How To Fix The IRS and CPA with AICPA's Sue Coffey and Tom Hood

Let's get real. The IRS is in trouble. The CPA pipeline is shrinking. Diversity efforts have stalled. GAAP continues to decline in relevance. So how do we fix it? Sue Coffey and Tom Hood join to discuss these issues and what the AICPA is doing to help.

Tom Hood: So, I think everything- I think one thing about our profession is we have been pretty adaptable over time. And I think you're seeing an acceleration of that adaptation. So, the number of firms that are starting in major diversity equity inclusion programs, the number of women in the profession has gotten significantly up in terms of leadership. You're seeing more and more leaders who are women in the profession, and that's another blind spot.

Blake Oliver: But still, only-

Sue Coffey: That is true. We still have a ways to go.

Tom Hood: Yeah.

Blake Oliver: Only 23 percent of partners are women. Only 23 percent. That is pathetic. It's pathetic.

Sue Coffey: That is true. At the entry level, we see it. It's about 50-50, but you're right, Blake. It starts to trail off as you get-

Blake Oliver: And that’s-

Sue Coffey: As you progress.

Blake Oliver: This goes to the hours.

[00:00:55] Welcome and introductions

Blake Oliver: Hello, everyone, and welcome to another episode of the Earmark Podcast. I am Blake Oliver, CPA, your host, and I'm joined today by Tom Hood, EVP of Business Engagement and Growth at the AICPA, and Susan Coffey, Chief Executive Officer, Public Accounting, at the AICPA. Thank you both for joining me today.

Sue Coffey: Happy to be here, Blake.

Tom Hood: Pleasure to be here.

Blake Oliver: So, Tom, the AICPA needs no introduction. We all know the acronym. Although occasionally, I forget that it's no longer the American Institute of Certified Public Accountants. It is now the Association of International- what is it?

Tom Hood: Certified-

Blake Oliver: Certified.

Tom Hood: Professional Accountants.

Blake Oliver: So, AICPA is international, and I tend to forget that a lot of the times. Would you mind just giving us a quick rundown on the numbers for the AICPA?

Tom Hood: Yeah, I've known the AICPA my whole career. I've been a member, I’ve been part of it, but now, I'm here. And when I talk to members, I'm finding out many don't know that we really have become global and merged with CIMA a few years back. We're now 696,000 professionals, CPAs, CGMAs, students, and engaged professionals, and spanning 192 countries and territories. So, we're the largest professional association for accountants in the world.

[00:02:26] How the AICPA looks at the membership

Blake Oliver: I've always been curious, what is the breakdown of the membership? Especially firm size, because I know there's a lot of smaller firms that I talk to, and they say, “Yeah, AICPA. I used to be a member when I was at a bigger firm. Now, I'm not anymore.” Do you release those numbers?

Tom Hood: So, you might- I don't think we have a specific like breakdown by the size of the firm. We look at it inside the association, so, you can talk about the major firms, the G400, and then all the small practitioners.

Sue Coffey: Sure. So, of course, we're made up of members in public accounting, and members in business and industry. And then we also have some members in advisory, and law, and education. So, we've got a very broad and diverse membership. And when it comes to CPA firms, we do look at them within some categories.

It's actually a very diverse group. And I wouldn't say that any one group is dominant over the other. And it's really important to us that we recognize all of our members do all different things, and that we serve them all in the best way we can and provide them with the resources they need to do whatever they do, as best as they can do.

[00:03:47] The IRS is way behind and not catching up fast

Blake Oliver: Let's talk about the issue that's on everyone's minds right now, which is tax season. ‘Cause we're in tax season, we're in busy season, and most CPAs are dealing with taxes, right? That's the bread and butter of small firms, especially, which make up the bulk of CPA firms in this country. A lot of them are dealing with the IRS right now and dealing with terrible situation there. I'm sure you're aware of the numbers.

At the end of the 2021 filing season, the IRS had 35 million returns unprocessed. BY the end of last year, they still had millions that they hadn't gotten to. So, we're rolling into another tax filing season, and the IRS is way behind. They keep sending out notices, and people keep getting penalties and liens, and they haven't processed the payments. And it's just spiraling out of control for tax repairs. So, I guess that's a long way of getting to my question, which is, how do we fix this mess?

[00:04:39] How do we fix this mess?

Sue Coffey: So, I'll take that one, and Tom, jump in whenever you want on this. And I guess I'll start out by saying the obvious, that it just has been horrendous. And just as you outlined, that backlog keeps on getting bigger and bigger, you can't get ahold of anyone. They continue to issue the penalty ladders; it's just been absolutely horrendous. And even the taxpayer, the taxpayer advocate recently issued her report and noted how impossibly bad it was. We have had a number of- we have a number of initiatives on our plate around this issue. And we have been pounding the pavement for quite some time on this.

