Improving Professional Ethics
Jane B Romal, Arlene M Hibschweiler. The CPA Journal. New York: Jun 2004.Vol.74, Iss. 6;
pg. 58, 6 pgs
Abstract (Document Summary)
Recent financial accounting scandals have generated unwanted and unfavorable publicity for
CPAs, including those working as comptrollers or chief financial officers. The inclusion of
ethics in the mandate of the PCAOB, and the consequences from ethics violations that may
arise now and in the future, means ethical and professional responsibility issues represent
genuine and increasing challenges for CPAs and the accounting profession. Accounting
firms and other employers of accountants must ascertain whether the CPAs they hire are
adequately trained on issues of ethics and professional responsibility. CPAs must make a
personal commitment to acquiring ethics expertise. Professional ethics resources become
particularly important in a smaller firm. As part of the effort to recognize potential professional
responsibility issues, practitioners must assess the ethical environment found within potential
and existing clients and business partners. Documentation is another useful tool for
incorporating professional responsibility principles into everyday procedures.
Full Text (3263 words)
Copyright New York State Society of Certified Public Accountants Jun 2004[Headnote]
Steps for Implementing Change
Recent financial accounting scandals have
generated unwanted and unfavorable publicity
for CPAs, including those working as
comptrollers or chief financial officers. The
plight of David Duncan, the lead audit partner at
Arthur Andersen on the Enron account,
underscores the consequences accountants
may face under professional responsibility
rules. Duncan pleaded guilty to obstruction of
justice in connection with document shredding.
The Texas State Board of Public Accountancy,
in lieu of further disciplinary proceedings,
revoked Duncan's license, effective February 6,
2003. Other examples of such disciplinary
proceedings can be found on the websites of
the SEC, accounting societies, and licensing
authorities.
The scandals also have implications for the profession as a whole. In April 2003, the Public
Company Accounting Oversight Board (PCAOB), created by the Sarbanes-Oxley Act of 2002,
voted to assume responsibility for establishing auditing standards, thus terminating the
central role previously played by the Auditing Standards Board of the AICPA. The PCAOB is
also authorized to provide rules governing ethics, independence, and quality control for
registered accounting firms, supplanting the role of the AICPA for auditors of SEC registrants.
The inclusion of ethics in the mandate of the PCAOB, and the consequences from ethics
violations that may arise now and in the future, means ethical and professional responsibility
issues represent genuine and increasing challenges for CPAs and the accounting profession.
How Ethics Is Handled Currently
Entry into the profession. The boards of accountancy in at least 26 states, not including New
York, require CPAs to pass an ethics exam or course either before sitting for the Uniform
CPA Examination or as a condition of certification. In more than two-thirds of the states, in
order to sit for the CPA examination a candidate must complete 150 hours of state-required
education. Few states require a college course in ethics. The required exams are generally
of two types: either designed by the state (e.g., Utah), or the AICPA's self-study ethics
course, required by 17 states. The 50 multiple-choice questions on the AICPA's
"Professional Ethics for CPA Examination" involve factual or ethical situations that raise
issues of integrity or independence. The passing grade for this self-study course is 90%.
The Uniform CPA Examination also contains questions on ethics. Under the revised
examination format effective Spring 2004, professional responsibility is part of a new section
entitled "Regulation," and constitutes a maximum of 20% of this section. Because 75%
continues to serve as the passing grade, examinees will be able to pass the "Regulation"
portion of the revised examination regardless of their knowledge of ethics.
In addition to whatever testing is mandated for CPA licensure, states generally require
applicants for certification to meet a character and fitness requirement. In New York, on the
Application for License and First Registration candidates are questioned about crimes and
unprofessional conduct. If a candidate answers "yes" to any of the questions (indicating, for
example, a criminal conviction or professional discipline), the candidate must submit a letter
giving a complete explanation, including copies of court records.
Continuing Professional Education (CPE). CPAs in every state except Wisconsin must
complete continuing education in order to maintain their licenses, with the usual requirement
being 40 credits per year. Currently, only 10 states mandate continuing training on ethics and
professional responsibility, typically requiring two hours annually or four hours every two
years. By comparison, 38 of the 41 states that mandate continuing education for lawyers
have special ethics requirements, consisting of a specified number of hours that must be
taken in ethics exclusively or in some limited number of topics, including ethics. (See
www.abanet.org/ legaled/publications/compguide/compguide. html.) Although the revised
"Joint AICPA/NASBA Statement on Standards for Continuing Professional Education"
(effective January 1, 2002) stresses the importance of both technical and ethical expertise,
only two states have added an ethics requirement to CPE mandates in the past two years.
