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Austin Adamson
Ms. Curtin
Intern/Mentor Program
Period 6
19 April 2015
Auditing, Finances, Regulations and Business: Analyzing the CPA Exam
What is a CPA? In order for an accountant to become licensed as a Certified Public
Accountant (CPA), he/she must first pass a uniform CPA exam. The issue of whether this exam
accurately determines the qualifications needed to be licensed as a CPA is important because
CPAs are presented with a large responsibility in a business. They are responsible for keeping
track of the finances and stability of a business and are tasked with predicting future outcomes,
financially. CPAs also have an ethical responsibility to follow a set code of conduct and remain
honest. With the amount of power they are given, CPAs have the ability to manipulate facts and
figures or steal money from a business or company without anyone being the wiser. As a result,
CPAs can positively or negatively affect people’s jobs and businesses, so determining whether
one is qualified for that sort of power and responsibility should be an issue of importance. The
CPA exam accurately determines the qualifications of a potential CPA because it covers a wide
basis of accounting material, provides a fair amount of difficulty, and assesses ethicality.
The Uniform Certified Public Accountant (CPA) Examination was implemented in the
United States between the late 1890s and early 1900s (Miranti). At the time, Americans were
starting to leave behind the field of agriculture and were moving to cities to start careers in
business and industry. There was a need for reliable accountants to help manage the finances of
the growing number of businesses. A consensus among accountants proved the need for a more
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uniform way of determining whether or not one is qualified to be a Certified Public Accountant.
The official uniform CPA exams were created, and the requirements to apply for the test, at the
time, were a couple of years experience as an accountant, and a high school diploma (Miranti).
In comparison to today, the requirements to take the exam in the first years of its existence were
not nearly as demanding. Originally, only a high school degree was required, but a bachelor’s
degree or higher and around 150 hours of classroom education, in the area of accounting, is
required by most states today. There also a restriction on age. Most states require an applicant to
be eighteen years old (nasba.org). Although it is difficult to become a CPA, there are many
benefits. With the title comes a variety of job opportunities, a better salary, and more
recognition. A CPA has the ability to work in any area of the accounting field and is more likely
to appeal to an employer rather than an unlicensed accountant. Only a CPA, for example, can
prepare an audited financial statement and a reviewed financial statement (nasba.org). A CPA is
also more likely to work longer hours and have more responsibility than an un-certified
accountant.
The CPA exam contains a heavy variety of material that a CPA would need to know in
any aspect of his/her job. The exam itself includes four sections with content ranging from
auditing practices to economics. These are known as the, “Financial, Auditing, Business, and
Regulations sections” (AICPA.com). Each section contains specific questions and problems
relating to the corresponding area of accounting. The Financial section contains material on
financial statements and types of accounting. The Auditing section contains material relating to
auditing principles as stated by the GAAP and IFRS. The Regulations section contains material
relating to tax and business laws as well as ethics and professional responsibilities. The Business
section contains material relating to operations and strategic management, economics, financial
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management, and information technology (Becker.com). Many question whether the knowledge
of all these elements is necessary as a CPA. If these elements are unnecessary they only add an
unnecessary challenge and difficulty to a potential CPA.
The exam covers every aspect of accounting so some material will only be applicable to
certain jobs. Regardless, the test taker is required to know about every area of accounting. In an
interview regarding her experience with the CPA exam, Miss Janice Sellman of Bowman and
Company Accounting stated, “I don’t use auditing. I mean there’s some things that you learned
in auditing that do help you, like reviewing financial statements, some of those auditing things
do help. Definitely not governmental, I don’t use that at all” (Janice Sellman). In a similar
manner, Mr. Mark Bowman of Bowman and Company Accounting remarked, “A lot of the stuff
on the test is stuff you don’t use, I’m trying to think of some specifics, but they try and teach you
everything. It’s kind of everything all in one” (Mark Bowman). It would not be fair to test
someone on irrelevant material. A more specific exam relating to one’s potential job area may be
desired by some. Even though the test contains material that not every CPA may need to know
for their potential area of accounting, it’s important that test takers are evaluated on accounting
in any area of the field, so that they are knowledgeable on every aspect and are able to work
wherever they choose.
The exam provides real life applications for CPAs. Computer simulations are employed
to re-enact problems that CPAs might face on the job. The,
Simulations use real-life work situations to test your in-depth knowledge and
skills in a particular subject area. Some tasks you may be asked to perform
include searching databases or working with spreadsheets and forms. Task-based
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simulations are presented after multiple-choice questions and appear on three of
the exam parts: Financial Accounting and Reporting, Auditing and Attestation,
and Regulation (Becker.com).