Our congressional affairs and tax advocacy teams have really been doing a great job in offering up suggestions for relief and good public policy. Just recently, we started to get some real success in this area. We created a coalition with a bunch of different organizations, including the enrolled agents, organizations representing Latino and Black tax preparers, the State CPA Societies, organizations representing small CPA firms who you know serve small businesses and individuals during tax busy season, and all across the year, because I had argued that the entire year now is tax-busy season.

But we all work together to get bi-partisan leaders in Congress to engage. And that actually resulted in a bicameral- actually, bicameral letters, two letters, one coming from the Senate, and one coming from the House to treasury secretary, Yellen, and IRS commissioner, Rettig, to adopt recommendations that we suggested to improve this tax filing season. And the house letter has 191 signatures on it, and the Senate letter has 25 signatures on it, which is absolutely amazing.

And the recommendations are around discontinuing those automated collections from now, until at least 90 days after April 15th, and really, until the IRS can devote the necessary resources for proper resolution. So, that's one. There's another one around delaying the collection process for filers until any active penalty abatement requests have been processed. There's another around streamlining the reasonable cause penalty abatement process for taxpayers who are impacted by the pandemic, without any need for written correspondence.

So, it's similar to the first-time abatement waiver, without affecting that FTA in future years. There's another one on providing targeted tax penalty relief for taxpayers who paid at least 70 percent of the tax due for the 2020 and 2021 tax years. And then just simply expediting processing of amended returns. I've been talking to our VP of taxation almost daily, and the advice that he's giving practitioners is, if you're in doubt about something, just delay filing; just extend the return. Don’t file the return and then amend it because that causes all sorts of problems.

So, those are five things that I know- and the IRS has already announced that they're going to stop sending some notices to taxpayers for filing errors. They have said though, that they believe they need congressional action on some other stuff, and we don't believe that to be the case. So, we're going to be pushing back. We've also been invited to testify before the Senate Finance Committee in February on this issue, where obviously, we'll be very well-prepared and very well-versed to express our views and the position of our mayors- our members and the taxpayers.

[00:08:28] Long-term solutions? The IRS is bleeding

Blake Oliver: So, that's a good temporary solution, a band-aid if you will. But this is a big wound that the IRS is bleeding from. So, how do we solve this, long-term? Obviously, COVID exposed this. It broke open the wound and the blood started flowing. We can put a band-aid on it by halting these notices that just compound the problem. But this is something that has been brewing for a decade. Since 2010, the IRS budget fell from an inflation-adjusted 12 billion to 10 billion. Meanwhile, the volume of returns went from 152 million, to 172 million.

And the number of IRS employees went from- round up to 95,000 down to 79,000. So, they have less money, fewer people, and more work. And that doesn't even take into account that they had to do this child tax credit payment thing, all this stuff that's being shoved into their corner by Congress. Why are we just now figuring out that this is a problem?

Sue Coffey: Yeah. So, taxpayer service has been a challenge for quite some time. I'm reminded of the several years of courtesy disconnects. Candidly-

Blake Oliver: Yeah, that's a really messed up name. If you want to put something-

Sue Coffey: I know, right?

Blake Oliver: Right. The most Kafkaesque term I have heard in the real world-

Sue Coffey: Totally agree. Totally agree.

Blake Oliver: -is courtesy disconnect.

[00:10:01] AICPA: IRS must be properly funded & modernize their technology

Sue Coffey: You know, Blake, I think part of it is, they need to be properly funded, and they need to modernize their technology. I'm not saying those are the only two things, but I do believe that those are two things that would make a significant impact. I think there's also something to be said for when Congress enacts legislation.

Effective dates are important to look at; when the legislation is enacted is important as well. So, there's a whole bunch of things that go into, I think, solving the problem, but I would say, being properly funded for a system that is obviously massive, but relies on taxpayer truthfulness, and self-reporting and things like that, as well as a profession that supports them. We’ve also asked for a taxpayer prepare service line to support prepares; not just our members, all prepares, ‘cause they have an important role in making sure that our tax system works on properly.

But I can't stress more, technology. I think they're operating with antiquated technology.

Blake Oliver: Mainframe-type servers. I don't think they're using punch cards anymore, but pretty close to it.

Sue Coffey: Right.

Tom Hood: Blake, I will tell you that that same scenario is playing out in state after state. I know Maryland, in the old MACPA days, we would go in and request support and funding for the comptroller because the legislature cut it out all the time. So, when they get down to their list of funding opportunities and they're passing those laws, they cut the tax side a lot, and use that money elsewhere.

And to exacerbate it, so, not only do you have antiquated technology, you also have the retirement of the baby boomers. So, that's driving a lot as well. So, there's a whole lot of people retiring from the feds and the state. And the challenge with that is that many of them have really good knowledge. That's often something that our folks would deal with, but now they're gone, and they're going to be less senior people that you're going to be dealing with, with less training.

[00:12:22] How much more funding does the IRS need?

Blake Oliver: The IRS needs more funding; we agree on this. How much funding do they need?

Sue Coffey: Oh, I can't answer that. And I wouldn't even start- we've not taken a position on that. That's just a tough thing to answer.

