Improving Professional Ethics
Steps for Implementing Change

By Jane B. Romal and Arlene M. Hibschweiler

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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 Sarbanes-Oxley 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 ethics-related 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.


Jane B. Romal, DBA, CMA, CPA, is an assistant professor at SUNY College at Brockport.
Arlene M. Hibschweiler, JD
, is a lecturer at the school of management at SUNY at Buffalo.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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