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Serving two masters, it still can't be done.

Practicing Public Accounting in an Unlicensed, Unregulated Environment

By Lawrence A. Ponemon

One of the most important reasons services performed by CPAs have added value, is the framework of licensing and ethics in which they are performed. A major issue facing users of CPA services is whether a CPA employed by an unlicensed, commercial organization can adhere to the ethics and licensing requirements while in the employ of a organization which itself is not subject to such requirements.

The scope of services performed by the practicing, licensed public accountant has undergone radical changes over recent decades. For instance, many public accounting firms have expanded the accounting function in terms of nonattest engagements and have simultaneously increased the scope of management advisory services provided to clients‹including systems development, total quality management, cost benchmarking, business risk analysis, and personal financial planning. In addition, the vast majority of services performed by practicing public accountants are actually not performed in the name of the individual CPA or licensed accountant but in the name of a firm or other qualifying entity, typically licensed or registered in the state or other jurisdiction in which the work is performed.

In addition, many of the services performed by the practicing CPA or the licensed or registered CPA firm are also performed by individuals who do not hold the CPA designation or by entities that are not licensed to practice public accounting. For example, CPAs and licensed CPA firms provide a wide range of personal tax and financial planning services. These same kinds of services are provided by CPAs and non-CPAs working for entities and organizations that are not licensed to practice public accounting. There are also non-CPAs providing services through licensed CPA firms that are also provided by non-CPAs in unlicensed or unregistered firms. A common example would be the principal or employee of a CPA firm that gives advice on management information systems or provides actuarial services.

What contrasts the services provided by the licensed or registered CPA firm is that those providing the service are subject to, and operate within, the Code of Conduct of the profession, its self-disciplinary aspects, and the disciplinary system of the state in which the service provider is offering services. For example, the CPA employed by a licensed or registered firm is typically subject to discipline for all the work performed in the name of the firm--even if it is for work that could also be performed by the unlicensed firm or non-CPA.

It is the view of most state regulators and the CPA profession itself that, to protect the public interest, all work performed by those that hold themselves out to be in practice as a CPA or a CPA firm must be subject to the Code of Conduct of the profession and the various levels of regulation‹state and self-regulation.

A New Challenge to Regulation

Perhaps one of the most significant challenges to the public interest concerning regulation of the public accounting profession today is the emergence of licensed CPAs performing accounting and related services as employees of unlicensed business organizations. This issue was brought to light by recent litigation concerning the Florida State Board of Public Accountancy and American Express Tax and Business Services (formerly IDS Financial Services), a wholly owned subsidiary of the American Express Corporation. By acquiring CPA practices throughout the U.S., American Express Tax and Business Services now has the infrastructure in place to compete with large public accounting firms in providing accounting and tax services.

The practice of acquiring public accounting firms by a non-CPA firm entity may not promote the public interest because it creates ethical conflicts that are far less likely to arise within a CPA firm fully subject to state regulation and professional self-regulation.

Ethics: The Core of Public Accounting

Fundamental to ethical conduct in the public accounting profession is a combination of government regulation and an extensive framework of self-regulation, whereby practitioners and firms agree to adhere to an ongoing process of control to ensure that the rules and regulations are established to protect the public's interest. Institutions and decision making bodies such as the AICPA, the Public Oversight Board, State Boards, and state professional societies work together to ensure that this regulatory structure is effective at promoting the ethical behaviors of CPAs and public accounting firms.

An effective ethics code coupled with oversight and regulatory controls has greatly enhanced the stature of the public accounting profession. This has led to an extremely positive perception of the CPA community as indicated by public opinion surveys over recent years. The general public has come to view the CPA designation as a hallmark of quality, especially in terms of the ethical caliber of accounting and tax services provided.

In short, the primary beneficiary of the profession's strict regulations for practitioners and professional firms is the general public. The basis for the CPA profession's high regard by the public is the unique combination of technical ability and longstanding ethical principles based on the independence, objectivity, and freedom from conflicts-of-interest under which CPA firms must operate.

The Business Versus Professional Distinction

There is an important distinction between ethics in a business concern and those in a professional services firm. That is, by virtue of different standards and conventions or norms of operations, a commercial services company will tend to view its ethical responsibilities to the general public differently than a professional firm. This is so because the practitioner is first and foremost an instrument of a profession while the manager/employee in the commercial organizations is an instrument of that organization. Hence, members of a profession contribute directly to human welfare through some public or humanitarian service, while a manager/ employee contributes indirectly to the social good by providing high quality, reliable, or inexpensive products or services to customers. In light of the "service to society" relationship required by professional practice, the practitioner has much more at stake in the event of ethical impropriety. In contrast, a manager/ employee can be sheltered by the corporate veil.

