We Are Cognitors

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By Ronald J. Baker, Daniel D. Morris and Justin H. Barnett - Founders, VeraSage Institute

If Columbus had an advisory committee he would probably still be at the dock
–Justice Arthur Goldberg, 1908-1990

Engage in this thought experiment: The following individuals go to some omnipotent body, such as a governmental industrial planning board similar to Japan’s Ministry of International Trade and Industry (MITI), with an idea for introducing a new product or service into the marketplace:

  1. A failed haberdasher
  2. A Harvard sophomore dropout
  3. A junior-college dropout
  4. A General Motors Executive

Which one is the planning committee most likely to invest in? To ask the question is to answer it. Any organization will naturally gravitate towards the status quo, as it is proven, safer, and the least likely to disrupt current fortunes and positions of power. The existing structure doesn’t have much incentive to invest in new ideas and radical concepts, and so they will cast aspersions on the first three people listed above. But who are those individuals?

The failed haberdasher is Sam Walton, founder of Wal-Mart. The Harvard dropout is Bill Gates, founder of Microsoft. The junior-college dropout is Rush Limbaugh, founder of the Excellence In Broadcasting (EIB) Network. All of these entrepreneurs were scoffed at by the existing establishment. Rush Limbaugh was incessantly told by all the so-called “industry experts” that his format for a call-in talk radio show (with no guests) would never work.

This is the history of all revolutions, which are created not by prophets but by heretics. New ideas–such as those contained in the Declaration of Independence–inventions, and experiments from the tinkerer in the garage, change the world, while rendering obsolete the existing modes of production, infrastructure, and status quo. The automobile was not invented by the buggy whip manufacturers and the slide rule manufacturers never even fathomed a calculator. MITI didn’t want Honda to experiment with automobiles or Sony the cassette recorder. So much for government investing in winners and sunrise technologies.

How A Free Market Creates Wealth

Social scientists, sociologists, political scientists, economists and other professions are obsessed with studying harms, poverty being amongst the popular area of research. Yet we learn very little from studying poverty, which has been the natural condition of man since we’ve roamed the earth, with still nearly four out of five people in the world living in abject want. What needs to be explained is not poverty, but wealth–the best known antidote to poverty. Wealth is a relatively recent phenomenon, and by understanding how it is created we may begin to ameliorate the suffering of billions.

Wealth and profits come from risk. Free minds operating in free markets, who give up the security and comfort of a paycheck and mortgage their homes and tap into the resources of friends, families, and other believers in their vision. Bill Hewlett, David Packard, Steve Jobs, and Steve Wozniak experiment in their garages and change the world, creating untold amounts of wealth as knowledge workers are empowered to find ever new ways of creating, disseminating and working with intellectual capital. Hewlett- Packard and Apple were not created by committees, or a majority vote of the population, but were introduced to the world by these entrepreneurs with no guarantee of success, putting their destiny–and faith–in the hands of total strangers, who were voluntarily persuaded to become customers because of the value added to their lives.

Yet when Jobs and Wozniak approached Joe Keenan, president of Atari and part of the existing establishment, in 1976, they were told: “Get your feet off my desk, get out of here, you stink, and we’re not going to buy your product.” Even a Hewlett-Packard executive told them: “We don’t need you. You haven’t got through college yet.”

Imagine the loss to society if Akio Morita, chairman of Sony, had listened to his market research and not created the portable tape recorder, ultimately leading to the Sony Walkman. New products and services introduced to the market are an experiment, some succeed, most fail. The free market offers a precise and flawless mechanism for weeding out the ones that don’t add value to people’s lives, thus wasting a society’s scarce resources. That mechanism is the Loss of the two-sided free market coin, Profit or Loss. All profits come from risk. Any new idea launched will ultimately succeed or fail depending on whether or not it serves the needs of others.

Horace Rackham, Henry Ford’s lawyer, was told by the president of the Michigan Savings Bank, “The horse is here to stay, but the automobile is only a novelty–a fad.” Fortunately, Rackham ignored this predilection to the status quo, purchased $5,000 of Ford Motor Company stock in 1903 and sold it several years later for $12.5 million.

We write this sitting in the Walt Disney World Resort–28,000 acres, two times the size of Manhattan–a legacy created by one man’s vision and dream. Imagine the amount of wealth created by a cartoon character. Walt Disney defied every business axiom known and tossed around ceremoniously by consultants, bankers, venture capitalists, and other self-proclaimed experts. As he said with respect to building his first dream in Anaheim, “I could never convince the financiers that Disneyland was feasible, because dreams offer too little collateral.” He also flouted the conventional wisdom so often heard in real estate: location, location, location. By selecting acres of orange groves in Southern California and virtual swampland in Florida to build his visions, he was able to build a Mecca for worldwide travelers, attracting nearly 50 million guests annually.

