On Professional Ethics and the CPA in Industry

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AUGUST 2006 - I have minor comments related to two thoughts in Lou Grumet’s Publisher’s Column in April, “Professional Ethics and the CPA in Industry”: 1) “Some of the ethical dilemmas faced by CPAs in industry are very different from those faced by CPAs in public accounting firms” and 2) “The public accounting firm’s purpose is crystal clear. … It is their raison d’etre. But who is the ultimate client for a CPA working in private industry? The CPA’s employer, or the public?”

Is there a basic difference in the critical nature of integrity required by accountants regardless of the organizations which provide their salaries? I wonder if there is a difference in the attitude that should prevail. I am inclined to think that there isn’t, although I haven’t explored this thought extensively.

Isn’t there always a public interest, possibly more subtle in the case of an accountant in a privately owned company than for an accountant in a public accounting firm? (The comments of public accountants in moments of candid expression reflect the powerful value of increasing the firm’s bottom line through “giving the audit client what the client wants.” Such a comment undermines what is perceived to be required of public accountants.)

Management accounting always seemed closely related to economics, which I taught for many years. I always found the Employment Act of 1946 identified a powerful economic goal. The declaration of policy concludes with:

[T]o foster and promote free competitive enterprise and the general welfare, conditions under which there will be afforded useful employment opportunities, including self-employment, for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power.

Management accounting is actually an implementation of microeconomic principles. It has as its objective the maintenance of an accounting system and related analyses that ensures an optimum level of resource use in all companies, both public and private. Many private companies provide some type of financial information when they seek lines of credit or loans from banks or venture capital groups. Many such companies do have external audits; many don’t need them, especially in communities where attentive bankers know their business clients and trust what financial information such clients present, although it may be minimal.

Accountants employed in private companies also have a commitment to integrity: They adhere to professional accounting standards in classifying transactions and in preparing financial statements. They are as sensitive to omissions and manipulation of financial data as are external auditors. Some private companies, even small ones, are owned by families that are not currently involved in the entity’s day-to-day activities. Family members depend on information and analysis that reflects the reality of what is happening to keep informed about their company.

The circumstances may differ, but accountants grounded in respect for high ethical standards are valuable in non–publicly owned entities. For example, a private company whose accounting manager is willing to record owners’ personal expenses as business expenses may be denying employees higher wages because the recorded costs may be too high to generate sufficient profit to justify salary increases. Of course, if we had a perfectly competitive model, which is one of the delightful models for economic analysis, then the owner who was extracting funds for personal expenses would undoubtedly continue his high prices and soon a declining demand dooms his entire business.

Ethical accountants in all our businesses make a critical contribution to providing the reality of financial status and financial success. Managers then have reliable financial information for making decisions, employees receive a just wage, and the economy has products that reflect optimum use of resources and fair prices. (I know I have oversimplified, but I hope I haven’t distorted the situation.)

And as I read the GAO bulletin of January 1997, Reliable Financial Information: A Key to Effective Program Management and Accountability, I am reminded of the critical need for government accountants who are committed to an impeccable quality of ethical behavior:

It is also difficult to make fully informed budget decisions when information on actual costs for programs is incorrect or known.
The federal government has a responsibility—and obligation—to American citizens to be a good financial steward of and properly account for their tax dollars. Decades of neglect and failed attempts to improve financial management systems have left the federal government ill-equipped and unprepared to adequately fulfill this responsibility.
The federal government continues to have—as related to financial reporting—high-risk agencies. The redressing of unbelievably unreliable financial reporting systems has taken a long time.

The New York State Society of CPAs is astute. Its Quality Enhancement Policy Committee will be able to state that an accountant, regardless of the entity for whom he works, has the same basic ethical responsibility. As we read the disclosures of alleged ethical violations among pharmaceutical companies, news reporters, lawyers, doctors, CEOs, priests, and college presidents, we realize the problem of insensitivity to the value—and power—of ethical behavior. The NYSSCPA’s committee has a challenging task.

Mary Ellen Oliverio, PhD, CPA

Note: The writer is a former member of The CPA Journal’s Editorial Board. She taught for many years, most recently at the Lubin School of Business of Pace University, New York, N.Y.





















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