The business versus professional distinction can create a serious ethical conflict for CPAs who are offering professional services to the public as employees of a non-CPA firm because they are likely to face an implicit conflict between professional responsibilities and organizational responsibilities to their employers. This implicit conflict can be illustrated within the framework of a CPA offering tax and related financial planning services to the public. If the CPA is working for a financial services company that sells life insurance and investment products as a mainstay of its business, how much freedom will the CPA have to send a client to a different financial products vendor or to recommend that no financial be purchased at this time? Compare this with a CPA working under the umbrella of a traditional CPA firm, whose professional and organizational interests are to work for the client's best interest.

As a member of a professional group, the CPA is obligated to uphold standards of professional practice, which include objectivity and due professional care. As a member of a commercial organization, however, the CPA is often required to champion the goals of management. This conflict can lead to dysfunctional and unethical behavior in terms of the employee/CPA's primary mission of carrying out the overall objectives of the organization. A responsible public policy response, and one which has been the bedrock of CPA regulation, is to help prevent a conflict of allegiance between a CPA's business organization and the public, by calling for professional services rendered to the general public to be preformed within a firm that is controlled by CPAs, where the firm and its employees are subject to a single high ethical standard, that of the profession.

To help define and clarify professional roles in a business organization, researchers have attempted to differentiate the key attributes of professional occupations. From this literature, it is generally believed that the following six attributes should be present for an occupation to be deserving of professional status in our society:

* Autonomy that grants legitimate control over the work environment.

* A set of values that is oriented toward community interest rather than toward individual self-interest.

* A body of knowledge that is formulated into a systematic theory or set of theories.

* A formalized educational process that imparts a body of knowledge deemed necessary by the professional group.

* A code of ethics that governs relations with clients, colleagues, and other organizations.

* Formal recognition by society that grants status to the profession through means of licensing, thus controlling entry into the profession.

Autonomy is perhaps the most significant attribute that distinguishes professions such as public accounting from other business occupations because the only visible distinction between professions and other occupational groups is that professional groups possess legitimate control over their work environment. The state grants autonomy, including the exclusive right to determine who can legitimately do the work and how the work should be done. However, autonomy is never without its limits since the public, through a formal system of regulation and law, is the ultimate source of professional status and sovereignty.

The "service to society" relationship alluded to above also means that by virtue of professional privilege such as autonomy and professional status, members of a profession are expected to demonstrate ethical conduct beyond mere compliance with rules of an organization. For instance, as illustrated in Figure 1, the hierarchy of ethical responsibility for CPAs in professional accounting firms simply means that the CPA practitioner has an unambiguous role in terms of following the ethical precepts of the firm, the profession, and society as a whole. While CPAs working in business firms are still expected to follow rules of the profession, their responsibility may be obscured by the competing demands placed upon them by the company's management, customers, and shareholders.

CPAs who are employees of a commercial financial services organization would face a different set of issues than those in public practice when considering the ethics of recommending investment alternatives to clients. Like other employees within the organization, the CPA is obligated to advance the economic interests of owners and stockholders who are not involved with or connected to the practice of public accounting. In fact, failing to recommend an investment option that maximizes the organization's profits or advising the client to consider an alternative investment from a competing financial services firm might be considered an ethical breach in terms of loyalty to the employer. As shown in Figure 1, CPAs in a commercial financial services organization deal with a somewhat disjointed hierarchy of responsibilities whenever the economic interests of owners or shareholders are not consistent with the accounting profession or society as a whole.

Objectivity and the Practice of Public Accounting

Closely aligned with the concept of autonomy is the notion of an individual's ability to maintain an objective point of view in the execution of his or her professional duties. According to professional standards, objectivity is an essential part of the public accountant's role in society. Objectivity, in this context, is defined as a mental attitude or state of mind that permits the individual practitioner to discharge professional responsibilities without compromising judgment or ethical beliefs or yielding to the demands of others within and outside the organization. The need for objectivity in all aspects of public accounting practice is succinctly stated in Article IV of the AICPA's Code of Professional Conduct, as follows (AICPA 1991, 6):

    Objectivity is a state of mind, a quality that lends value to a member's services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest.

The general principle of objectivity as defined in the AICPA's Code applies to accountants who serve as taxation, consulting, or general accounting (nonattest) specialists and who, by virtue of Rule 102 on integrity and objectivity, are required to place the obligation to the public ahead of the interests of any party in having the engagement achieve a particular result.

