Category Archives: Articles

The Times They Are a-Changin’ – Will you Rent or Own?

During SCACPA’s CPA Summit last November, Ron Baker, an influential and nationally recognized leader in the public accounting profession, suggested that competition for auditing services from non-CPA, non-professional firms may be not too far in the future.  If or when that happens, he predicted the disruption within our profession might be similar to that being experienced by the taxi cab industry because of UBER.

Barry Melancon, president and CEO of the AICPA, believes the accounting profession must evolve into something else to be successful in the future.  He warns: “If you think your competition is the CPA firm down the street, you’re missing the real threats… competition is no longer defined by the traditional ground rules.” (Accounting Today, December 8, 2015)

David Bergstein, a strategic account manager with the Accountant and Advisory Group at Intuit, believes it is time to rebrand and reposition the CPA because new business models are already doing what CPAs typically did in the past, minus financial statement preparation and attestation.  Looking at the messaging of their web sites, he observes public accounting firms of all sizes leading with advisory services rather than emphasizing their status as CPAs.  He sees marketing strategy being focused on helping clients become more successful rather than on the profession’s higher calling to serve the public interest. (Accounting Today, December 27, 2015).

Baker, Melancon and Bergstein are people in the know; and, they see the future of the accounting profession much different from its past.  Everything changes; it always has; it always will.  Bob Dylan’s lyrics to The Times They Are a-Changin’ are as apropos today as they were fifty years ago:

Come gather ’round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You’ll be drenched to the bone
If your time to you is worth savin’
Then you better start swimmin’ or you’ll sink like a stone
For the times they are a-changin’

Melancon says even though the profession is changing and we need to change, we don’t have to throw away the qualities that have made us successful in the past. The qualities he is talking about are: our specialized skills and knowledge, our adherence to a very high-minded Code of Professional Conduct, and most importantly our commitment to serving the public interest. Whether we remain a profession or de-professionalize depends upon how we uphold those qualities.

As change occurs, it cannot be given short shrift that a public accountant’s primary role is to serve the public interest.  We must own this fundamental principle and exemplify it across all service lines. To do that, we must be clear about what it means to serve the public interest. The United States Supreme Court described it in United States v. Arthur Young & Co. as follows:

“By certifying the public reports that collectively depict a corporation’s financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation’s creditors and stockholders, as well as to the investing public. This ‘public watchdog’ function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust.”

Although the public watchdog tag may be an overstatement as far as being descriptive of any legal duty owed the public, it does express the public’s expectations for public accountants.  We should not complain that those expectations are too high because it is our own Code that creates them, even requiring service “beyond the requirements of laws and regulations.”

Most public accountants understand and honor the primacy of the public interest when performing attestation services. But some do not realize the same primacy applies with respect to non-attest services. For example, the Code of Professional Conduct requires public accountants to resolve a conflict between a client’s interest and the public interest in favor of the public interest, regardless of the type of service being performed. That means we really are not free to advise clients to take actions not in the public interest just because there is no rule or law preventing such action or because a rule or law is unclear.  Those who do not resolve conflicts in favor of the public interest are either misinformed about the Code or only want to rent the reputation of those who have bought-into and own the principle.

As is true of all professions, membership in the accounting profession is composed of owners and renters.  The owners have a long-term perspective and the renters have a shorter-term perspective.  The owners are guided by the old saying of the wise that “a good name is rather to be chosen than great riches…” Proverbs 22:1.  In contrast, renters are susceptible to exploiting the profession’s reputation for high-principled conduct to achieve short-term profits.  Renters are much less concerned about residual values than are owners. When we consider the profession’s most embarrassing public failures, it is easy to see conflicted renters at every turn and owners in the background who were unable or unwilling to intercede for the sake of the profession, let alone the public interest.

As we change, as competitive and demographic pressures result in more public accounting firm combinations, and as the quest for greater profits intensifies, we are likely to see more renters in the strategic management positions of our firms.  Successful firm management may become more defined by how much this year’s revenues, new client additions, and profits exceeded last year’s rather than how well the firm has served the public interest. Simply put, firms may begin to measure success based more on efficiency than effectiveness.

