of the AICPA’s Statements on Standards for Tax Services
Scott A. Yetmar and Jacques Rioux
55% of all federal income tax returns and an even greater
proportion of complex returns are prepared by tax professionals
at a total cost that exceeds $11 billion annually. The role
of a tax professional lies somewhere along a continuum,
with government agent at one end and taxpayer advocate at
the other. The IRS first added return-preparer penalties
to the IRC in 1976, and amended them in 1989. Estimates
indicate that nearly a quarter of all tax preparers will
be assessed for some type of preparer penalty during the
course of their careers.
the creation and substantial increase in tax preparer penalties,
the IRS is moving preparers toward the agent end of the
spectrum. This may lead to more dilemmas in ambiguous situations.
When asked to describe the job situation that posed the
most difficult ethical or moral problem, AICPA members pointed
to tax issues. In “Ethical Problems in Public Accounting:
The View From The Top” (Journal of Business Ethics,
Vol. 7, August 1988), David W. Finn, Larry B. Chonko, and
Shelby D. Hunt wrote that the most frequently cited ethical
dilemma concerned clients proposing unwarranted tax return
changes or attempting to commit tax fraud. For several years,
tax malpractice claims against CPAs have outnumbered accounting
and audit claims, with tax claims representing approximately
60%, according to S.F. Holub, in “Tax Practice Review
and SSTS” (The Tax Adviser, December 2000).
Statements on Standards for Tax Services (SSTS) have their
origin in the Statements on Responsibilities in Tax Practice
(SRTP), which the AICPA issued between 1964 and 1991. The
SRTPs were advisory rather than enforceable. The SSTS and
Interpretation 1-1 superseded and replaced the SRTPs and
their Interpretation 1-1 effective October 31, 2000. In
addition, the SSTSs are enforceable by the AICPA. The SSTSs
now apply to all tax engagements, not just federal. A number
of state boards of accountancy have adopted the SSTS as
enforceable standards. Jurisdictions that have not explicitly
adopted the SSTSs nonetheless often expect CPAs to conform
groups were held in Des Moines, Iowa, and Kansas City, Missouri,
to gather insights into the most contentious passages in
the SSTSs. Tax professionals from the major national firms,
regional firms, and local firms studied the SSTSs and emphasized
passages that evinced their ethical concerns. Participants
were not biased toward any passages by the focus group facilitator.
Six passages were the topics of most of the discussion (Exhibit
1). Their ethical concerns were very similar to those
reported in two previous studies. (See “On Compliance
with Ethical Standards in Tax Return Preparation,”
Evelyn C. Hume, Ernest R. Larkins, and Govind S. Iyer,
Journal of Business Ethics, January 1999; and “Ethical
Issues in Tax Practice: Recent Changes in IRS Enforcement
Activity,” Lawrence C. Phillips and Kay W. Tatum,
The CPA Journal, January 2001.)
authors constructed a survey instrument using the six substantial
ethical concerns identified by the focus group. The intent
of the survey was to determine the rank order of these six
passages from the SSTSs and their relative magnitude of
importance in the daily tax practice using the Analytic
Hierarchy Process (AHP). The survey was sent to 2,000 members
of the AICPA’s Tax Division during February 2002;
842 usable responses were received.
Hierarchy Process (AHP)
respondents first chose which of two attributes was more
important. Second, pair-wise comparisons were made for all
15 possible pairs, using a nine-point intensity-of-importance
scale. A value of 1 implies that the two alternatives are
of equal importance (therefore, both items would be chosen
in step one), and a value of 9 implies absolute importance.
Statistical techniques determined the rank order and relative
importance of the six passages (attributes).
rank order of the importance of various passages of the
SSTSs is a standard statistic. The unique information provided
by AHP is the various passages’ magnitude of importance.
For example, while the standard statistical results indicate
that passage #6 is the most important and passage #2 is
the least important responsibility, AHP indicates that passage
#6 is 4.67 times more important (28/6) than passage #2.
results by position (Exhibit
2) show a striking difference between partners/owners
and managers/senior managers. Managers ranked SSTS passage
#2 (duty to the taxpayer and to the tax system) much higher.
This is also shown by looking at the results by age grouping
5). Younger respondents placed more importance on passage
#2, which may be due to their being more sensitive to tax
preparer penalties because the IRS’ emphasis on these
penalties has substantially increased in the last 15 years.
results by firm type (Exhibit
3) indicate that large firms place more importance on
passage #3 (advise the taxpayer regarding potential penalty
consequences) than smaller firms, which may be due to large
firms dealing with more complex issues with more “gray
area” tax situations.
results by risk level (Exhibit
4) show that, no matter the risk level, passages #2,
#4 (exploit the audit lottery), and #5 (bargaining chips
in a settlement negotiation) have relatively low importance
as compared with the other three passages. The respondents
were asked to indicate on a 10-point scale their professional
risk level when preparing a tax return (1 = very risk-averse
and 10 = very risk-seeking). A slight majority of respondents
the results are broken down by gender, males and females
responded very similarly.
passage #2 (a CPA tax practitioner’s duty to both
the taxpayer and the tax system) has a very low relative
importance and rank order compared with the other five passages.
This finding is not surprising, because the AICPA and its
predecessor organizations have endorsed the approach that
a CPA should function as an advocate for a tax client within
the bounds of professional ethical codes of conduct since
shortly after the enactment of the Sixteenth Amendment in
1913. Nontheless, those SSTS passages relatively important
to CPAs promote less-aggressive actions when compared to
client advocacy (e.g., make reasonable inquiries of information
furnished, advise of penalties and disclosure, and the realistic
A. Yetmar, PhD, CMA, CFM, FLMI, CPA, is an assistant
professor of accounting at the James J. Nance College of Business,
Cleveland State University, Cleveland, Ohio.
Jacques Rioux, ASA, PhD, is a senior actuarial science
at the SAS Institute, Cary, N.C. He is presently working on
software to satisfy the Basel II Operational Risk reporting
requirements for the banking industry.