Current Events Meet CPE in Recent Ethics Course

By Simon Eskow

NEW YORK—Ongoing accounting and corporate reporting scandals underscore the pertinence of a year-old state-mandated ethics course that probably would have attracted few CPAs in the early 1990s, a lecturer on ethics said at a recent four-credit CPE session.

“You’re here for the four credits,” John P. Laschenski, a member of the New York State Board for Public Accountancy, said to the 130 CPAs in attendance at his Ethics Update 2002 session on August 13 at the Helmsley Hotel in New York City. But, he added, the focus on scandals, beginning with the exposure of the Enron debacle in 2001, has made ethics in the profession an unavoidable, national hot topic imperative for all.

New York state enacted the four-credit ethics requirement a year before Enron precipitated a flood of corporate fiascoes that has drawn fire on the profession. The New York State Board of Regents, during then Chancellor Carl T. Hayden’s term, established the requirement—which went into effect in September 2001—to “raise the sensibilities of the CPA profession,” according to the then-chairman of the state board of accountancy. Now, in the wake of Enron, Adelphia and everything in between, Laschenski focused on recent rules issued by the Securities and Exchange Commission, the American Institute of CPAs, and the Government Accounting Office, but added a notable emphasis on auditors and an urgent message for CPAs to return to their ethical roots.

“Skepticism over whether CPAs have ethics at all has been seen much more in the press lately,” Laschenski said. “It’s a shame. We have a history of ethics in the profession.”

Ethics rules arose amid great “angst and debate” in the AICPA 50 years ago, Laschenski said, when, for example, CPAs often had a direct financial stake in their clients’ companies. The AICPA developed six underlying principles directing CPAs to serve the public interest with integrity and independence. Being human, all CPAs often faced a conflict of interest that put the public’s interest at risk, Laschenski said.

Playing by the Rules

Laschenski spent much of his session discussing changes to regulations, rarely straying from straightforward description. He, however, did depart from his agenda to talk about the battle in the last few years over nonaudit services and scope of practice reflecting the same kind of “angst and debate” that defined the development of the basic principles in the 1940s and 1950s.

Laschenski pointed to the SEC’s proposed rules describing professional services relationships between CPAs and clients that allegedly impaired the CPA’s independence. In 1997 and 1998, former SEC Chairman Arthur Levitt saw “problems” in auditors providing nonaudit services to their clients and set out in an exposure draft to prohibit firms from providing them to publicly traded companies. In congressional hearings, however, Chairman of the House Energy and Commerce Committee Rep. Billy Tauzin responded to the exposure draft with a threat to cut funding to the SEC’s budget, forcing Levitt to back down. According to Laschenski, those services were still allowed under SEC rules (until the Sarbanes-Oxley Act of 2002 passed earlier this summer).

“There was a lot of political pressure and intense lobbying by some CPA firms” to reject the prohibitions, Laschenski said. That resistance re-emerged in more hearings in 2000 before the Senate and the SEC, Laschenski said when quoting an article in a magazine published by TIAA-CREF, one of the largest financial service providers. TIAA-CREF President John Biggs published the article in the company’s Participant magazine, stating that representatives of three of the Big Five and the AICPA testifed that few “clients used auditors for nonaudit services and those that did used them very little.”

Subsequent studies indicated that the average ratio of revenue generated by nonaudit services to audit services is about 3-to-1, Laschenski said. The press is making “judgments” about what these numbers mean, but the information is not that good, although it has become obvious that audit fees did become problematic, Laschenski said.

“There’s no question that there are problems with audit fees,” he said. “They are too low. If you say the audit is a commodity, then you are part of the problem.”

Laschenski said firms began to lower their audit fees as loss leaders in the mid-1980s when firms “became seduced by computer consulting” and its promise of greater revenue.

Laschenski said the debate would continue in New York this fall as the New York State Board for Public Accountancy holds hearings on scope of practice, a subject which he said was one of the most difficult to articulate.

New Ethics CPE Requirement

The course fulfills a new requirement under state law mandating that CPAs take a minimum of four hours in professional ethics.
If CPAs decide to complete their CPE in a concentration, they have two options regarding the ethics component. They may complete 24 hours in the concentration and 4 additional hours in a general ethics course, or if they choose to complete an ethics course in taxation, auditing or accounting, they may include this in the 24 hours of study in the concentration area of taxation, auditing or accounting.