Despite its virtue, however, the applied psychology literature suggests that the ability to maintain an objective or impartial point of view can be extremely difficult for individuals who face organizational or peer pressure to behave in a biased manner. Within the long-established CPA-firm environment, where the profession's ethical standards are imbued throughout, such pressure can be kept to a minimum. This is not so within a commercial structure, where shareholders and the majority of employees are likely to be both ignorant of, and perhaps indifferent about, CPA professional ethics. Within such a structure, CPAs offering services to the public are far more likely to be under pressure with regard to their ethical principles. The ethical role of CPAs is defined within the context of the different and competing goals of the following constituent groups: the client, who provides revenue to the practitioner for services rendered; the firm that employs the practitioner; the general public that relies on the quality and integrity of the public accounting profession; and the public accounting profession.

As a good example of how a conflict can manifest itself in a business firm, consider what might happen if a financial services corporation rendered public accounting services. Even if employees of the financial services corporation held active CPA licenses in their respective states, they can face an insurmountable conflict-of-interest by virtue of the organization's business goals and objectives. For example, by providing accounting services for clients in conjunction with financial services, like investment planning, insurance sales, or security brokering, CPA employees implicitly endorse the investment and insurance products provided by the company. Even if the CPA employee is not directly involved in such sales, the working relationship with those who are involved in product sales creates an atmosphere that diminishes professional objectivity--at least with respect to the products or services offered by competing companies.

In short, the practice of a profession demands that professional firms render services that cannot, and do not, compromise the public's welfare. This issue is especially germane to public accounting firms because--unlike law or medicine where a client or patient is the primary beneficiary of the service received--the primary beneficiaries of public accounting service are often third parties (such as creditors, stockholders, potential investors, vendors, and employees) who may rely upon the work done by the CPA. Though especially salient for attestation engagements, it is also true that external parties have come to rely on the implicit assurances conveyed in compiled financial statements and even tax returns prepared by CPAs.

The Rationale for Public Accounting Firm Regulations

If the quality of public accounting services is ultimately a function of the competence and integrity of the individual practitioner providing the service, then how do public accounting firm regulations provide further protection for consumers?

In recognition of potential sources of ethical conflict, public accounting firms and self-regulatory bodies have instituted the following control mechanisms to discourage unethical acts that might diminish the individual practitioner's objectivity or are inconsistent with the standards of the profession:

* Commonly shared ethical values that are congruent with professional standards and which permeate all areas of practice within the firm.

* Internal controls over accounting work, such as adequate supervision and training of staff and the review of work papers.

* Team work, wherein a group is assigned to one client so that accounting and auditing functions are segregated.

* Peer reviews of engagements by practitioners from other firms or regulatory bodies.

* Affiliation, social discourse, and peer pressure within the public accounting firm.

* The individual's ethical values, integrity, and orientation toward professionalism.

* Regulations and licensing of CPA firms, owners, and professional staff members.

These factors work in conjunction with other exogenous variables such as the ethical culture of the organization, the education level of the practitioner, and the economic climate of the firm's business practice.

The regulation and licensing of CPA firms, owners, and professional staff members is a very important factor in terms of maintaining objectivity and professionalism when rendering public accounting services. This is true because, as noted by organizational researchers, even if ethical standards are encouraged by an organization, individuals will tend to follow the norms or conventions of an immediate reference group rather than the organization as a whole when framing and resolving ethical conflict. In this regard, firm regulation and CPA governance make it much easier for individuals to maintain an objective or impartial point of view when rendering public accounting services simply because it reduces the possibility that the organization and its employees will engage in behaviors that are inconsistent with espoused professional norms.

The contribution of the mitigating and instigating factors listed above to the CPA's ethical behavior is inextricably linked to the environment in which public accounting services are provided. For instance, CPAs working in business firms face economic and social incentives that could confuse their professional role and responsibility. Exacerbating this type of conflict is the reality that the ethical tone of business firms is markedly different from professional firms--because the managements and stockholders of these organizations do not have to embrace or even be cognizant of the ethics and values of the public accounting profession.

Is the public accounting profession really at risk of opening a Pandora's box if it permits CPA employees of business firms to state they are CPAs while performing duties also performed by CPAs employed by professional firms (licensed)? I strongly believe that such an action imperils the public by diminishing the objectivity of public accounting services provided to clients. Because ethical conduct is the hallmark of the CPA profession, a loss of objectivity could lead to a loss of the public's trust. This, in turn, could lessen the positive reputation and professional status enjoyed by the public accounting profession in this country for many years. In my opinion, the above mentioned argument is precisely the reason why state boards should continue to forbid licensed CPAs who are acting as employees of a nonprofessional business organization from practicing public accounting.

Lawrence A. Ponemon, PhD, CPA, is the Rae D. Anderson professor of Accountancy at Bentley College.

AUGUST 1996 / THE CPA JOURNAL



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