Innovation and creativity always come as a surprise from outside the present confines of the experts. If this wasn’t so, you could plan on innovation and creativity and incorporate it into your existing processes and the economy could be run simply by government bureaucrats and computers.

The Rule of Experts

For us, the most attractive feature of the new global credential is the fact that it is not regulated by any governmental agency. Our profession is far too enamored with the concept of government regulation, and for too long this central planning mentality has inhibited us from responding to the needs and wants of our customers. Deregulation in every other market–from trucking to financial services, airlines to telecommunications–has been an enormous success. Only those who harbor a socialist utopian vision, or Marxist fantasies, can doubt the overwhelming success of deregulation in every market. It has allowed the consumer to regain the indisputable title of sovereign ruler, and ultimate arbiter, of the value provided by the business community.

The notion that governmental regulation and licensure is essential in order to “protect the public” does not stand up to economic scrutiny or the empirical evidence of how the world works. With respect to regulation, engage in this thought experiment: You are head of the Food and Drug Administration, with ultimate authority to determine which drugs are safe enough to be marketed–all, of course, under the banner of “protecting the public.” Economists know incentives matter, the rest is commentary. Government officials face incentives just as strongly as do their counterparts in private industry. But there is a major difference. Consider the two types of mistakes you can make as head of the FDA: 1) You can approve a drug as safe and it ultimately kills people due to unforeseen side effects; or 2) You can disallow a drug from entering the market, and people will die without the benefit of experimenting with the possible new cure.

Which mistake are you more inclined to make? In the first case, the people who die will be highly visible and their loved ones will know who is responsible, possibly subjecting your budget to reduction, loss of your job, status, power, etc. But with the second mistake, the people who die won’t know why, and have no recourse, not being able to sue the FDA for blocking what could be life saving drugs. What does the economic evidence say about the FDA’s role in protecting the public? The evidence is convincing that the FDA has cost more lives than it has saved because of its bias towards error number two.

CPAs talk about the level of trust we have achieved with our customers and the general public, being ranked in occupational surveys with doctors and members of the clergy. And surely this is true. But it is not because of government regulation; it’s because we have ethical people in the profession. A profession doesn’t have ethics, people do. Private enterprise has also earned an enormous amount of trust. Consider the airlines. Every other day one of us risks our lives with various airlines, putting our destiny in the hands of absolute strangers who may not care anything about us personally. But the pilots, mechanics, flight attendants, and ground crew, among others, all work at a level of safety that exceeds our level of protection when we drive our cars out of airport parking. We don’t trust United Airlines because they are regulated. We trust them because we know it is not in United’s best interest to kill its customers (that is not a long-term competitive strategy). And if fatal mistakes do happen, we have private recourse in the courts against United for damages. What protection do we have against the FDA? This is precisely why the free market is the best protection for the consumer. To think the government is the ultimate Nanny and will protect us from womb to tomb, ensuring nothing fatal will happen to us, limits our freedom, prosperity and liberty. If the FAA had been around in the Wright Brother’s day, their first plane would have never gotten off the ground.

Government regulation also stifles creativity, dynamism, and innovation, the ultimate forces necessary to impel wealth creation. If government regulation is so forward-looking and omnipotent, why is the Federal Aviation Administration the only customer for vacuum tubes? If we had to rely on the government for innovation, we wouldn’t have Silicon Valley, but Vacuum Tube Valley, probably located in West Virginia, compliments of Senator Robert Bryd. The same bureaucratic structure–afflicted with economic ignorance and myopia–that can’t deliver the mail and created the California energy crisis by imposing price controls, should not be allowed to guide airplanes, regulate the accounting profession from the SEC’s Tower of Babel, or regulate who can enter what profession.

This is the heart of the public school versus voucher debate, or privatizing the US Postal Service. The goal is consumer sovereignty, and right now in both of these markets, that is missing. Why not turn over the decision of where to educate your child to the parents, rather than a governmental monopoly with a fifty-percent defect rate? If the public schools and the Postal Service are so good, why do they fear competition?

The accounting profession is today facing a threat to the one franchise where it has been the undisputed ruler, the attest function. As so dramatically, and forcefully, put forth in The Value Reporting Revolution, by Robert G. Eccles, Robert H. Herz, E. Mary Keegan, and David M. H. Phillips, the accounting profession needs to start attesting to leading Key Performance Indicators, rather than merely reporting on financial reports, which are lagging indicators. And if the profession doesn’t take on this role, others will, and it will become even more irrelevant. It seems as if Rome is burning and we are arguing with the SEC over more regulations.