The exam changed from a pencil and paper test with strict testing timeframes to a
computer based test around the early 2000s (Gonzalez). The change in the formatting of the
exam has vastly changed how the exam is taken. The new computer based format was created to
add an element of realism to the exam. By using programs that a CPA would operate in his/her
job, the exam adequately tests whether the examinee has the experience and ability to be a CPA
(thepasa.org). The experience of an accountant is an important factor in his/her ability to work in
the future. Without the requirement of public accounting, a potential CPA would not be able to
pass the exam and become a CPA. By testing one’s knowledge on accounting challenges, the
exam is also able to provide a potential CPA with experience. The exam is able to accurately
evaluate how a potential CPA would handle real life problems, which is an important
determination in the evaluation process.
The CPA exam has a high level of difficulty. The exam has proven to be challenging with
almost a majority of the test takers failing the exam each session. There is around a 50% passing
rate across each section of the exam (AICPA.org). A cumulative report of exam passing rates
throughout each quarter of 2014 shows a 46.35% passing rate in the auditing section, 55.46% in
the business section, 47.60% in the financial section, and 49.41% in the auditing section
(AICPA.org). A potential CPA needs a score of 75 to pass the exam. If the potential CPA fails
one section of the exam then he/she must retake each section of the exam. An applicant has a
time frame of 18 months to complete all sections of the exam (Michael Decker). With a rate of
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failure that high, some wonder if the exam is too difficult. An exam that is excessively difficult
might dissuade a perfectly competent and experienced individual from becoming a CPA.
The exam itself has to be difficult enough so that a potential CPA is knowledgeable and
ready for licensing. Miss Sellman explained, “The difficulty of the CPA exam does give the
person who passes it a little bit more of, you know, just like the Bar you don’t want to make it
too easy or you’re going to have everybody automatically being a lawyer, or in this case,
everybody being an accountant. So I’m glad it is difficult” (Janice Sellman). All professions have
some sort of barrier or test before they allow you to work freely. Whether it is a test, an
application, extra training or extra education, there is a necessary process to ensure the
professionals are knowledgeable or skilled enough to work. The CPA exam proves its use in this
way.
The profession of the CPA would not be as highly trusted and counted on if it did not
deserve it. An argument can be made that “what a CPA does is difficult and the areas of
knowledge broad and complex, and of course in today's times ever changing” (Barry C.
Melancon). Most importantly, “Exam content is determined based on what an entry level (2 year)
person needs to know to enter the profession and protect the public” (Leslie Mostow). The entire
purpose of the exam is to evaluate whether an individual is ready to be licensed as a CPA. All
necessary information that a CPA has to know should be on the exam. Michael Decker from the
AICPA explained that, “Our test is designed with a passing score of 75, a 75 or a 76 is very
different then a 74 or 73. It is very high discriminating at that level. It is not a test to say well if
you scored 90 then you are going to be a better accountant or you are going to be a better CPA. It
is not designed for that. We are there just trying to figure out, are you in or are you out” (Michael
Decker). There is a minimum score that a test taker needs to pass, just like any other test, but the
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purpose of this test is not to show how much one knows but whether he/she knows enough. By
only accepting those that have proved they know enough,
The CPA exam is an important determination of the ethicality of a potential CPA.
Ensuring that an accountant remains ethical is important in preventing accounting fraud.
Accounting fraud can include, “Merging short and long term debt into one amount to improve
the perceived liquidity of the company, failing to disclose risky investments or “creative”
accounting practices, over-recording sales revenue, under-recording expenses (i.e. depreciation
expense)” (batescarter.com). Many large corporations over the years have lost money and the
publics’ trust because of scandals in which accountants were revealed to have committed large
scale fraud. For example, “Xerox falsified financial results for five years, boosting income by
$1.5 billion. Freddie Mac was caught for understating earnings. Halliburton was revealed to have
improper booking of cost overruns. Lehman Brothers failed to disclose an accounting maneuver
that resulted in short-term loans being reported as sales” (batescarter.com). This kind of fraud
damages not only the people that are responsible, but each individual employee and the
consumer.
Along with the CPA exam there are ethics requirements that must be met before
becoming a CPA. Potential CPAs are told that, “Before you can get your license, you will need
to fulfill an ethics requirement. Many boards accept the AICPA's comprehensive ethics course
and exam, which can be taken at any time during your testing experience, before or after passing
the CPA exam” (nasba.org). With the CPA exam, this course ensures that the standards and
expectations of an ethical accountant are taught and instilled. The exam covers the AICPA
professional code of conduct as well as all other ethical codes necessary to follow as a CPA
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(AICPA.org). Ethics is an important part of accounting that, if ignored, would cause problems
for companies and clients.
