ACFE and AICPA utilize strengths to fight fraud: Interview with Barry C. Melancon, CPA, President and CEO of the AICPA

Why do the Association of Certified Fraud Examiners and the American Institute of Certified Public Accountants work together? The main reason is to protect the public interest, according to AICPA President and CEO Barry C. Melancon, CPA. "Both organizations are dedicated to helping business succeed," Melancon says in a recent interview. "Fraud detection and protection are important components of that mission."  

Through the years, the ACFE and the AICPA have cooperated on several projects including the Institute for Fraud Prevention, and several joint educational presentations such as the recent "Fraud and the Tone at the Top."

But beyond the cooperative efforts, each organization offers its members (many of whom belong to both the ACFE and the AICPA) the strength of its specialties, Melancon says. "Both organizations' members are known for their competence, integrity, and experience."

Melancon spoke to Fraud Magazine from his office in New York, N.Y., as the AICPA began consolidating its operations in Durham, N.C.

What do you see as the goal of the ACFE/AICPA joint presentation of "Fraud & the Tone at the Top?"
As we all know, there is a distinct correlation between the commission of fraud and the stance taken by management, or the "tone at the top." We saw it with Enron, WorldCom, Tyco and other high-profile scandals. ACFE produced an excellent paper on the subject, "Tone at the Top: How Management Can Prevent Fraud in the Workplace." [See article by Suzanne Mahadeo here.] The objective of our joint presentation is to reinforce the understanding that everything emanates from the executive suite. If management's ethics are compromised, that attitude trickles down, and the likelihood of fraud is greater.

Twenty percent of the ACFE members are CPAs and 31 percent of all CFEs are also CPAs. How has the cooperation between the AICPA and the ACFE been beneficial for both associations and the profession? What are the strengths of both groups that can help members, the business community, and the public?
The AICPA has enjoyed a long-term working relationship with the ACFE. Both the ACFE and the AICPA share the ultimate goal: protection of the public interest. Both organizations are dedicated to helping business succeed. Fraud detection and protection are important components of that mission. We jointly founded the Institute for Fraud Prevention to produce research and education. Both organizations' members are known for their competence, integrity, and experience. They share some of the same skill sets. As you yourself note, the two organizations share members. I think that's one of the most positive aspects of our working relationship. Joe Wells [ACFE founder and Chairman] is himself a CPA. I have to say that the entire field of forensics owes a great deal to Joe for his commitment and energy.

As you say, the AICPA and the ACFE are founding members of the newly formed non-profit Institute for Fraud Prevention (IFP), a research consortium of domestic and international colleges and universities. What are the major goals of the IFP?
The IFP is dedicated to multidisciplinary research, education, and prevention of fraud and corruption. The primary goals are to improve the ability of business and government to combat these crimes and educate the general public on effective methods of recognizing and deterring them. The IFP will draw on the talents and resources of its academic consortium, as well as top experts from around the world, to shed light on the root causes of fraud, the methods by which it is committed and the scope of its damages. The IFP essentially will serve as a central repository of fraud-related knowledge.

Have you seen an increase in the demand for CPAs who are also fraud examiners?
We believe there is an increased demand for CPAs who have the specialized skills to provide forensic accounting and fraud examination services as evidenced by the growth in the AICPA's Business Valuation and Forensic & Litigation Services (BVFLS) Membership Section. Our BVFLS Section was formed in 2004 to provide training, education, and market intelligence to CPAs who are specialists in this area, as well as in valuation and litigation support.

What do you think the CFE designation adds to a CPA's competency?
The CPA license signifies trust, credibility, and expertise to the clients or employers that our members serve, as studies have repeatedly shown. A specialty credential or certification, such as the CFE, enhances a CPA's competency and adds further proof to the marketplace that the CPA is skilled in that area. The AICPA offers its own well-respected specialty credentials to members who practice in financial planning, business valuation, and information technology.

