Monthly Archives: January 2016

Looking Back, Looking Forward

Last year, the New York Times reported that a leading public accounting firm had agreed to pay $4 million to settle accusations by the SEC that it violated independence rules by lobbying on behalf of two of its audit clients.  Clearly, lobbying for an audit client is a non-starter as lobbying or advocacy impairs independence. But, what about lobbying for non-attest clients – is lobbying ever acceptable professional behavior for public accountants? 

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The most cited concern of leaders in public accounting today is seeing the value of traditional services plummet and being rendered obsolete by technology, according to Daniel Hood in “Losing Sleep” (Accounting Today, September 28, 2015).  As the profession struggles to maintain its relevance and evolves to meet market demands, public accounting firms can be expected to add lobbying and many other non-traditional services to their repertoire. The test of whether non-traditional services can be performed within the norm for acceptable professional behavior is whether they harm or maintain the accounting profession’s reputation for integrity and objectivity.

In the 1980’s the AICPA began relaxing its rules and guidance that identified certain business activities and services as being incompatible with the practice of public accounting. Today, there are no hard and fast rules and determining the scope of public practice is somewhat left to the public accountant’s discretion, constrained primarily by the requirement to exercise sensitive professional and moral judgment in assessing whether an activity is consistent with one’s role as a professional.

The effectiveness of that constraint depends upon there being a consensus view of the role of a professional public accountant and upon the quality of an individual’s judgment as affected by his or her level of moral development, awareness of professional standards, and the context in which decisions about scope of practice are made.  It is not surprising that public accountants differ in their judgment about whether a non-traditional service such as lobbying is a professional service or an un-professional one.

“Sensitive professional and moral judgment” describes the type of judgment informed by awareness and fidelity to the Principles of Professional Conduct (“Principles” as stated in §0.300 of The AICPA’s Code of Professional Conduct) in service of our calling as public accountants to serve the public interest for reliable financial reporting. The Principles express the basic tenets of ethical and professional conduct requiring public accountants to always act with the highest sense of integrity, maintain objectivity, be free of conflicts of interest, and exercise due care.

Fidelity to the Principles imposes a cost on public accountants not imposed on business people.  Fifty years ago, John L. Carey, a long-time leader and former executive director of the AICPA, described the cost as follows: “… the professional attitude demonstrates that the obligation to serve the public is accepted as a primary obligation, and that financial gain is relegated to second place. To gain public recognition as a profession it is necessary not only to accept that obligation, but to act in such a way that the public will believe it.  This requires renunciation of many practices that are wholly acceptable in business, but which, if carried over into professional practice, would tend to make it indistinguishable from business, and would impair independence and the quality of professional service.”

Fidelity to the Principles distinguishes a true professional accountant from non-professionals of whom objectivity is neither required nor necessarily expected.  Recent scandals at General Motors, Johnson & Johnson, and Volkswagen to name a few, remind the public of what Milton Friedman said about the purpose of business: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”  Friedman’s view of business people and their limited obligation to the public interest is in stark contrast to Carey’s description of the professional public accountant and his or her primary obligation to serve the public interest.  And, the contrast has mostly to do with objectivity.

Objectivity has two facets – in thought and expression. Being objective in thought means one is exercising sensitive professional and moral judgment with integrity, which means one is able to justify reasons that others should not reject for being moved to act one way or the other. Being objective in expression means one is communicating everything that needs to be communicated in a manner it is understood accurately.  The two facets are neatly and memorably summed-up as Think Straight, Talk Straight, the aspirational motto of the once venerable public accounting firm Arthur Andersen, LLP before Enron et al.

If anything, the Enron debacle teaches how we are able to reason and convince ourselves that we are being objective even when our lack of objectivity is clear to others.  Max Bazerman and Ann Tenbrusel put it bluntly in their book Blind Spots (Princeton University Press, 2011): “…when people have a vested interest in seeing a problem in a certain manner, they are no longer capable of objectivity.” Ben Franklin put it this way: “So convenient a thing is it to be a reasonable creature, since it enables one to find or make a reason for everything one has a mind to do.”

We can easily lose sight of our calling and infringe our fidelity to the Principles when we get caught up in emotional conflicts with clients, our firms, and ourselves. The push to add new services and products, to attract new clients, and the pressure of pleasing profitable but difficult clients can cause us to put on blinders and not even notice when we become blind to our lack of objectivity.

In his book The Power Of Noticing (Simon & Schuster, 2014), Bazerman observes: “Most of us think we are better-than-average drivers, have smarter-than-average children and choose stocks or investment funds that will outperform the market – even when there is clear evidence to the contrary.  We discount facts that contradict the conclusions we want to reach, and we uncritically accept evidence that supports our positions.  Unaware of our skewed information processing, we erroneously conclude that our judgments are free of bias.”

If we are so susceptible to lacking objectivity in our personal lives and while performing traditional professional services, how much more susceptible will we be performing non-traditional services such as lobbying?  Is objectivity in lobbying realistic or even expected by the public? According to Gallup Surveys year after year, the public rates lobbyists at the bottom of the professions for honesty and ethics.

In Reputation Rules: Strategies for Building Your Company’s Most Valuable Asset (McGraw Hill, 2011), Daniel Diermeir emphasizes how we live in social environments and how our behavior is reinforced by observing others. He says that culture really matters and that people will adjust to their environments and to the behavior of others—sometimes to an astonishing degree. As a cautionary note, he says that things can easily shift to an equilibrium in which people are looking out only for themselves, particularly when people are unsure of what is expected of them and the consequences of their actions are not clear.

At the risk of further damage to the profession’s 100 year-old reputation for integrity and objectivity, the evolution of public accounting firms into lobbying and other services may not be something that should be left to individual discretion or chance.  Because we greatly value our reputation, we may need to take the steps necessary to protect it from ourselves.

In the 1999 movie The Matrix, Neo (Keanu Reeves) was given the choice to take the red pill or the blue pill. In pop culture, this has since come to represent the choice between embracing the sometimes painful truth of reality (red pill) and the blissful ignorance of illusion (blue pill).  As we make plans to meet market demands and evolve our firms, it may be time to take the red pill, see reality, remember our calling, and govern ourselves accordingly.

 

George DuRant is a member of DuRant, Schraibman & Lindsay, LLC in Columbia, South Carolina.  George is a past president of the Central Chapter and has been a member of SCACPA and AICPA since 1975.  He currently serves as a member of the AICPA’s Joint Trial Board.

This article was published in the Fourth Edition 2015 of the South Carolina Association of Certified Public Accountants CPA Report, pages 24-25.