Blake Oliver: So, we're saying they need more money, but we don't know how much money they need. I see it this way. We have 700,000 members; that's a lot of voters. That's a lot of- now, not everybody's a citizen, but a lot of them are. We can mobilize, but it's hard to mobilize around just something ambiguous like, they need more resources. Can’t we tell Congress what they should give the IRS?

Tom Hood: Well, you also have to remember-

Sue Coffey: But how would we know that, based on- we don't have access to perform an evaluation. I do know that this year, Congress came out with a number in one of the bills that was floating around. I think- oh, God, help me out guys. Help me out, Tom.

Blake Oliver: Well, the Democrats-

Sue Coffey: 80 million in order to get 300- 80 billion in order to get 300 billion worth of tax dollars, or something like that. Something like that, but please don't quote me because it didn't pass.

Blake Oliver: So, these various numbers have been tossed around. I don't even know how much the IRS is getting at this point, because the bills have passed, or they haven't. The question is, maybe it's a lot more. If we're going to fix this problem long-term, it can't be a political thing. It needs to be-

Sue Coffey: But Blake, you don’t want to just throw money at a problem. You want to assess what the true needs are, what the right technology is. How do you transform the process to make it as effective and efficient as possible? So, I don't think it's an exercise of just throwing money at it.

Blake Oliver: Yeah.

Tom Hood: Well, the thing that we struggled with at the state level, which I think is true at the federal level, Blake, is that it's one thing to have a legislature authorize the money, but they will tell you- and they've told us many times, that they can't direct where that money goes. So, I remember a while back, we were advocating on the hill, if you will, with the AICPA on some IRS stuff. And the problem was, they couldn't guarantee where that money would go.

So, you throw money at them, and they put it in some completely different area like enforcement, and all of a sudden, the things that you want to help people file their taxes on time and do the right thing, all of a sudden, it's being moved into another whole area that you can't control anymore. And Congress doesn't have that level of authority over the IRS- from what we understand- or in the state. Same basic setup.

Blake Oliver: I just am not convinced that writing letters and saying the IRS needs more resources without being more quantitative about it is going to make a difference. Because this decline has happened for 10 years. It's happened for a decade.

[00:15:30] The elephant in the room

Blake Oliver: And the elephant in the room, is what everybody knows, which is that there's a political reason the IRS has been starved of resources. Because some people believe that if you weaken the IRS, it becomes more difficult to enforce the tax code. And so, people who don't like to pay higher taxes can avoid doing so through legitimate tax avoidance, and the IRS doesn't have the resources to audit people. This is the strategy that has worked.

And we've seen that the effective tax rate of high-net-worth individuals, corporations has gone down as a result. Rather than arguing the case on the merits, it's, undermine the IRS to get the result you want.

Tom Hood: I'm not sure- I don't know if that's the origin of all that, but I just know that at the state and federal-level funding, the tax collector is not a thing that politicians would like to do. ‘Cause-

Blake Oliver: It just seems insane to starve the revenue-generating arm of your government. This is like the sales organization in a business. If you don't fund that, there's nothing to power the business.

Tom Hood: You just need to come down to some of these hill visits or go to one of the state CPA days and talk to the legislators and get their perspective. But that's what the average legislator- they don't feel comfortable funding, unless they knew it was going to go to the right sources. So, it is political, whether we like it or not. And that's part of the problem, is our politics is up in arms right now.

Blake Oliver: Right.

Tom Hood: Though has been, too, for a while.

[00:17:05] The IRS and Congress are at a stalemate

Blake Oliver: So, we're at this stalemate where the IRS doesn't get the resources it needs. What's the solution? How do we fix this? It’s not going to go away on its own. COVID caused the problem to get really bad, just like the Great Resignation, just like all this other stuff I'd love to talk about, but how do we fix it?

Tom Hood: Well, right now, we're trying to get the basic stuff done, so we can get through taxis. And I think that's number one. And then, it’s- I think the other part is, nothing's going to happen until COVID calms down some. And then- because that's the other exacerbating factor, is you've got a lot of IRS employees who aren't in the office, or they're sick and they're out, like every other business there is.

So, that's all part of the compounding. So, I think our idea is to get through this, so we can at least get some semblance of support through this crisis. And then to go to the next step, which is all about legislative advocacy, which is what we do. And now, we've got a coalition of a bunch of groups, and maybe, that collective power will get somebody's attention.

We haven't done that before, and that's what the AICPA convened that bigger group. So now, it's trying to get- it's all about strength in numbers.

Blake Oliver: Let's move on and talk about another topic that is near and dear to my heart, which is the CPA Pipeline. And I know that you guys care a lot about that too, because the CPA evolution project. I apologize- I hate to be the bearer of bad statistics, but I'm going to hit you with a few more. We all know there's been a decline in the number of CPAs taking the exam. CPA exam candidates are down. The pandemic, again- it's just like with the IRS- accelerated this problem, but it was already in progress.

