience could take confidence from the fact that downturns in the national economy seldom had an adverse impact on their chosen profession, because even a poorly performing economy still generated data that had to be analyzed and interpreted.
Of the roughly 2 million clerks engaged in various forms of bookkeeping, about a third worked in wholesale and retail; about a quarter worked in social, educational, health, or business services; and about a quarter worked part-time. Their employment prospects were seen as vulnerable to increasing computerization of office functions.
At the beginning of the 1990s, the average starting salary for junior accountants in the federal government was $17,000 annually. By the close of the century, a college graduate who began working in public accounting could expect to earn $26,000 to $36,750; salaries offered in corporate accounting began at $27,000 and capped at $33,750. College graduates with a master's degree could expect to add 10 percent to their starting salary.
Unsurprisingly, members of the accounting profession who had greater experience earned significantly more during this same period. Managers and directors in accounting firms commanded an annual average salary of $56,250 in small accounting firms and could earn up to $92,000 in large firms (usually after a period of five to eight years). In 8 to 12 years, once an individual reached partner status in an accounting firm, average first-year salaries were reported to be $175,000 ( 1999 Robert Half and Accountemps Salary Guide ).
Demand for qualified accounting professionals continued to grow during the early 2000s. The target accounting firms for most fresh graduates were the Big Four. Accounting firms were in constant search of qualified personnel. Consequently, they were offering flexible working hours and a more democratic promotion system, according to The Practical Accountant.
In her article on the changing roles of CPAs, Tami Kegley discussed the need for CPAs of the future to have knowledge of "the international market, technological applications and strategic knowledge management." Another area expected to grow is the consulting assurance area, according to Leigh Knopf of the AICPA. Other factors affecting the future of CPAs are increased competition with non-CPAs and the globalization of the accounting industry.
The largest of the accountancy firms in the United States possessed the resources to conduct extensive business overseas. Some of the smaller firms worked in conjunction with similar outfits overseas by associating with them in cooperative networks. With the increasing trend toward a global economy that was apparent at the end of the twentieth century, the importance of such international transactions was sure to increase, stressing the desirability of essentially uniform worldwide accounting standards in making cross-border financial data as accurate and useful as possible.
Because the American way of doing business exerted a powerful influence on the rest of the world throughout the twentieth century, and because American accounting standards, building on British precedent and developed over the course of that century, had established a level of sophistication and authority recognized around the world, international accounting standards greatly conform to an American model.
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