Noam Scheiber in his January 10, 2016 New York Times article “Defying the Medical Machine” describes how that sort of business model is playing out in the medical profession. He reports that hospitalists (doctors who supervise patient care inside of hospitals), can find themselves in an emotional debate in which a hospital’s imperative to increase efficiency (see more patients and increase revenues) is often at odds with the deference traditionally accorded to doctors.  Scheiber describes how some hospitalists have become demoralized over the loss, to some extent, of their ability to exercise their professional judgment.  He quotes one hospitalist as saying: “we’ve trained to be leaders, but they [hospital administrators] treat us like assembly line workers.”

It is not that administrative procedures and controls are unprofessional; it is that they sometimes do exact a toll on personal professional autonomy; i.e. a toll on the capacity to make informed un-coerced decisions without subordinating one’s professional judgment to others, including other professionals and non-professionals.

Professor T.J. Fogarty, one the most prolific authors of scholarly research in accounting, has written that: “as personal, professional autonomy is diminished, the distinctiveness of the profession declines, perhaps to the point when the transcendent obligation of being a moral actor seems quaint and superfluous.”  Does service in the public interest seem quaint and superfluous to you?

Is the public accounting profession on the road toward de-professionalization?  Although we tend to believe that our behavior is and always will be acceptable and compliant with the Code of Professional Conduct, it is more likely that we really don’t know how we will actually behave as the profession evolves.

In The Lucifer Effect (Random House 2007), Philip Zimbardo explains “how situational forces and group dynamics can work in concert to make monsters out of decent men and women.” He observes that “most of us know ourselves only from our limited experiences in familiar situations that involve rules, laws, policies, and pressures that constrain us.  We go to school, to work, on vacation, to parties; we pay the bills and the taxes, day in and day out.”  Zimbardo asks the question we might ask ourselves in the face of all the changes being predicted by the experts: “what happens when we are exposed to totally new and unfamiliar settings where our habits don’t suffice?” His answer, based on the “Stanford Prison Experiment” which he conducted at Stanford University in August 1971, is that situational circumstances and systemic factors can easily combine to bring out the worst in each of us.

If you intend to remain an owner throughout your career, you may want to double-down on your commitment to serve the public interest because it is likely to get tougher.  It is going to take some courage because most clients prefer to pay us for looking after their interests first rather than the public interest (e.g. think big corporate tax inversions).  Most clients want us to follow the rules but interpret and apply them in their favor rather than as intended (and we do know the difference).  Beware that putting the public interest first may cause you to be perceived as quaint and superfluous by your peers who have chosen to be renters.  Know this though: the future of the profession as a profession depends on you demonstrating your values, principles and moral reasoning with the renters before they bring out the worst in all of us.

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.

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? 


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.

Group Think

Assume you have been elected to the Board of Directors of the not-for-profit community hospital in your hometown. This honor has been bestowed on you because of your reputation for integrity and your professional expertise as a CPA. You intend to fulfill your fiduciary duties of loyalty and care to the hospital by putting its best interests ahead of all other interests and by acting with due care in monitoring and directing hospital management.

Scheduled for vote at your first meeting is a proposal for the hospital to purchase an undeveloped tract of land owned by one of the hospital’s founders who is also the current chairman of the board. The contract for purchase has been strongly recommended by the hospital’s CEO, a much admired but intimidating executive, who asserts the land might be needed one day for an ambulatory care facility.

You know related party transactions deserve extra scrutiny, especially in not-for-profit organizations. But, the CEO has given short shrift to your concerns about the need, timing and cost of the property other than providing you with an appraisal performed by another board member indicating appraised value in excess of the price being paid.

Because it is the beginning of your tenure on the board, you are not well informed of the hospital’s financial condition or its plans for the future. You acknowledge other board members and the CEO knowing far more about those matters than you. And, all indications are that regardless of how you vote, the board will approve the purchase relying primarily on the CEO’s recommendation.

Although your vote may be of no immediate consequence to the hospital, your vote could be of great consequence to the way other board members regard you going forward. How should you vote?

