| CPAs’
Responsibilities: Article IV Objectivity and Independence
According
to the CPA’s Code of Professional Conduct -
A
member should maintain objectivity and be free of conflicts
of interest in discharging professional responsibilities.
A member in public practice should be independent in fact
and appearance when providing auditing and other attestation
services.
What
does it mean to be objective? Is it possible to be truly
objective? Or is everything we see, do, or say affected
by our values, beliefs, and our preferences for certain
outcomes? When someone says, “I’m going to be
totally objective …,” how many of you, like
me, prepare for an expression of personal feelings, prejudice,
or interpretation obviously (at least to us) meant to persuade
us to the speaker’s subjective point of view?
When
I have asked CPAs to recount instances of objectivity in
their careers, most have identified situations where they
felt compelled to deliver bad news to a client or employer
based on an analysis they had performed. I cannot recall
a single occasion when a CPA classified delivering happy
news to a client or employer as an exercise in objectivity.
Our
experiences condition us to think that audit or accounting
failures occur because of a lapse in objectivity, a conflict
of interest, or a breach of independence. In other words,
accountants and auditors must be able to say no when faced
by overwhelming pressure to say yes.
Another
clue to the meaning of objectivity lies in its link to conflicts
of interest and auditor independence. Although conflicts
of interest and independence in fact deal with a person’s
state of mind, which is usually unknowable, we generally
gauge whether we have a conflict or have lost independence
by assessing the conclusions that others would draw from
the appearance of the situation. While objectivity may be
a state of mind, what really count are the perceptions in
the minds of others.
The
‘Fingerpost’ Concept
The
late-16th-century English philosopher Sir Francis Bacon,
vexed by the bias in applied scientific experimentation,
advocated a class of people to act as “fingerposts.”
The English government supported legitimate scientific research
through the Royal Academy of Sciences, but had difficulty
ascertaining whether aspirants’ claims were of legitimate
scientific merit. Fingerposts were financially independent
gentlemen with no interest in the success or failure of
a scientific endeavor or the scientist conducting it. Their
role was to observe experimentation objectively and report
independently to the funding committee. Established scientists
eventually sought fingerposts with impeccable reputations
for objectivity and honesty to observe their work in order
to build credibility with the committee. Charlatans also
sought to purchase credibility in order to receive even
more lucrative funding. The academy effectively ostracized
fingerposts that “sold out.”
We
currently face problems related to objectivity, conflicts
of interest, and independence that threaten the practice
of accountancy. So far, the result has been an increasing
number of rules that forbid certain practices or limit the
scope of services a CPA can render an audit or attest client.
Efforts to create a conceptual framework for independence,
or even to establish fundamental principles of independence,
have been poorly received by those outside accounting. External
critics of the threats-and-safeguards approach to independence
express cynicism about its viability. In their experience,
firms underestimate or ignore threats and overestimate the
power of safeguards. For example, how do you safeguard the
career of someone who says no when it is in everyone else’s
best short-term financial interest to hear a yes?
Accountants
cannot ignore the realities of others’ perceptions
about independence and objectivity. When others express
concerns about possible biases, we must listen. Our objectivity
exists in the minds of others, not in our assertions about
ourselves.
As
in the case of the fingerpost, objectivity and independence
flow from individual commitment to a group of people with
similar values and the desire to be held in esteem and accepted
by them. Integral to Bacon’s plan was the financial
independence of the fingerpost: Their livelihood did not
come from their “professional” observations
of experiments. Those
suggesting that an independent party hire and pay auditors
express the modern version of Bacon’s innovation.
Moreover, the Sarbanes-Oxley Act has heightened the awareness
of public accountants and internal accountants about the
preeminent role of an independent audit committee of a board
of directors in the oversight of financial reporting functions.
The
Pendulum of Professionalism
Whether
working internally as an accountant or externally as an
auditor, an individual’s most powerful potential incentive
to be objective and independent, as well as the most powerful
potential protector of such an individual when exercising
objectivity and independence, is a strong profession. A
strong profession, however, thrives only when membership
in it outweighs the demands and rewards of current employment.
When
the pendulum swings back to professional orientation, then
we will see progress on independence principles. Until then,
the demand for additional rules will continue.
Robert
H. Colson, PhD, CPA
Editor-in-Chief
rhcolson@nysscpa.org
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