Reporting Illegal Acts Externally

A Conflict between Confidentiality and the Public Interest

Kurt Pany, PhD, and Jian Zhang

According to Article II of the AICPA's Code of Professional Conduct, CPAs “should accept the obligation to act in a way that will serve the public interest. … The public interest is defined as the collective well-being of the community of people and institutions the profession serves” (ET section 53). In addition, Rule 301 states that a CPA “in public practice shall not disclose any confidential client information without the specific consent of the client” (ET section 301). Similarly, Interpretation 501-9, “Confidential Information Obtained from Employment or Volunteer Activities,” generally limits disclosures to a situation in which it is required or permitted by law and authorized by the client (ET section 501.10). Although the first two requirements above are well known and expected of public accountants, they periodically clash with one another. This conflict between the public interest and confidentiality exists not only in U.S. ethics (and auditing) standards, but also in international standards. The ensuing discussion focuses on one such scenario: audits in which an auditor knows of a likely illegal act that the client refuses to appropriately remediate and disclose.