The GAAP and auditing standards are significant test materials that a potential CPA must
be aware of in order to pass the CPA exam. Before taking the exam, a potential CPA is expected
to know about the GAAP, which defines the manner in which accounting procedures are
executed. All accountants are aware that, “in preparing financial statements, financial
accountants adhere to a uniform set of rules called generally accepted accounting principles
(GAAP)—the basic principles for financial reporting issued by an independent agency called the
Financial Accounting Standards Board (FASB). Users want to be sure that financial statements
have been prepared according to GAAP because they want to be sure that the information
reported in them is accurate” (new.edu). The use of a set system is also useful for avoiding
confusion and making expectations clear. According to the Becker review course, “A strong
understanding of U.S. GAAP and IFRS will help you answer many of the questions in the
auditing section” (Becker.com). Most importantly, “The use of the GAAP ensures the reliability,
comparability and integrity of financial statements” (smallbusiness.chron.com). Without the
GAAP, accountants wouldn’t be able to accurately communicate a company or individual’s
finances to other accountants or other necessary individuals.
Auditing is an important part of accounting not only in making sure that a company and
its accountants are keeping track of their money but are also remaining honest with the records of
their money. It is expected that, “Auditors ask a range of questions, examine financial and
accounting records, make judgments on significant estimates or assumptions that management
made when they prepared the financial report,” and more in order to establish an opinion on the
financial statements of a company (pwc.com). Auditors are necessary in evaluating the accuracy
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of finances of a business. Inaccurate accounting could be a result of fraud. For example,
“Fraudulent financial reporting may be accomplished by the following: Manipulation,
falsification, or alteration of accounting records or supporting documents from which financial
statements are prepared. Misrepresentation in or intentional omission from the financial
statements of events, transactions, or other significant information classification, manner of
presentation, or disclosure” (Consideration of Fraud in a Financial Statement Audit). The CPA
exam would not be able to determine that an individual who passed will not commit fraud, but it
ensures that the expectations and standards of ethical accounting are made clear.
As one of the most trusted professions in its industry, the CPA must remain
knowledgeable, experienced, and honest. Society holds CPAs in a higher esteem than other
accountants. CPAs gain admiration from anyone who recognizes the difficulty of gaining
certification. With the certification comes responsibility but more opportunities. The CPA exam
is an important determination of the qualifications of the CPA. If the requirements to become a
CPA were not so strict, then the public interest of society would be in jeopardy. Individuals
preparing to take the CPA exam must realize it is a necessary difficulty in order to become
licensed as an individual in one of the most trusted and relied on professions in the business
industry.
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Works Cited
AICPA. "CPA Examination Passing Rates." AICPA.org. CPA.com, n.d. Web. 7 Oct. 2014.
Becker. "CPA Exam Content." Becker Professional Education. Becker, 2014. Web. 07 Oct.
2014.
Bowman, Mark. "Interview with Mark Bowman." Personal interview. 08 Dec. 2014.
"CPA Exam Insider Information." CPA Exam Insider Information. PASA, n.d. Web. 05 Nov.
2014.
"Consideration of Fraud in a Financial Statement Audit." Public Company Accounting Oversight
Board. Public Company Accounting Oversight Board, n.d. Web. 28 Feb. 2015.
Decker, Michael A. "Interview with Michael A. Decker." Telephone interview. 21 Jan. 2015.
Goldstein, Andy. "Preparing for the CPA Exam Part III: The Next Step." Http://nasba.org/.
NASBA, 18 Oct. 2012. Web. 17 Feb. 2015.
Gonzalez, Adrienne. "Going Concern." Here's the Real Reason Why CPA Exam Pass Rates Are
Up. Sift Media, 27 Sept. 2012. Web. 08 Mar. 2015.
"Introduction to Business." New.edu. UNIVERSITYNOW, n.d. Web. 16 Sept. 2014.
Melancon, Barry C. "Interview with Barry C. Melancon." Telephone interview. 11 Jan. 2015.
Miranti, Paul J. "Birth of a Profession." CPA Journal Online. The New York State Society of
CPAs, n.d. Web. 28 Oct. 2014.
Mostow, Leslie. "Interview with Leslie Mostow." Telephone interview. 28 Jan. 2015.
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Petryni, Matt. "Accounting Ethics and Integrity Standards." Small Business. Hearst Newspapers,
n.d. Web. 03 Dec. 2014.
Sellman, Janice. "Interview with Janice Sellman." Personal interview. 12 Jan. 2015.
"The Uniform CPA Examination: Purpose and Structure ." AICPA. N.p., n.d. Web. 17 Feb.
2015.
"What Is Accounting Fraud?" Business Advisors & CPA Gainesville & Atlanta. BatesCarter,
n.d. Web. 24 Nov. 2014.
"What Is an Audit?" PwC Australia. PwC, n.d. Web. 05 Nov. 2014.