If you vote no you may look prudish and disagreeable to other board members; and likely, some will begin to think it was a mistake to bring you on board. Furthermore, voting no may be seen by some as distrust for the collective credibility of the board, creating some polarization going forward.

If you vote yes you can feign respect and trust for the board’s judgment thereby demonstrating your intent to be a team player. You might even convince yourself that yes is the right vote because everyone else is ahead of you on the issue and there is no clear reason why it should not be approved.

Welcome to groupthink. Groupthink describes a group deliberation that tends toward uniformity and censorship. At the risk of being censored, no one rocks the boat; no one asks really hard or unpleasant questions. For more on this very common phenomenon, read Cass Sunstein and Reid Hastie’s new book Wiser – Getting Beyond Groupthink to Make Groups Smarter, (Harvard Business Review Press, 2015).

But, as CPAs we do not get a pass to participate in groupthink.

The primary explanation for groupthink is the natural inclination to act in one’s self-interest. Under the assumed facts, preserving and maintaining the respect and trust of other board members is a powerful incentive to act in your self-interest. That is not to say self-interest is a bad thing or that you should always act altruistically. However, acting in your self-interest is problematic when doing so conflicts with a higher ordered interest such as in this case the hospital and its stakeholders’ interests.

Simply put, you have a conflict of interest if you are in a relationship with another requiring you to exercise judgment in the other’s behalf (such as being a director of the hospital) and you have another interest (such as self-interest) tending to interfere with the proper exercise of judgment in that relationship.

The AICPA Code of Professional Conduct and its Conceptual Framework require a CPA to be aware of potential and actual conflicts of interests. The Code requires a conflict to be evaluated on the basis of whether it poses an unacceptable threat to the CPA’s integrity and objectivity; and if so, the Code requires safeguards be put in place to bring the threat to an acceptable level or disengage from the matter creating the conflict.

Previously, this column has addressed what the Code means by integrity. Acting with integrity involves more than just being truthful; it involves acting consistently with the cardinal virtues of wisdom, justice, temperance, and courage. Acting with objectivity means exercising of sound judgment, impartiality, and fairness and communicating transparently.

If you have any difficulty seeing how those virtues apply in the boardroom, consider what your expectations would be of an independent CPA brought in to advise the board on the subject land purchase. You would not expect him or her to punt. Instead, you would expect to see a demonstration of wisdom, justice, temperance, courage, sound judgment, impartiality, and fairness on behalf of the hospital. The same is expected of a CPA serving on the board of directors.

Peter Drucker, the management guru once described by Business Week as “the man who invented management” once said that his greatest strength as a consultant was to be ignorant and ask a few questions. The following is an excerpt from Drucker’s The Effective Executive (HarperCollins 1967) wherein he relates what Alfred P. Sloan (the president and chairman of General Motors from 1923 to 1956) said at a meeting of one of his top committees: “Gentlemen, I take it we are all in complete agreement on the decision here.” Everyone around the table nodded assent. “Then,” continued Mr. Sloan,” I propose we postpone further discussion of this matter until our next meeting to give ourselves time to develop disagreement and perhaps gain some understanding of what the decision is all about.”

Asking hard questions when the situation is all but a fait accompli takes real courage. But, failing to do so deprives others of information which if shared could lead to more discussion and ultimately a better decision – or at least a better-informed decision.

Regrettably, most of us can think back to a situation when we were challenged to speak up and for whatever reason just failed to do so. It was easy at the time to justify our silence as loyalty or respect to a proponent of a bad idea; it was easy to sit back and wait on someone else to ask the hard questions; it was easy to convince ourselves the idea that deserved more questions was not really as bad as it seemed; etc. – there are many reasons we choose to remain silent. But, few reasons pass the test for integrity and objectivity; few survive scrutiny when examined for the exercise of professional due care.

Regardless of a not-for-profit’s size (whether it is the longstanding regional hospital or a struggling upstart), accepting a board membership entails legal and ethical duties. As a board member, you are charged with fulfilling the fiduciary duty of acting in “good faith” using the degree of diligence, care and skill which a prudent CPA would use in a similar position and under similar circumstances. In other words, becoming a board member is more than just an honor; it is a professional ethics challenge for a CPA.

