Accounting, Auditing, and Bookkeeping Services

SIC 8721

Companies in this industry

Industry report:

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.

Industry Snapshot

Accounting, auditing, and bookkeeping services serve key functions in the United States' (and the world's) economic engine. In publications such 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, the result of the demise of Big Five accounting firm Arthur Andersen in 2002, was followed by several other high profile cases of illegal business practices. By 2005, many corporate officers were convicted. 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, President George W. Bush signed the Sarbanes-Oxley Act in 2002 as part of an effort to crack down on fraudulent accounting practices and to bolster investor confidence. The U.S. Congress also stripped the American Institute of Certified Public Accountants of its regulatory duties, granting auditing oversight responsibilities to a new federal board.

By the late 2000s, the industry had begun to steady itself once again as news of the previous years' scandals faded from the headlines. The industry had experienced a sudden hiring explosion during the early to mid-2000s as firms added capacity to adjust to the increased work required to meet the guidelines set by Sarbanes-Oxley. Yet by 2009, the industry had mostly adjusted to the new requirements and now found itself in the midst of a deep recession, with too many CPAs. As a result, large and mid-sized firms instituted cost-cutting measures, such as layoffs, early retirement plans, and flexible staffing hours. In addition, merger and acquisition activity remained at a relatively high level. As new regulations loomed, which would require expert advice, and the economy slowly began to restart, those in accounting services had reason to anticipate a turning of the tides in the coming years. Mergers and acquisitions, especially among mid-sized firms, continued to reshape the industry during the late 2000s.

Together, the companies in this industry generated over $58.87 billion in revenue and employed 732,238 people. In 2009, approximately 125,000 accounting, auditing, and bookkeeping establishments were in operation in the United States, but the longtime "Big Four" were still at the top of the industry: KPMG International, Ernst & Young, Deloitte Touche Tohmatsu, and PricewaterhouseCoopers. These companies vied with each other for the constantly changing top spot.

Organization and Structure

Different fields in the accounting profession represent different degrees of affiliation with the world of commerce. Public accountants either run their own businesses or are employed by accounting firms to meet the specific 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, but 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. The American Institute of Certified Public Accountants (AICPA) is the largest and most important of the organizations within the profession. As of August 2009, it represented 342,490 CPAs, as well as 17,491 associate members (i.e., student, affiliate, and international members), serving as the voice of the profession as a whole through its activities. The AICPA is recognized by the Securities and Exchange Commission (SEC) as a self-regulating body and set standards until 2002, when the federal government took over those responsibilities following numerous high-profile accounting scandals. 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, which stands for 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."

Background and Development

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 U.S. accounting was 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, more 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 stockholder groups, government regulation, and continued economic growth. According to Principles of Accounting, all 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 U.S. 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 U.S. 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. This report 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). The scope of the FASB's standards was defined by one of its former chairpersons as "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."

However, 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 and public sectors were not always so different from each other to justify the maintenance of different sets of standards for each. These analysts also realized that the concept of having different standards for the two sectors was by no means automatically a good thing, especially as other sets of standards governed auditing procedures in federal government.

In recent years, a number of the industry's largest companies 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 large and small accounting businesses was so pronounced with a wide variance in the type of services offered by each business that accounting in the United States sometimes was viewed as "two separate and distinct professions," according to The Bottom Line. The Bottom Line also 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 was 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 because as smaller firms became more specialized, and larger ones had 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, which were already a cause for concern in some quarters during the 1970s, became a far more prominent feature of the business scene during the 1980s. According to a study 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, such displacement also tended to occur when companies decided to sell shares to the public according to the same study, which reported that "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 $50 billion. 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 to confront 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, including 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 globalization 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 on charges related to 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. Congress passed the Sarbanes-Oxley Act in July 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 charges levied against businesses and individuals convicted of corporate fraud.