I think the number that I saw most recently that stood out to me was NASBA's annual report. From 2019, revenue at NASBA, National Association of State Boards of Accountancy, decreased by 12.4 percent, which was attributable to a 13.8 percent decline in revenue from CPA examination licensing. Fewer CPAs are sitting for the exam. CPA firms are hiring fewer CPAs. It's declined by 30 percent in recent years; they're hiring folks who are not CPAs.

We've got CPA firms that are choosing not to be CPA firms anymore. EisnerAmper is a great example of that, splitting off their audit practice to focus on consulting and tax. Finding or retaining talent, a big problem. If we don't push up these numbers of CPAs, how do we stay relevant? How do we reverse this trend? Tom, you want to take this one first?

[00:19:41] Reasons for the decline in CPAs

Tom Hood: Well, I think I'm going to let Sue do the evolution side of that, but I will say that there's also a demographic trend here that we call hard trend. So, just like we had the baby boom and the baby bust- if you remember, Gen X was a lot less than the baby boomers- you have that phenomenon going through right now, in terms of less college-age, worker-level people. So, there's a physical shortage. It's not just people saying, “I'm not going to be the CPBA again.”

Blake Oliver: Smaller generation.

Tom Hood: Correct. You got a smaller generation dynamic, which is compounding it, to your point. And then the other part you have is, you also have a roaring stock market. So, we know that accounting majors often will opt- go out to finance because they look at the, “I'm going to go Wall Street and make $600,000 my first couple of years.” That draws them out.

Data analytics on the tech side is also drawing away some of those candidates. Evolution is one of our answers to that. We're also looking at adding Accounting to STEM. So, it's more like going from STEM to STEAM; I think there's a bill in Congress to add that. So, just think about every school in the country, pre-college, what are they pushing everybody to major in or do when they get out? It's all about the STEMs: science, technology, engineering, and math.

So, if we think of accounting as a discipline around math that helps you understand business of all kinds, that's another- and there's plenty of students that don't even get exposed to accounting, if you're not in a family that's got professional-level people. So, that's where we're trying to do, that basic-level piece. And then Sue, add the evolutionary change that we're doing with the evolution.

[00:21:32] Accounting is under the "T" in STEM

Sue Coffey: Yeah, sure. So, a couple of things. So, the accounting is under the “T” for technology. I know it’s vague, and I'm saying that because that is a big part of CPA evolution. But I do want to adjust about the hard facts. So, just to add, just a pile on a bit of what you guys were just saying. So, since the pandemic, there are one and a half million fewer students in the university system. And that's a combination, as you guys both said, of the pandemic, but birth rates as well, for young adults that age.

I will say one other thing, that- and I think this is because the economy has been so good, and the stock market has been booming- that education is valued less at some companies, and it's valued even more less because there are fewer people. So, companies are saying, you know, “I just need a body. I can train them.” So, that dynamic is going on.

[00:22:33] The CPA Pipeline Initiative

Sue Coffey: And Blake, to your point, it does mean that our piece is less, and we need to fight harder for that talent. So, the question is, how do we go about doing that? And so, we actually- CPA evolution is part of it, but we have a broader CPA Pipeline Initiative, that is actually designed to gather fact versus fiction, because there is a lot of fiction being floated around out there, in terms of what's really happening.

So, it's identifying the fact, and identifying the fiction. And then starting the dialogue and getting all of the stakeholders who have some piece of working together on solving the problem in a room and figuring out what those pieces are. So, for example, CPA firms themselves have a role. They have a role in getting into the high schools before students actually make a decision to go to college and talk about the value proposition of our profession; an amazing, dynamic, profession it is, and what the upside is. They have an obligation to look at their business models to see if they need to change in order to better address what's going on.

We obviously, at the AICPA, we have responsibility for part of this too. We own the CPA exam. Are there things in the CPA exam that should change? And I'll talk about CPA evolution in a minute. State societies have a really important role too. They're the boots on the ground in their state.

They know the high schools, they know the universities, they know the faculty, they know the students. They can drive messaging as well. The regulatory community has a role in this as well. There are certain rules and regulations that are barriers to entry, that are outdated, and maybe unnecessary. So, do the regulators need to take a look at their rules and regulations and determine whether some of them should be modified or eliminated?

There's a lot- there are- I could give you 10 more stakeholders, but starting that dialogue and saying, “What are the top five things that each stakeholder group should be doing in concert, in a coordinated fashion with measurable deliverables?” We got to get to it and get it done. So, that's just our broader Pipeline Initiative.

[00:25:21] CPA Evolution

Sue Coffey: CPA evolution, which you mentioned-

Blake Oliver: Yes.

Sue Coffey: We’ve been working on that for about four years now. That's about [CROSSTALK].

Blake Oliver: Updating the exam, the curriculum.

Sue Coffey: Well, it's about redefining the licensure process. And part of that is education. And we just issued a curriculum that can help support what we're trying to do. It is a CPA evolution model curriculum. It is not an accounting program, or a business program curriculum. And then changing the CPA exam to focus on a core of accounting, auditing, tax, and technology, and then allowing the student or the CPA exam candidate to select right now, one of three disciplines.