Ethics violations. Despite the minimal weight accorded to professional responsibility issues
by most states for purposes of both licensure and continuing education requirements,
violations of ethics provisions can have significant consequences for an accountant's
finances, livelihood, and licensure. Transgressions, both subtle and egregious, can generate
disciplinary action but, more significantly, may also serve as evidence of negligence or other
malfeasance in malpractice actions. Additionally, behavior that violates professional
responsibility standards may disqualify a practitioner from appearing before the IRS or
performing sec work. A comprehensive approach to ethics issues, according professional
responsibility more weight than state authorities governing licensing and continuing
education, would be proactive and positive steps for CPAs to take voluntarily.
Steps for Firms and Employers
Assessing new personnel. Accounting firms and other employers of accountants must
ascertain whether the CPAs they hire are adequately trained on issues of ethics and
professional responsibility. The low emphasis on ethics under both the new and the prior
versions of the CPA exam means that accounting graduates may have had limited exposure
to ethics matters. Although academics prefer not to acknowledge that the current curriculum
reflects the treatment of topics on the Uniform CPA Exam, increasing pressure to recruit
better students means more emphasis on outcomes assessment, and from an accounting
student's perspective, there is no better measure of outcome than CPA exam results. In
other words, topics not emphasized on the exam may not be emphasized in the classroom.
As a result, despite the introduction of the 150-hour requirement in many states, it is possible
accounting students will graduate from five-year accounting programs with no more
background in professional ethics than at present.
There is a need to take proactive steps during the hiring and training of new CPAs. After
checking references, probably the best effort a firm can make during the hiring process is to
bring up a less-than-obvious ethics dilemma, either in conversation or in a short case that the
candidate must evaluate during the interview. Once hired, new employees should receive
extensive training in the ethical environment of the firm and the profession. This training
would help ensure competence as well as underscore the importance of professional
responsibility within the organization.
Ongoing measures. Although investigating the ethics credentials of accounting graduates or
CPAs during recruitment is important, experienced accountants can also make
misjudgments about professional responsibility. While ethics CPE can be helpful, attending
seminars or completing taped exercises on a periodic basis is only a starting point.
Professional responsibility principles should be incorporated into every facet of office
operations and procedures. Large accounting firms should designate a senior member to be
a specialist on issues of professional responsibility.
Similar to a tax or audit partner, an ethics specialist serves as a resource when ethical issues
arise. This specialist should take charge of all efforts to maintain competence on professional
responsibility issues. This includes reviewing publications for useful articles to be circulated
among colleagues, attending ethics seminars, and developing a genuine expertise on issues
arising under the Code of Professional Responsibility. In this way, the specialist can help
colleagues recognize professional responsibility issues that, in some cases, are not obvious.
The specialist's second role is to ensure that any ethics issues that arise are resolved
appropriately.
An ethics specialist should be knowledgeable about available resources that can help
answer professional responsibility questions. An ethics specialist should work to maintain an
environment that stresses the importance of ethical compliance. Given the growing
pressures to attract and retain business and the need for timely and efficient services that
often are increasingly complex, firms need to work harder not to lose sight of professional
responsibility. Appointment of a highly placed firm member to the ethics position-one who
has the endorsement and full support of the managing partner-helps establish and reinforce
an ethical tone at the top, underscoring the company's commitment to professional
responsibility principles. This appointment should enhance the firm's reputation for
professionalism and help ensure that it adopts an appropriate response to any ethical
dilemmas that arise, rather than one that just meets technical requirements.
Acquiring ethics expertise. CPAs must make a personal commitment to acquiring ethics
expertise. Professional ethics resources become particularly important in a smaller firm. The
Professional Ethics Division of the AICPA offers many helpful resources, including an ethics
hotline and information about ethics enforcement. Additionally, the New York State Society of
CPAs' (www.nysscpa.org) Professional Ethics Resource Center provides useful information
about a variety of ethics topics, and its staff is available to answer questions by telephone or
e-mail. The NYSSCPA also provides information for CPAs that are subjects of an ethics
investigation. Beyond this, however, practitioners also need to ensure that they are always in
a position to act in conformance with professional responsibility guidelines, especially for
smaller firms. For example, CPAs should not allow themselves to become too dependent on
one client or to become so financially overextended that they cannot afford the reduction in
income that could result from terminating a client relationship because of an ethics problem.
