In his annual address to the Accountants Club of America on Jan. 11, Barry C. Melancon, president and CEO of the American Institute of CPAs (AICPA), spoke about the new Congress, IRS service problems, human capital, upcoming standards for environmental, social and governance (ESG) reporting, as well as other prominent issues facing the profession today.

“When you think about the CPA profession, I would put it in this context: We are the most global profession that operates throughout the country but is state regulated,” he said. “This points to the veracity of our organization, but also to its complexity. ... This complexity gives us a unique position in the world.”

Unfortunately, he said, “We are entering a period of time ... where there is going to be almost no movement in the next two years from a legislative perspective,” attributing that situation to the polarized environment in the 118th Congress.

“The reality is that our system was set up to compromise on an individual basis,” he said, “That’s how our founding fathers designed our system—for well-meaning people to compromise. Parliamentary systems are set up for parties to compromise. It’s fairly rare for one party to get a majority.” He said that what we now have is a like a parliamentary system, but that “incentives to compromise have been eliminated in our system. ... That is not ... good for our country.”

Given the configuration of the House of Representatives in the new Congress, Melancon warned of increased oversight of the Securities and Exchange Commission (SEC) and the IRS.

“We’re going to have two years of an immense amount of hearings” before Congress, he said, because Republicans in the House have targeted both the SEC and the IRS, due to their aggressive oversight of corporations. He predicted that “[SEC] Chairman [Gary] Gensler is going to spend a lot of time at hearings,” and so will incoming IRS Commissioner Daniel Werfel.

The IRS

Turning to the $1.7 trillion bill omnibus appropriations bill passed in the last days of the previous Congress, which provides funding for the government in the current fiscal year, he detailed a number of issues. Chief among them was the funding to hire about 87,000 new IRS employees to improve tax collection and enforcement, close the tax gap, improve customer service and upgrade technology, among other objectives.

“Both sides were wrong in the debate on the 87,000,” he said. “The Democrats said that the increase in employees would not do anything to middle-class taxpayers, and the Republicans said that it would create an army of armed agents. Neither was correct.” Besides, he added, “in this economy, no one is hiring 87,000 people.”

“This is about closing the tax gap,” he said of the estimated half-trillion-dollar difference between taxes owed and taxes paid. The current gap is “not the worst in the world, but not the best.”

“When you think about digitization and using technology to close the gap, ... it is more difficult to have no reporting” at the high end, he said. “Where is the gap? In cash-based businesses.” Because cash-based businesses tend to be run by people of moderate means, closing the gap would mean that the IRS would be going after these small business owners. He concluded, “To say that low-income people will not be affected is not true.”

Melancon emphasized that the level of service at the IRS is “a really huge issue, not just for preparers but for the American public.”

He said that the agency suffers from “self-inflicted wounds” that harmed its image, such as the destruction of 30 million paper-filed information return documents in March 2021. “That became an issue because they lost the communication issue on that one,” he said. He also mention the problem of turnover, leading to untrained staff; the need for a major technology investment; and the continuing backlog of unprocessed returns.

“This will be a better tax season because they have made some improvement,” he said.

He then touched on some of the other features of the budget bill, such as the lowering of the threshold for filing Forms 1099-K from $20,000 to $600, a policy that placed a huge reporting responsibility on payment companies such as Venmo. He noted that the IRS recently announced that the policy would be delayed by a year. “With the way this was going to be implemented and the backlog [of unprocessed tax returns], the IRS said we’re going to suspend it, and that was a good decision.”

The final bill did not, however, include a number of provisions that many hoped for, such as a return to immediate deductibility for research and development expenses, and an extended child tax credit.

Cannabis is also a looming issue for the profession, due its licensing in several states, including New York. Its lingering classification as a controlled substance under federal law presents potential problems, he said. “As a licensed professional, technically, you are creating a problem for yourself under federal law. We have been supportive of clarity in federal registration so [that] people are not risking their licenses. That was not in the final bill.”

Human capital

Calling human capital “a very important part of society,” Melancon discussed what this concept means for the future of the accounting profession.

“The reality is there are more than 1 million [fewer] young folks in colleges in this country than there were before COVID,” he said. “Community college enrollment is down 22 percent.”

The declining number of college enrollees is a problem for the profession, he said.

“One of the selling points has been that we are a stable and solid profession. [You] could pretty much guarantee yourself a job. If you continued to work in our profession for 20 or 30 or 40 years, you could have a good living,” he said. But, he noted, the perspective of members of Generation Z is, ‘I don’t know if the world is going to exist in 40 years.’”

“Our views are not aligned with this generation,” he added, also mentioning that starting salaries have stagnated in the three years since COVID, and are not increasing in comparison with those of other professions. “The profession is doing extraordinarily well,’’ but it doesn’t get down to starting salaries. He said that firms are shifting from a pyramid structure “more to fat-middle organizations,” where there will be fewer starting positions.

There are other factors, too, he said. In addition to lower starting salaries, there is the necessity of a college degree, the need to pass a difficult examination, the hard work and the lack of diversity. “You could go on and on,” he said. “Some say, ‘Let’s just fix the educational requirement.’ That’s not a panacea.”

Later, in response to a question about reducing the 150-credit requirement, he said, “I would disagree with you politely,” maintaining that the profession would not roll back its education requirement. “It’s a complex world, and education is a big part of it,” he said. Instead of reducing the number of credits, he said, “Can we find other ways to get to 150 ... with a different learning process with a lower price point?” In particular, he said that the AICPA is working on a proposal for the education requirement that includes allowing students to get academic credit by working at a firm.

Melancon still expressed optimism for the future of the procession, using history as a guide.

“Between 1990 and 1999, the number of accounting majors declined 50 percent. Why? The dot-com boom,” he said. “By the time we got to the mid-2000s, we had a record number of people majoring in accounting. Why? The dot-com bust.”

“The standing of our profession is at an all-time high,” he said. “A lot of students are going to be motivated by the stability of what our profession offers.”

ESG

In discussing ESG, Melancon noted that the International Sustainability Standards Board (ISSB) issued its first two proposed standards—one on climate and one on general sustainability-related disclosures—in March 2022 and will soon issue final standards. He expressed his belief that the United States will “point to” the disclosure standards, and that the standards will be adopted by the European Union.

“The U.S. needs to be part of the world stage, at this point,” he said.

Melancon also referenced the SEC’s issuance of proposed standardization of climate-related disclosures that were issued that same month. “There were 15,000 responses to the exposure draft, and the SEC will have to deal with that.”

“I’m a big supporter of [environmental protection] but also a supporter of measuring it correctly,” he said. “Every situation has truths and untruths,” he added, noting that the goal should be a “fair and equitable measurement process that is reliable and consistent. That is our profession. That is what our profession does.”

During the question-and-answer session, Melancon said that he had some concerns about private equity investment in accounting firms, from the tax side. He also expressed his view that accounting firm business models have to change, but predicted that small firms will continue to thrive.

Concluding his presentation, Melancon extolled the virtues of the accounting profession. He listed five elements that the profession provides in order to maintain trust: having controls that measure; doing the measuring; taking the measurements and telling a story internally; taking the measurements and telling a story externally, to multistakeholder groups; and the decision-maker’s knowledge that the information is reliable and consistent.

“Those five things are essential to our profession,” he said,  noting that the ways of carrying them out will continue to evolve.