Tax and planning is one, business analysis and reporting is the second, and information systems and controls is the third. So, if I, for example- and this is why I said that Accounting is under the T in STEM for technology, because we’re super focused on technology. And so, let's say I'm a student who is in an MIS program in college, and I'm really interested in business.

Maybe I have a co-major in business, maybe I have a minor in business. There is a really interesting pathway get your CPA. Yes, you need to know foundational accounting, and auditing and tax- and I want to emphasize foundational. But when you go to that discipline, you have the ability to actually display what you know about information systems, information controls, cybersecurity, system organization and controls. So, it really is designed or redesigned to bring it- to widen the net for attractiveness and interest in our profession.

[00:27:20] Accounting can't match tech money

Blake Oliver: I love the fact that technology is getting a bigger stake in the exam. But I do think it's going to be a hard sell to try and convince somebody who's studying IT or information technology at the university, to come over to do the CPA, given how much money you can make in tech. Tech money is one of the things that, to be honest, pulled me away from public accounting.

I was a manager at a large firm, and a startup came knocking and the firm just couldn't match that or the options. The fact that I could get stock options and participate in the equity of the company, whereas in a public accounting firm, I'd have to wait to hopefully, make partner someday, on an undefined timeline. And so-

Tom Hood: Well, the tech's getting automated at a pretty fast rate, Blake. So, if they get into it, unless they figure out how to move up the value chain, if they stay in at a programmer or senior analyst type-level, they'll never advance. They'll get really good starting salaries, but they won't get the advancement that we're seeing.

And that's true, even on the corporate side, that's what they're saying. But the combo of that CPA with any of that other background makes them able to withstand the robo-apocalypse that everybody's talking about.

Sue Coffey: And I will say that I believe that a lot of firms are looking at their business models, and really challenging whether they are fit for purpose in an environment now where talent is really hard to find, and different types of talent are very hard to find.

[00:28:56] How do firms attract talent?

Blake Oliver: Well, and that's the real issue. When it comes down to, you don't become an accounting student to follow your dreams. Let's just be realistic about that. I think everybody agrees. I was a musician before I became an accountant. I became an accountant- actually first, a bookkeeper, then an accountant to pay the bills.

And I happened to like it a lot, and people wanted to pay me to do it. And now, I love it. I found a niche in technology that I love, and I think a lot of people do accounting because they want to pursue their passions. They don't want to make it their full-time thing. They want to be comfortable.

[00:29:28] Problems with the traditional accounting career trajectory

Blake Oliver: The problem I see with the accounting career trajectory, the traditional trajectory is, get your accounting degree, start working at a Big Four, if you can. That's the ideal pathway: big firm, Big Four, audit, tax, take your CPA exam, put in a lot of hours, and then eventually, you exit to industry, and you get that nice, comfortable position as a corporate controller. People talk about this openly on Reddit. I don't know if this is considered gauche or inappropriate to talk about in other circles, but this is what people are thinking when they are students.

The problem is that that has changed. And now, it's very obvious to people who are on social media, what it's actually like working 55 hours, billable minimum, at a large firm when you're a staff accountant. It's not healthy. It's not good. And that's what most people are up against when they go in there. And the pay, honestly, is not that great; it hasn't kept up. It used to be the pay made up for it, where you could justify it that to yourself. But now, people are looking at, “I'm built I'm billable for 55 hours, I'm going to be working for 60 to 70 for the next three to four months.” Oh, and busy season doesn't really have an end anymore, as you said, Tom.” So, it's just not that appealing.

Tom Hood: Well, I think you're seeing, first of all, a big shift in a lot of employers. So, I think, yeah, while it's not instantly fixed across the board, and there's going to be a bunch of people that are miserable, and on Reddit complaining, but there's a whole bunch of them- and I see those firms, so does Sue, every day. So, two things. The other part is the nice, soft, easy job as a corporate controller, that's a total myth. I was one, and I worked just as hard as most people in public accounting, most of my career prior to that. So, I think that's- I know that grass is always greener on the other side.

[00:31:29] Millennials and Gen Z have decided the work isn't worth it

Blake Oliver: So, there's not even a promised land then. So, that just compounds the problem, right? Because then- see the problem is, we're in a talent crunch, right?

Tom Hood: Right.

Blake Oliver: And I'm a millennial. M y generation, you want to psychoanalyze us, right? We have been scarred in so many ways. First, by the great recession, which destroyed my dream of being a musician in many ways, and forced me to become accountant, which I'm happy I did, but that was bad. A lot of us went through that.

And now, we've got the pandemic. And I think a lot of millennials and the Gen Zers behind us have just decided that it's not worth it. It's not worth working that many hours, even if you're going to make maybe a lot of money someday. I think the myth of making partner has pretty much been dispelled, don't you think? Because only what, 1 percent of people who enter a big accounting firm make partner. So, it's very unlikely.