Rent-seeking Behavior

The idea that government licensure of professions is necessary to protect the public is just as specious. Milton Friedman wrote his Ph.D. dissertation at Columbia University in the 1940s on this very topic, and has refuted with economic evidence this constantly repeated mantra. His later works, such as Capitalism and Freedom and Free to Choose also provide empirical evidence that licensure is nothing more than a mechanism used by members of a profession to raise the entry costs and thus to keep wages and profits artificially high. This evidence is overwhelming, with a majority of economists agreeing with Friedman’s conclusions. In fact, they have coined a term to describe this exact behavior: Rent-seeking.

Rent-seeking means behavior which improves the welfare of someone at the expense of the welfare of someone else. In other words, it’s a zero-sum game–I can’t win unless you lose. In any economy, there are only two ways of attaining wealth (other than coercion):

  1. Economic means; and
  2. Political means

Economic means is conducted in the marketplace, where businesses try to persuade customers to choose them rather than the competition, because of superior value, service, price, etc. Wealth attained through political means is conducted through the process of government and has little relationship to actually serving the consumer.

For example, it is illegal for the state of Nevada to operate a state lottery. Any bets on who lobbied for that bill? Another rent-seeking restriction on competition are taxi cab medallions, which are required in order to operate a taxi in most major cities across the United States. These medallions are presently valued at $140,000 in New York City. Also, the United States Postal Service has the Private Express Statutes, which forbid competition in first-class and most third-class mail. In all of these cases, “protecting the public” is always touted as the justification for this rent-seeking behavior.

Economists know otherwise. Competition is the lifeblood of a market economy and forces all businesses to operate efficiently, deliver superior service and value, and cater to the preferences of customers, one at a time, every time. Governmental licensing of professions is merely a tactic used to limit competition and maintain high wages (and profits) for existing members.

This is why members of professions always run to the government in order to secure licensing regulations. Lighting rod salesmen in New Hampshire must be licensed; tattoo artists in Hawaii also require licensure–all in the name of “protecting the public.” The irony of this is that no member of the public ever asks the government for protection against any of these professions. This is revealing. Whose interest does licensing really serve?

In Texas, a law was passed in 1991 requiring a person to have a combination of six years of education and experience in interior design as well as pass a two-day state exam to get a license as an interior designer. The September 2, 1991 Austin Business Journal reported, “The adoption of the bill is a victory for the Texas Association for Interior Design (TAID), which for the past seven years has been lobbying for regulations to license interior designers.” Lazin Mathews, vice president of the TAID, declared, “I think it’s a very positive step for the public because they will now have a guideline [to locate] someone with a lot of education and experience versus someone who got into the business because somebody told them they had good taste.”

While Texas residents suffer from an epidemic of violent crime, they can rest assured that the state government is spending its limited police resources throwing anyone in jail, for up to one year, who provides advice on what color rug goes with which color curtains and doesn’t have a license.

In our home state of California several years ago, CPAs recently had a clamor over the possible elimination–due to a sunset clause–of the State Board of Accountancy. Instantly, the California Society of CPAs sent a statewide fax to all their members insisting we contact our Assemblyman and voice our concern that the SBA should be preserved to “protect the public.” When we talked with fellow colleagues about this campaign to save the SBA, most responded that the public must be protected. We simply asked, “Then why didn’t the fax go to the public?” We have yet to meet a CPA customer who ran to the California legislature pleading for protection against their CPA.

The right of individuals to enter the profession of their choice is a basic human freedom. Over one thousand licensing laws, covering one-third of the workforce, are now in effect across the United States. The goal is always the same: “Protect the public.” To the extent that licensing laws protect the public, it is by coincidence, rather than by design. Instead, they protect the profession from the public. After all, Thomas Edison had little formal education and would not qualify, under modern guidelines, for an engineering license. Nor could Frank Lloyd Wright even qualify to sit for the architect’s certifying examination. Cognitor, being a self-regulated designation not provided and regulated by the government, avoids this self-serving, rent-seeking behavior. This retains consumer, not professional, sovereignty.

Old Ideas in New Places

To know nothing of what happened before you were born is to remain ever a child

With every day that passes, the “new” world recreates the “old.” When American Universities introduced the Masters of Business Administration degree in the early part of the 20th Century, it wasn’t done by a committee. The universities around the United States didn’t take a collective vote. The Early Adapters saw a need in the market, and they responded to it; it was an experiment. If it ultimately was not valued by the business community, it would have failed. Fifty years ago, no one was asking for a graduate with an MBA degree. It took decades before it reached a critical mass, ultimately being a respected designation worldwide, with over 1,250 different MBAs being offered today.