Dramatic changes came to the accounting industry following a rash of U.S. financial scandals in the early 2000s. Criminal charges resulted in prison terms for several corporate leaders by 2005. The Big Five became the Big Four after Arthur Andersen effectively went out of business. At the same time that clients showed a loss of confidence in accounting firms, their services became more valuable. Prices for accounting services and pay for accounting managers increased significantly. In 2006, fee income was recorded at $40.7 billion, a 16 percent increase over the previous year.

The Arthur Andersen conviction on obstruction of justice charges was overturned in 2005, but the company had already lost its accounting license and laid off 28,000 employees, leaving it a mere shell. The remaining Big Four players scrambled to secure the business of Andersen's largest clients. This trend provided an unprecedented opportunity for smaller firms to secure new business from clients more appropriately placed with a local accounting firm. However, the regulations put in place by Sarbanes-Oxley made it more difficult and costly for small companies to perform SEC audits. Sarbanes-Oxley only applied to public companies, however, and auditing of private companies required different measures, a task smaller accounting firms were poised to begin. As a result, many industry analysts predicted that small and medium-sized firms would consolidate in the mid-2000s and beyond. Indeed, in 2006, 65 percent of regional firms had revenue increases in the double-digits.

The Wall Street Journal reported that the Big Four were made more powerful by these conditions, and that they were able to reject clients and charge higher fees. The Sarbanes-Oxley Act created more work for these firms at the same time that it required companies to divide certain kinds of work between different firms. Sun Microsystems was reported to employ all the Big Four firms, for example. In 2003, the Government Accountability Office issued a report saying the Big Four audited more than 78 percent of all U.S. public company books. That year, according to AuditAnalytics.com, audit fees increased 18 percent for companies in Standard & Poor's 500-stock index, and they were expected to climb 25 percent in 2004. These numbers affected salaries at public accounting firms and corporate internal-audit departments. Managers were expected to see 10 to 12 percent pay raises in 2005.

The U.S. Congress responded to these events by creating the Public Company Accounting Oversight Board, which began reviewing the work of the Big Four in 2003. Replacing self-regulation, the board had subpoena and disciplinary powers.

In 2005, KPMG International, one of the remaining Big Four companies, was indicted in a tax shelter case, creating concerns that accounting resources would continue to dwindle. The indictment came on the heels of sentencing in a number of high-profile cases. Former WorldCom CEO Bernard Ebbers was sentenced to 25 years in prison for his role in an $11 billion accounting fraud. He was also ordered to pay $5 million and put most of his assets in a trust to pay claims in a civil suit. Two Tyco International leaders, former CEO L. Dennis Koslowski and CFO Mark H. Swartz, were found guilty on 22 charges, including grand larceny and falsifying records. Adelphia Communications founder John Rigas faced 15 years in prison, and his son Timothy was sentenced to 20 years after being found guilty of conspiracy and bank and securities fraud. The biggest figures in the Enron scandal, which included charges of hiding company debt, inflating profits, and skimming off millions of dollars, were founder Kenneth Lay, former CEO Jeffrey Skilling, and lead accountant Richard Causey, whose sentences were handed down in 2006.

Accusations continued into the late 2000s, however. A Japanese branch of PricewaterhouseCoopers was involved in a scandal that caused the firm to be barred from practice for two months. In 2007, the SEC censured Ernst & Young for faulty accounting with client PNC Financial Services Group and fined the company $1.6 million. It was the second time since 2004 that the company received penalties for violations.

Current Conditions

Following the passage of Sarbanes-Oxley Act in 2002, accounting firms in general and the Big Four specifically ramped up their employment numbers to address the learning curve created by all the new rules and regulations stipulated in the act. Overall, the industry grew by nearly 20 percent. However, by the late 2000s, that learning curve had leveled out and, at the same time, the economy had sunk into a recession, causing the pool of clients to shrink. Thus, in 2009, by some estimates, the industry was overstaffed by as much as 15 percent. As a result, the Big Four announced staffing cuts. Deloitte laid of 900 workers and PricewaterhouseCoopers laid off 120 workers in the United States. Ernst & Young announced staffing cutbacks in the United Kingdom and Ireland.