Sue Coffey: So, Blake, if I could just chime in here. I do think- as I mentioned, firms are really looking at their business models because they know that they've got this challenge, and they're doing- there are a lot of firms who are doing a lot of things to address many of the things that you just laid out.

So, for example, they realize that they may need to change their client base. And they are looking at their clients to make sure that they are the right clients, that it is the right fit for the firm, that their fees are priced appropriately. And many firms are actually calling clients and saying, “You know what, we're taking off the bottom 20 percent, pick your firm.”

They may maybe more, maybe less, but they're taking off a certain amount and saying, “We're going to create a different type of environment in our firm, based on a smaller client base.” Whether it's, they're focusing on a certain industry, or they're focusing on a certain service, or they're only taking certain types of clients, they're looking at it from a business perspective, and from a talent perspective.

Blake Oliver: And when you say that, do you mean they're also reducing hours?

[00:33:51] Firms are changing

Sue Coffey: That would be yes, they are.

Tom Hood: A lot.

Sue Coffey: And they're also looking at different ways to compensate. So, I get the, you may not become a partner, but there are other pathways within firms that are just as lucrative, and just as satisfying for some, who may not even want to be a partner. There are a lot of people who don't want to be a partner in certain firms, but they get the exposure, they have profit sharing, and things like that.

So, I think there is a lot going on within firms now to take a hard look at some of those things that were- some might say set in stone, and nothing is set in stone anymore.

[00:34:35] CPA firm partners are 91 percent white

Blake Oliver: Well, some things never change, right? Like CPA firm partners are still 91 percent white. We've been working on diversity in the profession for 20 years now, and that's still the same.

Tom Hood: Well, that's true in a whole lot of corporate America. I think it's an initiative though, that many are moving the needle. I’ve seen a bunch of examples of large and small firms that are focusing on diversity and inclusion, and that's all part of culture shifts. So, you're seeing- the other thing is the next gen leaders now are starting to take root.

So, to your point, for years, the baby boomers never retired. And that was a trait; I'm one of them. So, it's a trait of us, wanting to be workaholics and working hard. So, something we did, but the next generation is beginning to take over, and you're starting to see changes in some of these firms.

So, I think everything- I think one thing about our profession is we have been pretty adaptable over time. And I think you're seeing an acceleration of that adaptation. So, the number of firms that are starting in major diversity, equity, inclusion programs, the number of women in the profession has gotten significantly up in terms of leadership. You're seeing more and more leaders who are women in the profession, and that's another blind spot.

Blake Oliver: But still, only-

Sue Coffey: We still have a ways to go.

Blake Oliver: Only 23 percent of partners are women. Only 23 percent. That is pathetic. It's pathetic.

Sue Coffey: At the entry level, we see it. It's about 50-50, but you're right, Blake. It starts to trail off as you progress.

Blake Oliver: This goes to the hours. So, I think these two things are linked. I think that the crazy hours at CPA firms is what pushes many women- now, here I am, mansplaining. So, this is totally inappropriate, but this is my theory, right? And I'll tell you why I have this theory and you tell me if I'm right, Sue, or wrong.

So, the hours, it's very, very difficult to be a parent, if you're working lots of hours. And I have experienced this myself; I have a seven-year-old son and my wife, and I made a deal, we're going to do 50-50. We are really going to try to do that. And when I say 50-50, I don't mean the fake dad does 50, but it's really 20 percent kind of thing.

We’re really splitting this as best we can, quantitatively, too. And I could never be a father to my son, and be present in his life, working traditional public accounting hours. I just couldn't. And so, is that why women tend to fall off at manager and above?

[00:37:19] Flexibility in the workplace

Sue Coffey: So, I don't know, but I will tell you that- and I'll use my own personal experience, ‘cause I worked really hard at AICPA. So, I was in public- I started in public accounting, and then I did a year in business, and then I came to the AICPA. So, I've been with the AICPA for quite a while, and I worked really- I still worked very hard at the AICPA, but I always had a significant amount of flexibility and where I could work.

So, I traveled, but when I didn't travel, I worked at home, and I had a sitter, but I had a significant amount of flexibility. So, if you asked my kids, who are 24 and 25, they would say, “Mom, you were in everything.” Now, I wasn't in everything, but to them, I was in everything, which is great.

Blake Oliver: Hey, perception is reality, right?

Sue Coffey: But it was because I had the flexibility, and also, within my team, I created a culture of that for the entire team. So, I led by example, and I think it's worked. I do think now that firms- again, this is part of looking at their business model, and the pandemic really forced this, the flexibility, like, “Hey, we never thought we could do an audit remotely.” We 100 percent could do an audit remotely. So, why does the CPA have to be at the client's location when they could be doing it at home? Right?

Blake Oliver: Yeah.

Sue Coffey: And that goes a long way, because then you can go to your son or your daughter's basketball game, or school play, from 3:00 to 4:00 or 3:00 to 5:00, and then come back and do what you need to do. So, I really think that the pandemic is forcing this level of flexibility that is going to continue, because people are seeing it can be done.