The major consulting firms–McKinsey & Co., Bain & Co., Boston Consulting Group, Booz Allen & Hamilton, among others–were established at various times after World War I. No committee or institute took a vote for approval before they were launched. They were all entrepreneurial experiments, the very force that propels all economic growth. They grew in response to a perceived market need. They didn’t have licenses issued by the government, and they attracted talent from a wide range of industries and professions, as well as college graduates with degrees in studies other than business and finance. In fact, if you think about it, all of these firms were the first true Cognitors. Have they been successful in marketing and branding their expertise worldwide? Are they any less competent, professional, or trustworthy than the Big 5’s consulting divisions?

In terms of the history of business, Cognitor is not that revolutionary of an idea. It is nothing more than responding to the marketplace and what has already happened. Most CPAs in practice today do not perform audits. They are engaged in wide array of service offerings, and the historical franchise granted to them by the various state boards of accountancy–that they may attest to financial statements–is no longer relevant to the world they work and live in. Why shouldn’t they demand a global designation, free of micro-management by government bureaucrats, and better equipped to attract the talent they need in the future to pursue the opportunities that exist in the 21st Century business environment?

Agents of Change

We at VeraSage Institute know a little about changing the existing paradigm of the accounting profession. Our mission is to, once and for all, bury the billable hour, and the timesheets that go with it. Not an easy task, since two generations of accountants around the world have been taught they only sell their time. Ron Baker’s best-selling book, Professional’s Guide to Value Pricing, Third Edition, debunks this myth and offers pricing strategies and tactics other industries utilize to price their products and services. Once again, an existing industry in being changed by forces and ideas that were created outside of itself. When we first started talking about this concept in the late 1980s, we were constantly told it was impossible for the professions to price their services without utilizing hours. Nonsense. We never did any market research, never asked the existing “experts” whether or not Value Pricing was the proper paradigm, we simply did extensive research on the economics of value and how other industries priced and presented it to our customers and colleagues around the world. We tested these ideas in the free market arena, knowing full well that our colleagues could either reject or accept them at their choosing. It wasn’t put to a vote, or decided by a committee.

Fortunately, Value Pricing is having a dramatic effect, and hopefully we will accomplish our mission by having our ideas implemented by the Innovators and Early Adopters in our profession, who will build up a critical mass and eventually the idea will take root in the rest of the profession. This wasn’t a revolution created by the majority, but a tiny minority. Had we listened to the majority of the profession, we would have been–indeed, we continue to be–rebuked and ridiculed. We took solace in the words of the German philosopher Arthur Schopenhauer, who said all truth goes through three steps:

First, it is ridiculed.
Second, it is violently opposed.
Third, it is accepted as self-evident.

Today’s cranks have a history of becoming tomorrow’s prophets. We at VeraSage Institute speak, teach, educate, write, author books, mentor, coach study economics, human behavior, posit theories, persuade, and battle in the arena of ideas. What are we? It seems far too restricting to call ourselves CPAs, when none of us do audits, yet that is the only thing–in the final analysis–the franchise confers upon us. Indeed, we are Cognitors.

A Proposal

We have it in our power to begin the world over again
–Thomas Paine

All human progress is dependent upon the minority, not the majority. The great ones attempt what the good ones let go by. What we dream, they do. The Declaration of Independence wasn’t written after taking a direct vote, or an opinion poll. Instead, a minority of men pledged their lives, their fortunes, and their sacred honor in order to build a new nation founded on a radical set of principles and ideals. Imagine the loss if we didn’t let men of such vision test their dreams.

As Margaret Thatcher is fond of saying: “Consensus is the negation of leadership.” We applaud the courage and vision of the leaders of the AICPA for pushing ahead with Cognitor, and we wish them success.

However, should they ultimately not persuade the required majority of the members of the AICPA to go forward with the initiative, then we propose the following: Let those who did vote for Cognitor secede from the AICPA and we will do it ourselves. We will put our faith in the marketplace, not tyrannical majority rule.

The Cognitor experiment should prevail because we already are Cognitors.

Editor's Note:

For over a year, AccountingWEB has provided a home to those who wish to debate the topic of the AICPA's proposed global business credential, referred to previously as "Cognitor" and "XYZ."

As the national body prepares to conduct a vote of its members on the need for this new credential, AccountingWEB is pleased to host an open forum with Kathy G. Eddy, Chairman of the AICPA, wherein AccountingWEB members will be able to learn more about the global credential and voice their opinions.

The live discussion is scheduled for Wednesday, August 22, 2001, at 11:00 a.m., Eastern Time.

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