The AICPA Antifraud & Corporate Responsibility Center on your Web site says that "some of the biggest challenges facing business today are reestablishing confidence among investors, promoting ethics and integrity in the workplace, and establishing clarity in reporting procedures." Beyond the Center, what are some other AICPA initiatives?
We continue to educate and train our members in ways to serve their clients or employers in this area. These include providing resources and information in the form of technical publications, practice aids, Web casts, and conferences like the AICPA National Conference on Fraud and Litigation Services. Our audit committee/governmental guidance has been widely cited as the premier source in this area.

During your statement to the Committee on Financial Services of the U.S. House of Representatives in 2002 you said that "CPAs across this country and the Members of this Committee share a common goal: to restore faith in the financial reporting system. ..." Do you feel that goal is being realized? What is the AICPA doing to inform the general public about CPAs' efforts to tackle fraud?
I believe we've come a long way since 2002. The profession itself has rebounded. In fact, I would say we're stronger than we've ever been. Polls show the public still holds the CPA in high regard, and college accounting programs are filled to capacity. The public understands the essential role the profession plays in safeguarding our economic system.

That said, the AICPA continues to act aggressively in our efforts to reduce financial statement fraud. Our Auditing Standards Board, which sets standards for the audits of private companies, not-for-profits and governmental entities, released a suite of standards that require more stringent procedures on the part of auditors to assess risk.

Our Audit Quality Centers allow firms to exchange best practices and demonstrate their commitment to quality.

Audit committees, of course, have a vital role in fraud prevention. Consequently, we created the Audit Committee Effectiveness Center and Audit Committee Toolkits to help them discharge their responsibilities appropriately and effectively. There are tens of thousands of copies of our toolkits in circulation. We also have an Audit Committee Matching System, though which audit committees can find qualified CPAs to serve as members.

Earlier in 2006 in New York, we held a special conference on Management Override of Internal Controls.

We've also produced white papers, courses, and a host of other resources that may be found at our Anti-Fraud and Corporate Responsibility Center, https://www.aicpa-cima.com/.

I think all of these efforts serve to demonstrate the profession's commitment to combating fraud.

In your testimony in March of this year to the Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee of the U.S. House Committee on Financial Services you said that as the U.S. economy is changing from one based on physical assets to one increasingly dependent on intangibles, it's become clear that existing accounting models aren't as well suited to informing investors. What can be done to foster more transparency and accuracy in financial reporting?
The AICPA believes that a key element in achieving this goal is the widespread adoption and usage of XBRL. [See www.XBRL.org.] Without XBRL, reporting is limited to a static, paper-based environment in which information is not contextually relevant to the actual reports, or is not provided in a manner that can be immediately and effectively reused. Once reporting in XBRL format takes off, the concept of paper-based, static, summary-level reports will be replaced by an online Web services model that is available on demand, near real time as appropriate and will allow users to customize searches and drill down into underlying data.

Improving financial reporting also requires consideration of not just how information is reported - such as in XBRL format - but what information is reported. In order to make informed decisions, people both inside and outside a company need information about value drivers; key performance indicators; business opportunities; risks, strategies and plans; and the quality, sustainability, and variability of cash flows and earnings. Key non-financial information on strategy, product innovation, people, customer loyalty, and other intangible value drivers is critical in assessing value. Accordingly, the Enhanced Business Reporting Consortium, a collaborative, market-driven effort, is working to promote greater transparency of corporate strategy and performance by developing an internationally recognized, voluntary framework that will establish reporting guidelines for the adequacy and structure of the types of information, allowing for more complete, relevant and consistent disclosures.

The EBRC is also working to identify opportunities for simplification of current reporting requirements for public companies. The EBRC Reporting Simplification Task Force is currently working on research to identify the relative usefulness of disclosures to key user groups with the intention of issuing thoughtful proposals for reducing complexity. Both the AICPA and the EBRC also support recent dialogue around the establishment of a high-level, high-profile Blue-Ribbon Commission charged with addressing complexity.

You've called for more transparency and a new vision in the AICPA. How are your efforts faring in those areas? The CPA profession has changed dramatically during the past 10 years, with more change to come. We have an aging population of CPAs who are part of the Baby Boomer generation, we have record student enrollments filling a new pipeline of CPAs for the future, and we have new requirements through regulation and public expectations.

