AICPA's Financial Reporting Assailed from Within

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The 118 year old American Institute of Certified Public Accountants (AICPA, the Institute), the profession's trade organization and one of its standard setting boards, while adjusting to changes in its role and focus resulting from the accounting scandals, is facing charges from some of its own members that its financial reporting does not clearly describe the AICPA's financial activities. CPAs Reforming Our Profession (CROP) ( is an organization of 160 AICPA members, who began their activities in 2002 and presented a detailed report analyzing and criticizing the AICPA's financial information to Council in May 2004.

CROP founders Andrew Blackman, Mitchell Freedman, Harold Katz, John Levy, Stan Mills and Kendall Wheeler, presented an updated report at the Spring 2005 Council meeting and continue to press the Institute to provide more explanation for various business transactions and business practices. In addition, CROP has criticized the AICPA's presentation of financial information for lack of transparency.

CROP questions the financial relationship between the AICPA and CPA2Biz (C2B) ( the AICPA-sponsored web portal that has incurred huge operating losses since 2001. The CROP reports contain very detailed analysis of the transactions surrounding the disposition of Capital Professional Advisors, Inc. (CapPro), a subsidiary of C2B. CROP has also questioned the changes in the AICPA's asset composition in recent years and its impact on financial liquidity, and has noted a decline in affinity income.

Phyllis Bernstein, writing an opinion for NPA Magazine about the CROP reports said “CROP has questioned data they found unclear and requested information which, in their opinion, was dribbled to them in small batches without enough “Meat on their bones” to answer their questions.” Bernstein writes, “In my opinion, a not-for profit organization should issue financial statements in which the numbers “get up and dance” and tell the story of what's happening.

Barry Melancon, the AICPA's CEO responded to Ms. Bernstein's opinion in the same issue of NPA Magazine saying, “The annual report includes a formal Management Discussion & Analysis (MD&A), which goes beyond what is required of a not-for-profit entity, but is consistent with our belief in transparency.” Melancon, whose second 5-year contract as CEO of the Institute will expire at the end of 2005, claims that the AICPA had met with CROP numerous times. He said that the current Chair, Robert Bunting, and Vice Chair had met with CROP this past spring.

The authors of the CROP report continue to press for more information about the complex stock transaction by which Nationwide Financial Services in October 2002 purchased CapPro with C2B preferred stock. CROP also questions the net gain on disposal of CapPro, recorded by the Institute in the 2003 financial statements. Stock valuations generally fluctuated widely during the period C2B owned CapPro, from July 2001 to October 2002.

CapPro was initially purchased by C2B in July 2001 for a $3,000,000 note and $140,000 of stock, according to the CROP reports and the AICPA's 2002 Annual Report. CapPro incurred significant losses in the short period that C2B owned it, according to CROP.

AICPA management described the sale and the reported gain in the Management's Discussion and Analysis (MD&A) of the 2003 Annual Report.

In October 2002, CPA2Biz completed the sale of Capital Professional Advisors, Inc. (”CapPro”) to an investor holding CPA2Biz common stock and Series A Preferred Stock. The Purchaser exchanged all of their CPA2Biz equity instruments in exchange for the common stock that CPA2Biz held in CapPro. The financial statements are presented to reflect CapPro as a discontinued operation for all periods. The loss from the discontinued operations was $0.7 million and $3.1 million in 2003 and 2002, respectively. The current year loss is offset by a gain on the disposal of $6.3 million.

CROP reports that the net gain on the sale was $5.6 million.

The Purchaser, Nationwide Financial Services, was named provider of the Member Retirement Plan in July 2002 and Preferred provide, retirement savings plans for CPA Clients in April 2003.

CROP continues to question the financial ties between the AICPA and C2B. AICPA management, which asserted in the MD&A for 2003 that the Institute as a stand-alone entity is not liable for C2B obligations, acknowledged C2B's losses in their MD&A discussions for 2003 and 2004 saying in 2003, “CPA2Biz sustained significant losses during its first two and one-half years of operations. . . .CPA2Biz completed several initiatives [in 2003] to improve its liquidity and better position itself under current market conditions.”

The AICPA's 2003 Notes to the Combined Financial Statements, for example, describe changes in a note granted to C2B by the AICPA, “The unsecured note bore interest at 10% and required a principal payment of $3,600,000 in March 2004. In July 2003, the loan was modified to bear interest at 5% and is payable in various installments through May 2008. The effect of the substantial modification of debt terms resulted in a gain of approximately $61,000.” (Note 8).

The CROP reports compare financial data on AICPA liquidity from 1998 to 2004. They say “In spite of the two recent and significant dues increases, liquidity of the AICPA assets has declined substantially since 1998. They report that unrestricted net assets have dropped from a $48 million surplus in 1998 to a $60 million deficit in 2004.

According to the published financial statements for the past three years, unrestricted net assets for 2002, 2003 and 2004 totaled $(49 million), $(54.9 million), and $(60.6 million), respectively. C2B's impact on unrestricted assets was $(80 million) in 2002, $(90 million) in 2003 and $(101 million) in 2004. Total assets report C2B preferred stock valued at $87 million in 2002, $80.9 million in 2003 and $82.3 million in 2004.

Some of the detail in the CROP reports suggests that CROP has had access to more information than what is provided in the published financial statements. For example, CROP was able to note the monthly losses of CapPro. CROP makes reference to Board of Directors minutes in the reports as well as conversations with AICPA personnel.

Barry Melancon refers to recent contact with CROP according to NPA Magazine. He said that AICPA personnel discussed the Institute's accounting for deferred costs related to the computerized CPA exam with CROP. He describes the accounting treatment by saying “our contractual arrangement with our exam partners requires that we break even. Therefore we appropriately classified those expenditures as deferred costs, a cumulative $32.3 million asset on our books as of April 30, 2005.” He adds, “We fully expect to recoup that investment through our contractual share of exam fees on or before 2014.”

CROP has also criticized the AICPA's consolidation of not-for profit with for-profit entities in its financial statements, saying that does not lead to clarity. The AICPA notes in its financials that the accounts of the for-profit and not-for-profit entities have been combined in accordance with Statement of Position 94-3, Reporting of Related Entities by Not-for-Profit Organizations. (SOP 94-3).

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