Responsibility for Ethics: Firms or Individuals?

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APRIL 2005 - An NYSSCPA task force is currently discussing how the accounting profession deals with unacceptable behavior; specifically: What would the profession’s peer review and ethics programs look like if we were starting from scratch?
This question is interesting because assigning responsibility to ensure the profession’s core concepts of integrity, independence, and competence has been approached in an apples-and-oranges manner.

Licensing agencies’ disciplinary programs and voluntary organizations’ ethics programs deal with individuals. A CPA losing her license for disciplinary reasons, however, is an infrequent occurrence. The AICPA’s and the NYSSCPA’s ethics programs also deal with individuals, and the result of an ethics complaint can include termination of membership. If the individual is also involved in litigation, however, the ethics case is deferred until the litigation is adjudicated, which in some cases takes years.

The AICPA peer review program, however, which is required to operate independently of its ethics programs, deals with firms, specifically their quality-control systems. Peer review’s focus has historically been remedial, although many state licensing agencies require peer review for firm registration. Peer review is designed to modify firms’ behavior in generally nonpunitive ways, and firms are not shut down for failing to comply with peer reviewers’ recommendations unless they persist over several review periods, at which point a firm can be dropped from the program. How a CPA firm deals with ethical issues usually depends on the size of the firm, regardless of its participation in peer review. In large firms, issues that are generally considered “ethical” fall under “quality control,” and most of them are addressed within the firm’s policy and procedures manual.

A recent change of direction came with the Sarbanes-Oxley Act, which requires PCAOB inspections of all public accounting firms that audit public companies. Although the PCAOB has disciplinary authority, it hasn’t conducted enough inspections yet for anyone to know the program’s long-term implications. But many CPA firms fall outside of the PCAOB’s inspection program, and although the public expects peer review or PCAOB inspections to look at individuals, they don’t. Moreover, peer review programs cannot share information with ethics programs, even if the information concerns an individual that is involved in an ethics complaint.

Most CPAs and firms recognize that integrity, independence, and competence cannot be turned on and off like a switch. But would they be higher if the ethics and peer review programs were allowed to work together more than they currently do? If peer review were to become more disciplinary in nature, however, and important information from peer review results were to pass to ethics enforcement, then due process, to protect the “innocent until proven guilty” rights of both individuals and firms, would become more important than ever.

Where Do You Want to Go?

I’m reminded of Lewis Carroll’s Alice in Wonderland, when Alice gets lost and comes to a fork in the road. She sees the Cheshire cat in a tree: “‘Which road do I take?’ she asked. ‘Where do you want to go?’ he responded. ‘I don’t know,’ said Alice. ‘Then,’ said the cat, ‘it doesn’t matter.’” Similarly, CPAs must recognize that knowing where you want to go does matter, and if they themselves—as well as regulators—don’t answer these questions, no one will be smiling. They’ll still be lost, even though they helped lay the roads themselves. But because the ultimate goal is serving the public, finally confronting that apples-and-oranges question—firms or individuals?—is worth the effort.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA




















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