Blake Oliver: I think in many ways, it was a blessing in disguise in that regard, not- calling the pandemic a blessing is terrible. I should cut that from the show, but I won't.

Sue Coffey: I totally get- we get it.

Blake Oliver: You get what I mean, right?

Tom Hood: It’s the silver lining.

Blake Oliver: There are silver linings, there are silver linings to terrible things. I hope that changes, right? But then I think the problem is that it's changing so slowly, and there's a lot of firms that are not adapting. You see it in the firms that I talk to, which tend to be 100 people or less, which is small in the world of CPA firms. But most of them, that is where the action is happening. And you see flexibility, you see true cloud-based firms.

Sue Coffey: You do.

Blake Oliver: Firms that you don't have to be in the office, we don't require you to have a set schedule. But maybe that's 5, 10 percent at this point. And so, that's the problem, is how do we get those-

Sue Coffey: There are some really progressive firms. There are some really progressive firms. And I love to see a lot of them that are all-female, and we have a ways to go with females. We have even more to go with racial diversity and whatnot. And that's a tough one. A lot of firms are focused on it, but it's a tough one.

Blake Oliver: Yeah.

Tom Hood: But Blake, add to it that the cloud technology piece, which has accelerated dramatically through COVID is now allowing that flexibility. And again, on the corporate business and industry side, we're seeing the exact same thing, where they would never be flexible about when everyone- we have to do our quarter close, everybody's all hands on, we're all here.

They're all doing that remote now, and they're focusing on more flexibility in their cultures. And so, I think that spreading faster than you might think, because we're hearing it every day. Is it everywhere? No. Are there plenty of examples of those folks on Reddit being right? Yes, but it is moving faster than it ever has.

Blake Oliver: So, I hope it comes across that I am actually very passionate about this profession, and about accounting, and I love it. And that's why I get to the hard questions first. Because I think we have a lot of challenges in our profession due to some of these- the tendency of our profession to be conservative is a good thing, but also, a bad thing in times of rapid change.

[00:41:35] Goodwill and the relevance of GAAP

Blake Oliver: And there's one more thing I want to touch on, which is super nerdy, and I hope you'll indulge me before we go, which is Goodwill. So, FASB- I believe it's FASB- has reopened this concept of talking about Goodwill and how we deal with it on our corporate balance sheets. Tom, maybe since you're the former corporate controller, CFO guy, you can help me with this.

And I think the current discussion is, should we continue to analyze it and impair it, or analyze for impairment annually, and then write it down? Or should we start amortizing it? And I think this- personally, I think this completely misses the point, and misses a big opportunity, because what is Goodwill? We should actually think about it. It represents almost 30 percent of corporate balance sheets now; Goodwill. And if you went and you talked to accountants on the street, and you did man on the street, and you asked them, “What is Goodwill?” you'd probably get 10 different answers or 100 different answers.

And if you tie this to intangible assets, which is what Goodwill really represents- it's the value of intangible assets created by a company- we have real problem with GAAP. And this ties back to our entire discussion about the future of the profession, which is, you want to get people to go into audit, but they're auditing financial statements that are not really that useful these days.

Sue Coffey: So, can I answer the question outside of Goodwill? Because boy, am I glad you asked Tom that, and not me. The way- what you were talking about got me thinking about the work we're doing with integrated reporting, and business reporting, and the value proposition of- I'll just say corporate reporting in general. How 85 percent of a business's value right now is through intangibles. It's not through the things that we report on the balance sheet, right?

Blake Oliver: Yes.

Sue Coffey: And it gets to issues like ESG, Environmental, Social Governance. It gets to brand, it gets to talent, it gets to raw materials, and depletion, and things like that. And I really believe that the future of our profession is in broader business reporting, and the value proposition we can bring to that, whether we're working in a company, or we're in public accounting, advising. It's not like the traditional financial statements that we learned about in college.

Blake Oliver: I love that idea of adding more information so that investors can make better decisions, because isn't that the entire point of financial statements and auditing? We prepare financial statements to give investors and management information, and then we audit them as accountants to protect those investors.

But if you follow Baruch Lev's research as detailed in his book, The End of Accounting, his research finds that today's financial reports provide only 5 to 6 percent of the information relevant to and used by investors.

Sue Coffey: It’s exactly right.

Blake Oliver: When was the last time you looked at financial statements of a company to make an investment decision? We're accountants and we don't do it. And that's because all the growth that's happening in our stock market that's happened over the last 40, 50 years now has been in intangible assets.

Sue Coffey: That's right.

Blake Oliver: And GAAP does a terrible job of valuing intangible assets. So poorly does it value intangible assets that we created this thing called Goodwill, and we just plug the balance sheet. 30 percent of it is just this hole called Goodwill. So, I guess my question is, how do we fix that? Why isn't FASB working on that?

