In his annual speech to the Accountants Club of America on Feb. 1, AICPA President and CEO Barry C. Melancon presented an overview of the accounting profession, including some of its challenges, as well as a summary of pending tax legislation.

Melancon began by highlighting the traditional role of CPAs as trusted advisers. He observed, “Being that trusted adviser right now is, I believe, more complex than it’s ever been in history” because of the challenges posed by the phenomenon of the “extraterritorial effect.” He explained, “What we are in is a phase in which state legislatures ..., other countries … or, in the case of the EU, a collection of countries are attempting to pass legislation and regulation that actually has impact on people or companies that are not in their country.”

“I think [this] is very difficult for people in the business world, and it’s going to get more difficult for our profession,” he said. California, for example, has passed two such laws. One requires companies with revenues over $1 billion annually that do business in California to disclose their scope 1, 2 and 3 emissions, starting in 2026, and the other will require companies with revenues over $500 million that do business in California to prepare and submit climate-related financial reports, also starting in 2026. 

“[Both are] being challenged because [they have] a component that is attempting to really put burdens and reporting responsibilities on companies that are not even in California,” he said. There is also “ESG [environmental, social and governance] legislation [in the European Union] ... that has huge implications to the United States,” he said. “So this extraterritorial notion is changing the ... landscape of how we look at what businesses have to do, what you have to plan for, how you give advice if you’re a trusted adviser or CPA, and it’s way, way more complicated.”

Melancon later returned to the topic of ESG, reflecting on what he called “a very interesting pendulum.” He spoke about major “political pushback” in the United States.

“The [European Union] has been in the front end of the ESG to the largest degree as it relates to requirements on business,” he said, noting that climate change activism is not just a domestic issue, but is growing in the European Union. “You had marches on the government in the Netherlands, you’ve had marches on the government in Germany.”

But, he noted that there has also been a backlash “at the EU level from small and medium-sized businesses, particularly farmers, and all those things are a manifestation of the realization of what some of these requirements actually put on businesses.” He added, “Right now, it’s like 1,000 different calculations for even small businesses, and businesses are throwing up their hands and saying, ‘This is absurd.’”

Firm growth: mergers and private equity

Melancon lauded the growth of the profession, noting that the biggest firms grew through acquisitions. Excluding the Big Four, he said that there are currently a dozen firms that took in a billion dollars or more in revenue as of Dec. 31, 2023. 

“We’re still seeing lots of mergers-and-acquisition activity—private equity in the profession; there are a lot of rumors about some more big firms going private equity,” he added. “That’s probably going to happen. It does change the landscape of the profession to a large degree.”

Later in his presentation, Melancon spoke about “a fundamental change” in the traditional shape of the finance function in corporate America and accounting firms.” Since the 1940s, he said, there has been a pyramid—a wide base of people that narrow up to the owners of the firm. “That is already starting to change because of some of the current technologies and AI,” he said. Private equity is driving some of this. They are already becoming what I call “fat-middle” organizations. ... I think other professions are going to go through this as well. ... You can find a lot of law firms that are more cylinder-looking than pyramid-looking, ... and so that’s the type of impact that has already started. And if we were in this room five years from now, 10 years from now, I guarantee you the pipeline discussion is about the war for talent in the middle, not the war for talent coming out of colleges.”

Then, during a Q&A session, Melancon answered a question about the non-CPA ownership legislation that recently passed in New York and how that would impact attest services.

“Until recently, you could have non-CPA owners, even in the attest services area, but yet have a majority of owners. In a traditional accounting firm, that has been the case for decades, and that will continue,” Melancon said. “That notion of the responsibility for the audit practice remains. I think the substance of your question is these alternative firm structures—private equity, etc. The way that actually works in those firms is that there’s a split of control ... so in the private equity side, the tax, advisory services, financial planning, cash services would go.” The attest side would still be controlled by CPAs, he said.

Pipeline

In response to a question about whether the 150-credit-hour requirement has an effect on the pipeline, Melancon said that it does have an impact—some of it positive, some of it negative.

He spoke about the AICPA’s National Pipeline Advisory Group, formed last summer, which is “looking at leakage—where does leakage occur? ...  Where do people who would like to become accountants or even have an interest in becoming accountants—where do they fall out of the process? A lot of them fall out of the process ... when they take the first accounting course,” he said. And some fall out of it for cost, whether it’s undergraduate or graduate.

For students who fall out because of cost, Melancon mentioned the ELE (Experience, Learn and Earn) program that allows students to work while earning the 30 hours (or fewer, depending on the student) necessary to achieve the 150 hours needed to qualify for licensure at a rate of $150 per credit hour. The online program is available from Tulane University, and Melancon said that he hoped to add other universities to it.