Those are just a few of the major trends impacting the profession and, therefore, the AICPA. We have been actively managing all of these issues and many more. I'm proud to say that our efforts to attract more CPAs are balanced by succession and training programs.

We are aggressively dealing with more than 30 major issues at any one time. Today, through the combined efforts of our members, the AICPA, the state CPA societies and our partners, the profession is well positioned for the future.

How have your background and experience helped you handle this position?
My background is unique for my position. I grew up in the profession in an under 20-person CPA firm, have taught adjunct, and have a government relations background. I believe some of the key expectations of my position are to bridge firms large and small, bridge points of view from the public sector to the private sector to academia to government, and relate to big business issues and small private company issues. My background has given me a good starting point to make those connections, but the breadth of our volunteer members and staff is really what makes the AICPA.

In the past, you've said that the AICPA has six leadership roles to fulfill: standard setter, liaison between market institutions and corporations, researcher, educator, promoter of the level of financial reporting, and promoter of strong corporate governance and internal control systems. Briefly, what are your thoughts on those leadership roles and any additional ones?
The CPA profession is diverse and touches all parts of the United States economy. The AICPA is active in all of those areas. We have obligations to deliver programs for the education of our members. In areas of governance and public company standards, we advocate for workable solutions and provide tools. Our leadership challenge is to set the priorities at any given point and to execute on those priorities with both the public and the CPA profession in mind.

You've said that the new set of standards released by the AICPA's Auditing Standards Board requires auditors to more closely plan and execute audit procedures based on a thorough assessment of risk. Practically and specifically, how does that work on a daily basis for auditors and fraud examiners?
These new standards, which are commonly referred to as the Risk Assessment Standards, will be applicable to audits of financial statements conducted in accordance with generally accepted auditing standards. The standards will make important changes that our Auditing Standards Board believes will improve the effectiveness of the audit. Two of these changes deal with 1) wider understanding of the business and industry and 2) assessment of control risk.

An effective audit of an entity's financial statements needs to start with an in-depth understanding of the client, the business, and the industry. By having that understanding and knowledge, including knowledge of the strategic initiatives and plans of the business, the auditor will have better information to make intelligent risk assessment decisions. For example, if the auditor looks at the entity's strategic plan and sees unrealistic revenue goals or unrealistic gross profit goals vis-à-vis that industry, the auditor will be more sensitive to fraud risks in those areas since there will be added pressures on management to meet these seemingly unrealistic goals.

The standards also require the auditor to make an assessment of control risk. With this requirement, the auditor will need to have an understanding of financial reporting controls throughout the COSO framework and determine if those controls are placed in service. By gaining this understanding, the auditor will be better able to identify weaknesses in controls and areas more susceptible to misstatement (fraud or error). That, in turn, will put the auditor in a better position to tailor auditing procedures to be responsive to those weaknesses and higher risk areas.

Can you talk some about the work of the AICPA's Audit Quality Centers?
We established our Audit Quality Centers in 2004 to focus on audit quality in two distinct areas: Yellow Book audits, or audits of governmental entities, and audits of employee benefits plans. Each center is designed to create a community of professionals committed to excellence, a community that shares experiences and best practices. That may be the most important benefit: the opportunity for dedicated CPAs to learn from and inspire each other.

The centers include dedicated Web sites [www.aicpa.org/GACQ and www.aicpa.org/EBPAQC], e-news alerts on current audit and regulatory developments, online member discussion forums, and Web-based seminars, and teleconferences on technical, legislative, regulatory and practice-management topics.

Firm membership is voluntary. The Employee Benefit Plan Audit Quality Center has 1,200 member firms, which conduct 75 percent of all ERISA audits performed annually.

The Governmental Audit Quality Center has 600 member firms, which account for 80 percent of the federal expenditures audited by CPA firms as a part of a single audit. There are 100,000 governmental audits per year, of which 40,000 are single audits.

