Enron, WorldCom, Adelphia -- these corporate names have become shorthand for the business corruption that seemed rampant in the first years of the decade. Congress responded in 2002, enacting the first broad amendments in accounting standards since the rules were put into place in 1934. The Sarbanes Oxley Act, which profoundly impacted the way corporations police themselves, has influenced the accounting industry as well, reversing what appeared to be a fast trip to obsolescence just 10 years before.
"Throughout the dot-com hysteria of the 1990s accounting seemed to lose its relevance, because companies that were not performing by accounting standards appeared to be very successful in the capital markets," said James Boatsman, director of the School of Accountancy at the W. P. Carey School of Business. "During this multi-year period accounting lost a lot of its influence, because in the so-called 'New Economy' the rules apparently had changed. As it turned out, they haven't changed that much at all."
Because of Sarbanes-Oxley, it was back to basics for corporate America's auditing practices. Sarbanes-Oxley altered financial reporting, including the disclosure of executive compensation. It also created the Public Company Accounting Oversight Board to generate new standards of ethics and conduct for auditors and companies. But the segment of Sarbanes-Oxley that has generated the most controversy has been Section 404, which requires companies filing annual reports after Nov. 15, 2004, to thoroughly document, along with a third-party auditor, the procedures taken to ensure the accuracy of financial statements. It also requires companies to evaluate their system of internal controls and then subject that evaluation to audit.
It's a far cry from how business was done over a decade ago.
According to Steven M. Rivers, founder of the Phoenix accounting and auditing firm of Rivers & Morehead, adding value for the client 12 or 13 years ago meant dealing with gray areas by taking an aggressive position, as long as it was supportable. "Now we're getting back to a little more conservative approach, less cozy," Rivers said. "Before it was, 'Help us find the best way to present our company in the most favorable light.' Management still wants us to present things in the most favorable light, but within the realm of realism. There are executives going to prison and it's just not worth it anymore."
Because of the changes wrought by Sarbanes-Oxley, CPAs have become some of the most sought-after employees in corporate America. Rivers said that the requirements under Section 404 have almost doubled the number of hours every audit firm has to spend with each of their clients, and has created similar burdens on the companies themselves. "There is a premium in the workplace for accountants and we have seen salaries rise tremendously. I have a lot of contacts with partners in the big firms or who work as consultants or are even in company management, and they are now fighting to get the same people with the same skill sets," River said. "There is a huge demand for accountants and there's just really not a lot of talent out there."
During the dot-com era, the number of business school graduates with bachelors or masters degrees in accounting dropped sharply. According to the American Institute of Certified Public Accountants (AICPA), the nation's business schools turned out 47,895 accounting degrees in the 1998-99 school year -- a drop of 20 percent from the year before. The numbers continued to decline steadily, reaching a low of 44,695 in the 2001-02 year when the corporate accounting scandals reached a fever pitch. Not surprisingly, the number of accounting degrees awarded by universities the following year jumped 11 percent to 49,665. That same year, the number of new accounting graduates with bachelors and masters degrees that were hired by CPA firms rose 5 percent and 8 percent respectively. Of those new graduate hires, about 72 percent were assigned auditing duties.
According to an AICPA survey, the outlook for accounting graduates continues to be bright. AICPA-member firms estimate that, depending on their size, they will hire between 9.2 percent and 20.2 percent more new accounting graduates next year than they did in 2003, and between 8.2 percent and 19.3 percent more in 2008 than they did in 2003.
"Clearly, supply and demand is in effect for financial statement auditors, process auditors and IT auditors right now," said Stan Watkins, a partner in Deloitte & Touche LLP in Phoenix. "Starting salaries in those areas have gone up quite a bit because of the demand. As the prices being paid to people in those fields go up, as there is more core recognition of the importance of those roles in corporate life -- both from the company's standpoint and the public accounting standpoint -- that demand, that respect, those dollars are going to encourage people to get that kind of training. That's going to put pressure on the business schools to deliver that kind of training so they can satisfy their customers, which are the students."
In other words, CPA firms need more auditors, so they are willing to pay more for them. Students wishing to enter a field where they can make more money are looking at the CPA credential. The next logical step is for universities to increase their course offerings to meet the growing demand of students. However, market force exigencies present complications for universities.
"It's hard for a university to scale itself up and scale itself down rapidly because of the nature of faculty employment contracts and classroom limitations," Boatsman said. "For example, our masters program currently operates at a level of about 50 students, which is one section of students. If we went from 50 to 60 students we would have to add a section, but one of them would theoretically have only 10 students. In order to maintain a faculty/student ratio that is cost effective for the school, we need to recruit students in increments of about 50."
In addition, although the prospect of higher salaries may entice students to accounting, Boatsman added, the extra work needed to become a CPA may send them in another direction.
"Recently, the requirements for becoming a CPA were ratcheted up," he said. "Students are now required to take150 credit university hours, of which 30 must be in upper division or gradate accounting courses. Our undergraduate program is 18 hours. That leaves an additional 12 hours that students must acquire. Our graduate program is an attractive way to get those hours.
"It's finally dawning on students that the easier way to go is bite the bullet and make the investment of staying an extra year, acquiring the extra hours and earning a masters degree" Boatsman said. "Firms are realizing it, too. They would much rather hire somebody who is eligible to take the CPA examination, and they're being supportive in coming up with creative ways to help share the cost of this incremental education."
It's a philosophy embraced by companies like Deloitte & Touche, said Watkins, who also advises ASU on what his company needs from W.P. Carey graduates.
Students coming out of university programs are raw materials, not finished goods, Watkins said. In years past, firms hired new graduates with bachelor's degrees in accounting and after they worked for a few years they sat for the CPA credential. These days, however, new accounting graduates are joining firms with solid education and training in the actual work of the firm.
Still, the new accounting standards pose a challenge. "In this area, even the people who are responsible for writing the rules aren't tooled up," Watkins said.
Boatsman said that the W. P. Carey School spent a large part of last year redesigning the curriculum of its accounting masters program to refocus it more on auditing. Yet, despite the changes brought about by Sarbanes-Oxley, Boatsman cautions that universities should not go over the top and lose sight of what's important for students to know in order to have a good career.
"I think it's important for us not to jump on the bandwagon," he said. "I hope that we're smart enough not to overreact and change curriculums in such a way that we're throwing the baby out with the bathwater."