Congress and tax legislation

Melancon addressed the current partisan divide, saying that the current Congress “will probably have passed the least number of pieces of legislation in history, and that is a manifestation of the true polarization of our country politically. It doesn’t matter where you are in the political spectrum—we have a polarization in Washington.”

He found it notable that the U.S. House of Representatives had passed tax legislation the previous evening in an overwhelmingly bipartisan vote of 357 to 70. Melancon noted that two “biggest elements” of the legislation, as he saw it—the research-and-development credit and the child tax credit—will be paid for by the elimination of the Employee Retention Credit (ERC).

Melancon did say that the attainment of such a large majority on the tax bill “bodes well for the tax legislation that we’re going to need in 2025” because of the provisions of the Tax Cuts and Jobs Act that will be expiring in that year. He said that there is some hope that a compromise can be reached

He enumerated the elements of the federal balance sheet that make the deficit add up to $131 trillion, using the accrual basis, saying, “It’s a big number when you consider the fact that during the Clinton administration, we were at a net surplus”

Beneficial ownership information

Turning to the G20’s “massive attempt around the globe to ... thwart money laundering,” Melancon observed that the effort “manifests itself here in the United States in something called beneficial ownership legislation,” referring to the Corporate Transparency Act.

“The law skews to the smaller businesses,” he said. “As of right now, we’re supporting a delay for a year, but ... by the end of this year, any existing business ... that meets those thresholds has a reporting [requirement] to an organization that’s part of Treasury”—the Financial Crimes Enforcement Network (FinCEN)—”about who the actual beneficial ownership is of these entities. Not overly complicated, but it’s an ongoing process. Every change requires a filing within 90 days. Going forward, any new entities created in 2024 [have] a 90-day window to file as well.”

Estimating that about 36 million of these reports are to be filed, Melancon pointed out that it would be the CPA firm doing the filing because these entities typically are tax-strategy entities. “The CPA is going to be on the front line of that,” he said. “And there’s been this big debate about whether CPAs can and ought to do this work. I will tell you my personal opinion: The CPAs ought to do this work. I think that it’s [because] you’re closest to your client.”

“You’re going to need engagement letters that protect you,” he said. He also noted that “there are people who say this is the unauthorized practice of law. There’s no evidence that this is the unauthorized practice of law; no state has said it’s an unauthorized practice of law. ... Let’s say, two years from now, [a ruling comes down holding that it is the unauthorized practice of law.] OK, that may have application to any new work that you do, but it shouldn’t have any applicability to any work you did before that determination, and CNA, who is our underwriter, is going to make that clear, so that’s a good thing.”

Artificial intelligence

“If anyone tells you they know exactly what’s going to happen with artificial intelligence, they’re wrong,” he said. “But I can tell you it’s going to be pretty amazing.”

“I would argue that AI actually will be a very significant net positive to the profession,” he said, ticking off the profession’s early adoption of technologies such as the personal computer, networks and, now, cloud computing.

He told the attendees about the AICPA’s development of the Dynamic Audit Solution, which is being used for live audits today and has AI built into it. “It has massive data analytics built into it,” he said. “So those types of things are going to be where the profession is an adapter.”

The PCAOB

During the Q&A session, Melancon was asked about the “aggressive nature” of the Public Company Accounting Oversight Board’s (PCAOB) process as a possible deterrent to smaller firms staying in public company auditing or young people going into public company auditing. Melancon replied that its process “is not intended to be educational; it’s intended to be punitive.”  

He contrasted the process with peer review. “The premise of peer review … is to find people who are doing poor work … and to create an environment in which the firm has an opportunity to fix that, and if the firm doesn’t fix that, then not to have them be able to do that work. The premise of inspection is … the protection of the individual investor and the quality of work that is expected, if you choose to do public company work. … So I think in this debate, you have to understand the premise is different. ”

Melancon added that the PCAOB’s actions ebb and flow, depending on who has been appointed to the board. Under the Sarbanes-Oxley Act, each member was to serve a five-year term, with the terms staggered. He noted, however, that the recent trend has been for new administrations to replace the whole board. “That’s not how it was set up. When you have a rotation, you have more of an opportunity to have … an even keel.”

The PCAOB’s current chair, Erica Williams, is “very talented and has a great history, but she will tell you she about enforcement,” he said. “She’s about getting people who are not doing the right job. It’s a different attitude than, say, banking regulations, which is about prudence” and ensuring the soundness of a bank’s financial assets. “So it’s a different attitude that sits there.”