Can you describe the AICPA Competency Self-Assessment Tool?
The competence assessment tool enables CPAs to assess their proficiencies and compare them against the highest and most valued in a particular area. It allows our members to build their own learning plan based on competencies they want to develop. Essentially, it helps our members take a snapshot of where they are in their professional development and helps lay out a roadmap for getting where they want to be.

What's the progress of the AICPA's Center for Public Company Audit Firms?
Currently, representatives of U.S. audit firms registered with the Public Company Accounting Oversight Board [PCAOB - the private-sector, non-profit corporation, created by the Sarbanes-Oxley Act, to oversee the auditors of public companies] are working together with the AICPA to explore news ways to encourage and inform public discussion among financial market participants on issues critical to the public interest. Their efforts aim to enhance business reporting and auditing for the benefit of investors; provide timely and comprehensive technical and educational information; and contribute to the growth and stability of our capital market system.

In the last few years, the ACFE has aggressively promoted higher-education fraud examination training in accountancy programs. What new fraud examination tools does an accounting student now need? What does the CPA of the 21st century need to have?
The AICPA applauds ACFE for its efforts in this area. We agree that fraud training should play a significant role in accountancy programs. Our new CPAs must understand and recognize the different types of fraud and learn the best ways to prevent each type. Cyberfraud, for example, is a very serious concern, one that didn't exist when I was in school. Global money laundering issues are also important. As far as tools are concerned, I would cite data analysis software, data mining tools, and digital evidence collection.

How is the AICPA working with the PCAOB?
The AICPA has an excellent working relationship with the PCAOB. The Board, under the leadership of current chairman, Mark Olson, and former chairman, Bill McDonough, has done a tremendous job in restoring investor confidence. We meet regularly with Chairman Olson and/or his staff to discuss policy issues, audit quality, and the concerns and ideas raised by our members. We also submit comment letters on PCAOB proposals. The PCAOB rule on independence, tax services and contingent fees, to cite one example, includes a number of our recommendations.

Do you feel the PCAOB is sufficiently meeting CPAs' concerns about Section 404 of SOX?
In May 2006, the PCAOB announced a four-point plan designed to improve auditor implementation of 404. We believe that plan will lead to beneficial 404 reporting for the protection of investors and the greater good of the U.S. capital market system. The Board's four-point plan will promote the long-term sustainability of the internal control reporting process by helping eliminate unnecessary and burdensome costs.

How do you think Sarbanes-Oxley will continue to affect private companies and nonprofits?
Since SOX was passed, many private entities have expressed an interest in learning more about how they can strengthen their internal controls over financial reporting. In the nonprofit world, audit committees are taking a more proactive role in their dealings with the auditor and with management. They are starting to ask the tough questions and not be rubber stamps for management. These are all important steps in improving financial reporting. Through the work of the Auditing Standards Board and our Business and Industry Team, we want to make sure that the importance of good internal controls is being stressed in a cost-effective manner, and we want help those who are charged with corporate governance to carry out their responsibilities as effectively as possible. However, we also believe it's important to not overly burden private businesses and negatively impact entrepreneurialism.

What are your thoughts about some states pushing to enact legislation patterned after Sarbanes-Oxley?
The AICPA strongly supports the goals of SOX and considers the law an important contributor in restoring investor confidence.

We believe SOX provisions are appropriate for SEC registrants and their auditors and they contribute to the protection of the public interest. However, the extension of SOX provisions to smaller, non-SEC registrants and their CPA firms raises a number of issues that do not contribute to the public interest and may in fact be harmful to small business. SOX was not intended to be a template for state regulation.

We have a number of concerns, including costs for business to operate; lack of uniformity in legislation from one state to another, which could be an impediment to business; and restrictions in scope of services among CPA firms.

We encourage state legislators and regulators to take a reasoned approach to reform when considering adopting SOX provisions beyond non-SEC companies and their auditors. One of the authors of the bill, Senator Sarbanes, said from the Senate floor in 2002, "This bill applies only to public companies that are required to report to the SEC. It says plainly that State regulatory authorities should make independent determinations of the proper standards and should not presume that the bill's standards apply to small- and medium-sized accounting firms that do not audit public companies."

