Ignorance of the Law Is Not a Defense

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JUNE 2006 - In this digital age, most of us have installed software on a computer. It’s basically the same process every time. After downloading a program off the Internet or loading a CD, you click “Next” through a series of screens before arriving at the ubiquitous License Agreement. You know the one: warning you to PLEASE READ THE FOLLOWING LICENSE AGREEMENT CAREFULLY; written in legal jargon; and the approximate length of War and Peace. Below the Agreement are two small buttons asking you to either accept or decline the terms of the License Agreement. In order to move forward, you must accept the terms of the Agreement.

So what usually happens at this point? Do most people carefully read the Agreement? Mark key stipulations with a red pen? Call their lawyer? No. For better or worse, most people simply click the button to accept the terms without even reading the first sentence. After more finger-numbing “Nexts,” the software is installed and, more often than not, everything is fine.

But let’s say that—having hastily accepted the Agreement—some users unknowingly violate its terms by installing a copy of the software on another computer. The software company discovers the violation and decides to sue. Can the users say they are not liable because they didn’t read the Agreement? Of course not! Once users accept the Agreement, they are responsible for upholding its terms—whether they have read them or not.

The CPA’s Responsibility

The same applies to New York State CPAs when it comes to upholding New York State laws. The very fact that practicing CPAs in New York State have been granted a license means they have implicitly agreed to obey the state’s laws, even if they haven’t read them all.

Knowing the law is a CPA’s responsibility and, like the case above, ignorance is not an excuse. CPAs can make a business decision to not practice in New York State, or to not practice in certain areas. But once CPAs have made a decision to practice in New York State, or to audit certain state-regulated entities, they have the responsibility to know and uphold all the state’s laws affecting their practice. Although this may sound obvious (of course New York State CPAs should know and uphold New York State laws!), it may be so fundamental … so seemingly simple … that it may be overlooked.

CPAs who provide professional services to a client that is regulated by a state agency must fully understand applicable state statutes and regulations to ascertain whether state law includes requirements pertaining to the services to be rendered to that client. Interpretation 501-3 of the Society’s Code of Professional Conduct states, in part, “Engagements for audits of government grants, government units, or other recipients of government monies typically require that such audits be in compliance with government audit standards, guides, procedures, statutes, rules and regulations, in addition to generally accepted auditing standards,” and members are obligated to follow such requirements. 501-3 goes on to say that failure to follow such requirements “is an act discreditable to the profession … unless the member discloses in his or her report the fact that such requirements were not followed and the reasons therefor.” Generally speaking, the law rarely contains similar exceptions.

It is important to understand the context of rules governing the profession. Per 501-3, disclosing to the client that state law is not being complied with may well neutralize the ethics issue posed by failure to follow state law. But the profession’s rule 501-3 does not mitigate other consequences of noncompliance with the law. Violations of law can lead to far more serious consequences to CPAs than loss of membership in their professional society. The possible consequences of breaking the law can include loss of license, fines, jail time, and the possibility that a CPA’s client may lose funding from the state program, because the client would be in violation of state law as well.

Some assume a law does not exist unless they know about it. They are setting themselves up for a very rude awakening. Others mistakenly believe that, where they conflict, professional standards must be weighed against state laws. This, too, is untrue. Where possible, professional standards must be read consistently with state laws; where impossible, the law—statutes, appellate court decisions, and usually even regulations—takes precedence. If you doubt this, you can confirm it with your lawyer, your professional liability insurance carrier, or the State Board for Public Accountancy. While it is true that occasionally statutes are declared unconstitutional, court cases overruled, or regulations overturned—and the law is thereby changed—these are the exceptions, not the rule.

Knowing and upholding the law is an essential part of professional competence and protecting the public interest. The profession, the state, and the public expect CPAs to know and uphold the law, and they deserve nothing less.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA





















The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

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