In any company, the two fields of accounting—financial and managerial—can be distinguished by the users they serve: those outside the company and those within.⁵

Public accountants offer accounting services to the public and are distinguished by their independence from the clients they serve. That is to say, they typically work for an accounting firm providing services for outside client firms in which the public accountant has no vested interest, thus avoiding any potential biases in conducting their professional services. Among public accountants, certified public accountants (CPAs) are licensed by a state after passing an exam prepared by the American Institute of Certified Public Accountants (AICPA). Preparation for certification begins with majoring in a college program studying the theory, practices, and legal aspects of accounting. In addition to the CPA exam, certification in most states requires some practice, varying up to two years, in a private company or government entity under the direction of a CPA. Once certified, the CPA can perform services beyond those allowed by non-CPAs.⁷ Whereas some CPAs work as individual practitioners, many form or join existing partnerships or professional corporations.

The “Big Four” Public Accounting Firms

Although thousands of CPA companies of various sizes, ranging from small one-person local operations to large multinationals, operate in the United States, about one-half of their total revenues go to the four biggest CPA firms (listed with their headquarters):

• Deloitte Touche Tohmatsu (United Kingdom)

• Ernst & Young (United Kingdom)

• PricewaterhouseCoopers, PwC (United Kingdom)

• KPMG (Netherlands)

In addition to prominence in the United States, international operations are important for all four of these companies. They have experienced especially rapid growth in recent years for CPA services in Asia and Latin America. Each of the Big Four firms has more than 150,000 employees worldwide.⁸

To ensure integrity in reporting, CPAs engaged in auditing activities are always independent of the firms they audit. However, many businesses also hire their own salaried employees, private accountants, to perform day-to-day activities. These accountants may also be CPAs but cannot engage in the external audit process.

Private accountants perform numerous jobs. An internal auditor at ConocoPhillips, for example, might fly to the North Sea to confirm the accuracy of oil-flow meters on offshore petroleum drilling platforms. A supervisor responsible for $2 billion in monthly payouts to vendors and employees may never leave the executive suite, with duties such as hiring and training, assigning projects, and evaluating performance of accounting personnel. Large businesses employ specialized accountants in such areas as budgeting, financial planning, internal auditing, payroll, and taxation. In small businesses, a single person may handle all accounting tasks.

Although private accountants may be either CPAs or non-CPAs, most are management accountants who provide services to support managers in various activities (marketing, production, engineering, and so forth). Many hold the certified management accountant (CMA) designation, awarded by the Institute of Management Accountants (IMA), recognizing qualifications of professionals who have passed IMA’s experience and examination requirements. With more than 65,000 worldwide members, IMA is dedicated to supporting accounting professionals to create quality internal controls and financial practices in their companies.

One of the fastest-growing areas in accounting is forensic accounting, the use of accounting for legal purposes.¹³ Sometimes known as “the private eyes of the corporate culture,” forensic accountants must be good detectives. They look behind the corporate façade instead of accepting financial records at face value. In combining investigative skills with accounting, auditing, and the instincts of a detective, they assist in the investigation of business and financial issues that may have application to a court of law. Forensic accountants may be called on by law enforcement agencies, insurance companies, law firms, private individuals, and business firms for both investigative accounting and litigation support in crimes against companies, crimes by companies, and civil disagreements. They may conduct criminal investigations of Internet scams and misuse of government funds. Civil cases often require investigating and quantifying claims of personal injury loss as a result of negligence and analyzing financial issues in matrimonial disputes. Forensic accountants also assist business firms in tracing and recovering lost assets from employee business fraud or theft.

The financial wrongdoings associated with firms such as ImClone Systems, Tyco, WorldCom (now MCI), Enron, Arthur Andersen, and others have not gone unnoticed in legislative circles. Federal regulations, in particular the Sarbanes-Oxley Act of 2002 (Sarbox or SOX), have been enacted to restore and maintain public trust in corporate accounting practices.

Sarbox restricts the kinds of nonaudit services that CPAs can provide. Under the Sarbox law, for example, a CPA firm can help design a client’s financial information system, but not if it also does the client’s auditing. Hypothetically, an unscrupulous accounting firm’s audit might intentionally overlook a client’s false financial statements if, in return, the client rewards the accounting firm with a contract for lucrative nonaccounting services, such as management consulting. This was a core allegation in the Enron-Arthur Andersen scandal. Arthur Andersen, one of the world’s largest accounting firms at the time, filed audits that failed to disclose Enron’s shaky financial condition that eventually led to the massive energy company’s bankruptcy and to Anderson’s dissolution. Andersen’s auditor gained more money from consulting at Enron than it got for auditing.¹⁸ By prohibiting auditing and nonauditing services to the same client, Sarbox encourages audits that are independent and unbiased.

Sarbox imposes requirements on virtually every financial activity in publicly traded corporations, as well as severe criminal penalties for persons committing or concealing fraud or destroying financial records. CFOs and CEOs, for example, have to pledge that the company’s finances are correct and must personally vouch for the methods and internal controls used to get those numbers. Companies have to provide a system that is safe for all employees to anonymously report unethical accounting practices and illegal activities without fear of retaliation. Table 15.2 provides brief descriptions of several of Sarbox’s many provisions.