Assessing Clients
As part of the effort to recognize potential professional responsibility issues, practitioners
must assess the ethical environment found within potential and existing clients and business
partners. To some extent this is required by current audit guidelines that, for example,
mandate an evaluation of a firm's internal control structure. In addition, under the SarbanesOxley Act, the SEC will promulgate rules forcing issuers to disclose whether senior financial
officers are required to sign a code of ethics. If no such requirement exists, the company
must provide an explanation. Beyond these steps, however, additional measures can be
taken to help CPAs assess an existing or potential client's commitment to ethical operations.
The use of these tools should not be limited to audits, as ethics issues can arise in all kinds
of services.
Better Business Bureau (BBB). CPAs should check for complaints filed with the BBB against
a company. A record showing a limited number of grievances may not be sufficient to raise
concerns, but multiple complaints filed within the BBB's reporting period may suggest a
pattern of practices that at a minimum increases the risks presented by forming or
maintaining a working relationship with the business under consideration. Information
available through the BBB includes the number of complaints against a company and the
nature of those complaints, such as grievances involving customer service or product quality.
Pending bankruptcy or criminal matters may be noted as well.
Litigation. Some states' court records can be accessed online. For example, information
about litigation filed in Erie County, New York, can be obtained at ecclerk.erie.gov. Because
the level of information available varies, and searching all possible courts where legal
proceedings may be ongoing is important, it may be necessary to search in several
jurisdictions. Some courts provide information about not only final judgments but also
ongoing civil or criminal proceedings.
CPAs also can search the records of the federal courts using Public Access to Court
Electronic Records (PACER; pacer.uspci. uscourts.gov). PACER is a national index of
information about proceedings in federal district, appellate, and bankruptcy courts. Because
not all courts participate, however, a search must check the website for a list of
nonparticipating tribunals. Searches can be conducted by party name for criminal and civil
matters, including bankruptcy. If a search uncovers a civil suit, PACER will report on the
nature of the litigation and in some cases provide a litigation summary. Registration for the
service is free, and an access fee of $.07 per page is charged for Internet service. Users are
billed on a quarterly basis, and searches can be coded so that expenses can be charged
back to the appropriate file. Sample PACER search results are available from the website
without registering, so interested parties can try it out first.
Assessing client personnel. The credentials of CPAs working as comptrollers, financial
managers, or officers of an organization can also be checked. In New York, for example,
information about a professional's license is available from www.op.nysed.gov. Searching in
the right jurisdiction-the state that issued the CPA's license-is important. Any report of
disciplinary action taken, such as a suspension, should serve as a red flag and indicate that
additional caution is warranted.
Other measures should be taken with respect to both CPAs and non-CPAs working in
positions of financial responsibility. For example, the aforementioned judgment searches
also should be conducted (for example, through the SEC) for a company's senior financial
officers. Obviously, if a company's CFO has been the subject of an Accounting and Auditing
Enforcement Release (AAER), this should raise a red flag. Many local and national
newspapers maintain websites that can be checked for stories involving lawsuits, financial
irregularities, or other information indicating that an individual presents a particular risk. A
more sophisticated database is available from Factiva.com, a Dow Jones & Reuters service
that incorporates almost 8,000 sources, including current and archival coverage of media
sources and international outlets.
Documentation. Documentation is another useful tool for incorporating professional
responsibility principles into everyday procedures. For example, accounting firms should
consider using a "sign-off form for ethical considerations. This form would be updated
throughout the duration of a project, identifying the client, the nature of the assignment, and
beginning and completion dates. The body of the form should ask whether any part of the
work required raised ethical issues. This part of the form would need to be completed and
initialed by everyone working on the assignment. If the project raised ethical questions, a
memo should be attached detailing how the issues were resolved. This paperwork should be
reviewed by the ethics specialist.
Many firms prepare a client acceptance or retention form that addresses management
integrity. Additionally, auditors must examine various aspects of a client's ethical setting
under SAS requirements. The ethics form suggested above, however, would be used for all
services, not just attestation. Furthermore, using a separate form, rather than merely
documenting procedures in workpapers, would help underscore the importance of ethics
issues to everyone involved and to remind them to remain alert for ethics issues.
Steps for the Profession
The accounting profession must take public and comprehensive steps to repair the damage
the scandals of the past several years have done to its reputation. To restore public
confidence, CPAs must vigorously and energetically support and encourage comprehensive,
profession-wide ethics reform measures.
In 2003, the AICPA membership passed two measures designed to improve the timeliness
and transparency of the disciplinary process. Under these provisions, the AICPA can
discipline members sanctioned by other regulatory bodies without investigation and can
provide information obtained in a disciplinary action to the originator of the formal complaint.