Despite the recession, the bottom line for most firms was positive through 2008. According to a 2009 report by Accounting Technology, net revenues at the top 100 firms increased by over 8.1 percent during 2008. The weakest performing sector was firms with over $1 billion in revenue (i.e., the Big Four along with RSM McGladrey/McGladrey & Pullen and Grant Thornton), however; they posted a 7.4 percent increase, which, when compared to the very weak overall economy, was quite a strong showing. The smallest of the top 100 (with less than $100 million in revenue) grew the most, posting a 12.5 percent increase whereas the mid-size group (between $100 million and $1 billion in revenue) grew by 9.7 percent.

Despite the positive growth, naysayers pointed to the fact that the growth rate was down more than three percentage points from 2007. In addition, although 10 firms reported revenue growth in excess of 25 percent, only 4 of the top 100 firms increased revenues by over 30 percent, compared to 11 firms in 2007 and 14 in 2006. Also, revenues dropped at seven firms in 2008, compared to just three firms in 2007 and one firm in 2006.

During the mid-2000s the Big Four had focused its vast resources and talent on its major clients to adjust to Sarbanes-Oxley. In the process, they lost some of their smaller and mid-sized clients to smaller accounting firms who offered more personalized service, as expected. Accounting Age noted the "Big Four's practice of using senior partners to 'seal the deal' while leaving junior employees to do the grunt work," a practice which left smaller clients feeling alienated. As the Big Four looked to increase their workload, they looked to win back some of those former clients. At the same time, small and mid-sized firms prepared to tout their personalized service to a U.S. business community that was growing increasingly wary of accounting mismanagement.

Although accounting work in such areas as mergers and acquisitions was down during the latter part of the decade due to the stagnant economy, the demand in other areas, including tax work, remained strong. The industry also was awaiting the implementation of International Financial Reporting Standards by the SEC, which was expected in 2011. As with other new regulations, implementing the new standards would be labor-intensive, thus adding a boost to the accounting industry. Another area that was expanding was forensic accounting. U.S. businesses and organizations lost an estimated $994 billion due to fraud and abuse during 2008. The poor economic environment was expected to increase the potential for abuse as financial pressures came to bear. As a result, according to a 2009 Accounting Age survey, 40 percent of the top 100 firms expected to increase their forensic accounting departments.

Industry Leaders

While the Big Four--KPMG International, Ernst & Young, Deloitte Touche Tohmatsu, and PricewaterhouseCoopers--were the most well known in the profession in the late 2000s, the U.S. economy also supported regional and local firms, as well as thousands of accountants who maintained their own small businesses. According to 2008 revenues, PricewaterhouseCoopers was number one ($28.2 billion), followed closely by Deloitte Touche Tohmatsu ($27.4 billion), KPMG International ($22.69 billion), and Ernst & Young ($22.69 billion).

Workforce

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.

According to the Bureau of Labor Statistics, in 2008, the industry employed about 87,600 individuals. Accountants and auditors, which made up roughly one-third of the industry's workers, earned a mean annual salary of $76,270. Chief executive officers earned a mean annual salary of $188,900. Tax preparers, which comprised about 7 percent of the industry, earned an average of $35,130 annually. Bookkeeping, accounting, and auditing clerks, making up about 11 percent of the industry, made an average annual salary of $33,020. The outlook for accounting jobs, especially certified public accountants, was favorable through 2016 due to increasing complex tax code and ongoing changes to accounting regulations.

America and the World

The largest of the accounting firms in the United States had the resources to conduct extensive business overseas. Some of the smaller firms worked in conjunction with similar concerns overseas by associating with them in cooperative networks. With the increasing trend toward a global economy, the importance of such international transactions increased, stressing the desirability of essentially uniform worldwide accounting standards in making cross-border financial data as accurate and useful as possible.

Because the way of doing business in the United States exerted a powerful influence on the rest of the world throughout the twentieth century and because U.S. accounting standards, which were founded on British precedent and developed over the course of the century, had established a level of sophistication and authority recognized around the world, international accounting standards greatly conform to an U.S. model.

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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