In June of this year, the AICPA and the Financial Accounting Standards Board issued a joint proposal intended to improve the financial reporting process for private company constituents. [The comment period ended Aug. 15.] Under the proposal, the FASB says it would "implement certain improvements to enhance the transparency of its standard-setting process for private companies." Briefly, what are the major points of the proposal after the comment process and its possible implementation status?
The importance of private companies to our capital market system can't be overstated. Of the more than 20 million businesses in the United States, only about 17,000 are registered with the SEC. The AICPA had been aware for some time that current GAAP did not always reflect the needs of users of private company financial statements. The AICPA conducted research among private company constituents, who said enhancements to the standard-setting process would be appropriate.

The proposal, jointly issued by FASB and AICPA, advanced the concept of a special volunteer committee that would consider differences in current and prospective GAAP for private company financial reporting. The proposal and comment letters are available at www.pcfr.org.

Changes are already underway. When it issues exposure drafts on proposed standards, the FASB will now ask questions specific to private companies.

The AICPA is now in the midst of consolidating its operations in Durham, N.C. Why did you decide to move the association and how did you decide on this location? What are the latest developments in the move? Have you had your first taste of North Carolina barbecue?
We decided to relocate our New Jersey operations and select operations in New York, a total of around 400 positions, because of the continued escalation of costs in the New York metropolitan area. We looked at over 300 possible locations. We settled on Durham for several reasons: the quality of the labor force, the quality of life, and the ability to save substantially on operating costs. The state of North Carolina and Durham County both offered generous financial incentives, which contributed significantly to our final selection of Durham.

We leased a 100,000 square-foot office building and moved in officially at the end of August. Tony Pugliese, our senior vice president of finance and operations, and his staff have done a remarkable job in overseeing the relocation. Durham is a great place, and we're very happy to be part of its business community. We estimate the relocation will save us $11 million a year over 15 years. The quality of staff, hospitality and, yes, the food is excellent in Durham.

You're now in your third five-year contract with the AICPA. So far, what has been most satisfying to you as president?
It's hard to believe I'm in my 12th year as AICPA President and CEO. It seems like yesterday my family and I moved to New York from Louisiana. The world has changed dramatically during that time. The thing I'm most proud of is that the AICPA has been able to change with those times. We are a large organization, but we've instilled a culture of change and newness in everything we do. That's not always easy with a 120 year-old organization. I'm also proud to have been a part of the profession adapting to the significant challenges of Enron and WorldCom and SOX. We've proved as a profession that our core values are intact and will allow us to be successful despite those challenges.

At then end of the day, what motivates you in your position?
I'm motivated by our 330,000 or so members, who reside in every corner of our country. Every morning, I know that I represent the finest, most dedicated, charitable, talented, and honest group of people to be found anywhere. The group collectively works to do the right thing from Main Street to Wall Street and representing them is motivation enough.

MELANCON BRINGS EXECUTIVE, PROFESSIONAL, EDUCATIONAL EXPERIENCE TO TOP AICPA POSITION

Barry C. Melancon, CPA, in his twelfth year as president and CEO of the 330,000-member American Institute of Certified Public Accountants, represents the most diverse and largest group of CPAs in the world.

With more than 25 years of experience, Melancon travels the United States meeting with representatives of state CPA societies, CPA firm associations, and CPAs from all segments to discuss the challenges of the profession and gather feedback to incorporate into the AICPA's planning process.

Prior to joining the AICPA, Melancon was the executive director of the Society of Louisiana CPAs for eight years. He began his accounting career in 1979 at the firm of Bergeron & Company, CPAs, in Houma, La., and was elected a firm partner in 1984. He graduated in 1978 from Nicholls State University in Louisiana with a major in accounting and a minor in government. He earned an MBA from Nicholls State in 1983 and was an adjunct professor of accounting at his alma mater for four years.

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Dick Carozza is the editor of Fraud Magazine.