The NYSSCPA has also made changes that permit its Professional Ethics Committee to
refer the results of certain disciplinary matters to the New York State Education Department
and "other regulatory bodies" as it sees fit. The profession should adopt additional measures,
however, that would help CPAs both recognize ethics issues and respond appropriately.
A national CPA database created, funded, and operated by the accounting profession should
be established to serve as a single source for accurate information about licensing problems
and other charges of unprofessional conduct, licensure status, and disciplinary actions for all
CPAs. The profession would control the accuracy and scope of the information included.
Most important, information about ethicsrelated actions, including license suspensions and
revocations as well as other disciplinary steps, would be easily accessible to the public and
to other CPAs. Creating the database would worsen the potential consequences for
unprofessional behavior, thereby serving as further incentive for CPAs to act ethically.
Educators should be encouraged to increase discussion of the Code of Professional
Responsibility and similar matters in accounting programs, by increasing ethics coverage on
the CPA examination or by requiring that candidates pass a substantive ethics test. This
would produce more awareness of the need for appropriate professional behavior by
accountants and also help ensure that accounting students graduate with at least some of
the expertise they will need to recognize professional responsibility issues.
The accounting profession should address questions of continuing education. States should
be encouraged to mandate ethics training as part of CPE requirements. Promoting a greater
amount of CPE in ethics and professional responsibility issues would increase visibility and
promote a greater dispersion of ethical awareness. Ethics CPE should focus on recognizing
professional responsibility issues and on the consequences of ignoring or, worse, actively
violating ethics precepts.
Steps for Accounting Educators
Other changes are needed with respect to ethics and accounting education. For example,
widely respected practitioner and academician Arthur R. Wyatt has commented on the need
for an increased focus on professional responsibility issues in accounting education
programs. Wyatt thinks students must understand the idea of concept-based standards and
how client advocates have unduly influenced FASB. The responsibility of financial reporting
in today's society, as well as the pressures they will encounter to undermine that
responsibility, must be made clear to students. Wyatt suggests encouraging students to
reach the highest professional behavior; this may mean that accounting educators will
require more training themselves.
In addition to questions of what to teach, the academic community has debated how to teach
ethics and professional responsibility. Of the 163 master's degree in accounting programs at
U.S. schools accredited by the Association to Advance Collegiate Schools of Business
(AACSB), only four offer a separate course in professional responsibility. This reflects a
widely held view that ethics integrated into the curriculum produces better awareness of
ethical dilemmas than does a separate course.
While an integrated approach to ethics training may have sound pedagogical underpinnings,
it presupposes that accounting professors have adequate training and class time to address
ethics issues. Both assumptions are questionable. In many cases, accounting faculty, while
highly trained on technical matters such as taxation or cost accounting, have little expertise
or background on ethical issues. Furthermore, the increasingly technical nature of
accounting means that professors are struggling to cover more material in the same number
of classroom hours. Schools using an integrated approach to ethics must continually and
vigorously endeavor to incorporate professional responsibility in all accounting classes. This
effort should include additional training of faculty.
Accounting educators should establish and enforce stringent rules against cheating and
other dishonesties that must receive the full support of college administrators in both
implementation and enforcement. This is consistent with the recommendations of the
Treadway Commission, which challenged colleges and universities to establish a "culture of
academic integrity." Privately, many educators lament the difficulty of taking meaningful
disciplinary action against students who cheat or otherwise engage in academically
dishonest acts. Studies have established that cheaters in college are more apt to be involved
in deceptive practices in the workplace. Thus a concentrated effort to establish a "culture of
academic integrity" in accounting programs is needed to reduce academic dishonesty and
prevent dishonest individuals from entering the profession.
Restoring Confidence
CPAs have long and rightfully enjoyed a reputation of integrity and competence. Recent
scandals, fairly or not, have damaged that reputation and diminished public confidence in the
accounting profession, leading to the passage of Sarbanes-Oxley and the creation of the
PCAOB. The entire accounting profession must endorse a comprehensive approach to
professional responsibility principles. Adopting the reforms discussed herein would both
increase recognition of ethical dilemmas and help elicit responses consistent with
professional responsibility guidelines. This, in turn, would represent a step toward restoring
confidence in a profession that cannot function without the public's trust.
A concentrated effort to establish a "culture of academic integrity" in accounting programs
is needed to reduce academic dishonesty and prevent dishonest individuals from entering
the profession.
[Author Affiliation]
Jane B. Romal, DBA, CMA, CPA, is an assistant professor at SUNY College at Brockpon.
Arlene M. Hibschweiler, JD, is a lecturer at the school of management at SUNY at Buffalo.