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Accounting and Regulation and Ethics, Oh My!

Mary-Jo Kranacher, MBA, CPA, CFE

As NYSSCPA staff members traveled around New York State informing CPAs and other financial professionals about recent legislative reform, they began each session by explaining the history of the accounting profession. It went something like this:

  • In the late 1800s, the United States transformed from an agricultural society to an industrial one. Equity and debt financing became an integral part of larger corporate entities whose managers were not necessarily the owners. To enhance the integrity of the value of the stocks and bonds, detailed record-keeping systems were devised. As a result, individuals with specialized accounting knowledge were needed to help third-party investors rely on the financial information. And so the CPA profession was born.

This history points to the accounting profession's raison d'être—the public trust. Yet if we examine our recent history, we can see that this noble cause sometimes gets lost in the rush to a different set of values and priorities—a fatter bottom line. Every time unscrupulous behavior deals a blow to our financial markets, our leaders vow to implement stronger regulations. It wasn't long ago that the Sarbanes-Oxley Act was passed in response to the Enron and WorldCom scandals, supposedly marking the end of self-regulation for CPAs.

Over the past several years, the accounting profession has attempted to refocus on the purpose that initiated our professional existence. Ethics content has been added to college-level accounting courses and in most states CPAs are required to complete continuing professional education (CPE) in accounting ethics. But how should a CPA handle an ethical dilemma in the real world? Let's discuss some practical guidelines to follow when confronted with such a situation.

Steps to Resolution

The first step to resolving a problem is to recognize that an ethical question exists. This may sound simplistic, but ethical standards are dynamic and not always intuitive. For example, years ago CPAs were not permitted to advertise their services, but today this is readily accepted as a standard business practice. Keeping abreast of current rules and regulations is critical to knowing if a situation may present a problem.

Next, consider what approaches you as a CPA could take to resolve the issue. You'll want to ensure that you have access to all the relevant facts and can identify who may be affected by your decision. The stakeholders could be anyone who will be impacted—positively or negatively. Think about how each party might be affected in the scenarios under consideration. Then, drawing on your education and experience, use your best judgment to make a choice with which you can feel comfortable. Apply the following test: How would you feel if your decision were printed on the front page of your daily newspaper?

Lastly, before choosing one of your options, check to ensure that it is in compliance with current rules, regulations, and laws. Keep in mind Rule 102-4 of the AICPA Code of Professional Conduct, which “prohibits a member from knowingly misrepresenting facts or subordinating his or her judgment when performing professional services.” The rule goes on to state: “If, after discussing his or her concerns with the appropriate person(s) in the organization, the member concludes that appropriate action was not taken, he or she should consider his or her continuing relationship with the employer.”

Difficult Decisions

Even if you answer one ethical question, there may be other lingering issues that make it impossible to continue with the employer or client. Resigning from the job or engagement is certainly not something to be taken lightly, especially when the unemployment rate is almost at 10%. Maintaining documentation as the situation unfolds is essential, and you should also consider whether you need to consult with an attorney on the matter.

Legislative reform has expanded the scope of public accountancy to include accounting, tax, financial planning, and management advisory services; the public is expecting CPAs to be objective and professionally competent, and to exhibit integrity in all their work, whatever the context.

It's unrealistic to expect that rules and laws will anticipate every possible situation. When it comes to resolving ethical dilemmas, CPAs have the brains and heart to know, and do, the right thing—if only we can muster the courage.

Mary-Jo Kranacher, MBA, CPA, CFE. Editor-in-Chief.

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