How to value intangible assets, or how to- 90 percent of the market value of the S&P 500 is intangible assets now. And we suck at it because we're using an accounting system that was built for an industrial era, and we're in an era of knowledge in invisible things.

Sue Coffey: So, I will say- oh, go ahead, Tom.

Tom Hood: Go ahead, Sue.

Sue Coffey: No, I was just going to say, I know that FASB has just gone through an exercise, an agenda setting exercise. I haven't seen the final product, but they asked for feedback on what their agenda should be over the next few years. And I do believe they received a fair amount of comments on this concept of broader reporting and disclosures. I don't know what their conclusion is or anything like that, but I think we're going to see something relatively soon.

Tom Hood: And then the other part that I know AICPA- I think Barry might be the chairman, or he's on the board of The Value Reporting Foundation, which used to be the Integrated Reporting Group. And that Value Reporting Foundation, it's basically, what combined with SASB, the Sustainability Accounting Standards Board, and they're putting forth this idea of intangibles, and they even have a model report that many companies are beginning to adopt.

So, even if it's not regulated, if you will, by FASB or other regulators, or even the SEC, it is something that many companies are beginning to adapt. It also, by the way- when you start talking about ESG in our profession- that's a driver for the young folks coming out of college. They love the fact that that the profession's got some of these social objectives inside of it, and that we are trying to change that.

Now, it's not easy for us to change all that. But in fact, many companies, because of all the movements in the recent years, are now adopting those kinds of things. And it's on their agenda, which is exciting.

Blake Oliver: And that's good, right? Anything that we can do to provide information to investors that they care about, especially when it comes to environmental causes, maybe we can actually make a difference as accountants. I really do believe that.

Tom Hood: And think about the whole idea of accountability, which is in accounting. And the fact that, as Sue said, both the corporates are adopting it voluntarily, in many cases. But then you're going to want assurance on those numbers, because anyone could start making it up, “Here's how much green we are, and we're doing this, or that,” it's all that doing the painting on the wall for the balance sheet and income state.

They're going to start putting it in, to having audits about it. So, I think there's where our professional player, a big role in the future of the whole world, from that standpoint, helping companies do good.

Blake Oliver: Well, I do hope though, that we don't get distracted by this shiny object called the ESG, and all these other acronyms, because GAAP is what we do. That's our thing. That's our franchise, is auditing GAAP financial statements. It's the only thing you need your CPA to actually do. And if GAAP is not useful to investors, what's the point?

And maybe to get back to our question about our discussion of the pipeline, maybe that's one of the reasons why people don't want to be auditors as much anymore. It's because they're aware of this. When a company's financial statement goes on to EDGAR, only 30 people download it.

So, you do all that work as an auditor. Not only does nobody ever look at your work papers, but very few investors are actually looking at the financial statements, because the information in there is just not that useful anymore to them, because the economy has changed.

[00:49:24] Consequences of bad audits/financial statements

Tom Hood: Well, it's not useful unless it's wrong. And then you see company failures, right? So, if we don't have that base level there, yeah, I think we have to evolve the financial system in general, and we'll be at that table. But for now, we know what happens when people mess around with those numbers, and they aren't verified and audited, and what can happen.

So, I think that's the other part of it. We are still playing. So, just think about the PPP money that they did, which I know there's a whole bunch of fraud that went, but what did they run that stuff through? Accounting payroll systems, right? That's where that whole- all those monies went through those systems, which is why those systems, the core of our profession, are so important to our- that's why we got licensed as CPAs, to begin with. That's the public interest part.

Blake Oliver: Yeah, but most auditors will disclaim any liability for finding fraud. We'd say it's not our job to find fraud.

Tom Hood: No, but it's our job to make sure the numbers are-

Sue Coffey: Yeah, we have a responsibility to detect fraud.

Blake Oliver: But then you look at these collapses of companies in the UK, and they're seriously talking about breaking up the Big Four in the UK because of all this. It's shameful. You know?

Tom Hood: Yeah. And then it becomes, what's the alternative? And that's where it gets, “Do you want government doing that?” which could set up a whole different idea, so.

Blake Oliver: Well, I think one of the ideas floated around has been, don't let companies select their own auditors. You could randomly assign it, or have the SEC assign the auditors. And then there's not this conflict of interest that you have as an audit partner, where this person’s paying my salary. This person's paying me to audit.

We don't have time to talk about this now, and I've kept you over, so I'll just end with this. But there's a fundamental conflict of interest in our profession, when it comes to audit, which is we get paid by our clients. You can't be independent when you're getting paid by somebody. That's a connection. That's a lack of independence.

Sue Coffey: Well, remember that the- no, it is not. But remember that the audit committee is who hires the auditor. And that is who receives the financial statement. So, it is not management.

Blake Oliver: Tom, Sue, thank you so much for joining me today.

Tom Hood: Awesome.

Sue Coffey: Yeah, thanks. Appreciate being here.

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How To Fix The IRS and CPA with AICPA's Sue Coffey and Tom Hood
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