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.

Published in CPA Report, Third Edition, 2015. CPA Report is a quarterly magazine published by the South Carolina Association of Certified Public Accountants.

Let’s Not Forget Who Brought Us to the Dance

Assume one of your tax clients instructs you to provide select information from your file to a third party. You know the information is incomplete and would be misleading for the third party’s specific use. What do you do?

Likely, if you are a tax return preparer not subject to the AICPA’s Code of Professional Conduct, you would send the information as instructed because you would not want to risk losing the client’s business. As long as no laws are broken, that would be just good business practice.

If you are an attorney, you might do the same thing but for a different reason. Many attorneys believe they are obligated ethically to advance a client’s interest within the bounds of the law without necessarily considering the morality of a client’s actions. Thus, as long as no laws are broken, many would consider it just good legal practice.

However and in contrast to business people and attorneys, CPAs are generally seen as having a greater ethical obligation to third parties and the public. So much so that the public has reason to think and tends to think of CPAs somewhat as watchdogs for the public interest. To understand why that is so, it helps to remember who brought us to this dance – it was the public.

Public accounting as a profession in the United States got its big kick-start in the 1930s with passage of the Securities Acts of 1933 and 1934. That legislation was responsive to the stock market scandals of the 1920s and early 30s – in particular the 1932 Swedish Match Company investment scheme that in current dollars might rival investor losses in Enron. Then for the first time, federal law required public companies to include audited financial statements in their registration statements and annual reports.

At the time, there was considerable debate over whether the government should do the auditing. The prestige of the public accounting profession is owed in large part to those who persuaded the Senate Committee on Banking and Currency not to assign the external audit function to a government agency. Essentially, the argument was and continues to be that in the final analysis CPAs and in fact all accountants should be and can be trusted to be loyal and accountable to the public at large.

Recently, Olivia Kirtley, former chair of the AICPA board of directors and current president of the International Federation of Accountants (IFAC) posted the following on the AICPA Insights blog: “I’ve always thought the world would be a better place if only there were more professional accountants working throughout organizations. Each and every day, we bring transparency and accountability to businesses and governments around the globe. We promote financial integrity, expose wrongdoing, and lift the veil of uncertainty to shine light on the truth. When you think about it, we are much like the Swiss-Army knife for modern business—equipped to bring solutions in countless ways.”

Without regard to the type of service performed (audit, tax, litigation support or other services), the AICPA Code of Professional Conduct obligates members to always act in the public interest, always honor the public trust, and always demonstrate a commitment to professionalism (§0.300.030.01). Our obligation to the public interest is far more than just a lofty aspiration. George Oliver May, one of the giants of the accounting profession observed in 1932, that accountants can be seen to have greater ethical obligations to persons who are not clients than other professionals such as lawyers and physicians.

As the late Harvey Kapnick (chairman and chief executive of Arthur Andersen from 1970 to 1979) put it: “the accounting profession is – or should be – the link between responsible business and the public in providing adequate financial data in an understandable manner for use in arriving at sound, unbiased conclusions about the effectiveness of business enterprises in managing our economic wealth for the overall benefit of society.”[1] Kapnick succinctly described the accounting profession’s public service calling. It is our integrity and objectivity that warrants the public trust. It is our fidelity to that trust that makes us professional and different from other business people and attorneys.

Acting in the public interest can and often does conflict with a client’s interest or the CPA’s self-interest. The Code provides that CPAs must resolve conflicting pressures from clients, credit grantors, governments, employers, investors, the business and financial community, and others by acting “with integrity, guided by the precept that when members fulfill their responsibility to the public, clients’ and employers’ interests are best served” (§0.300.030.03).

The “conflict” dilemma described at the beginning of this column has a multitude of variations in practice, all with the same solution. For example, a client asks you to prepare a tax return based on information that you know or suspect is wrong; what do you do? Or, you are asked to prepare cash basis financial statements for an insolvent client seeking capital; what do you do? In each case, acting with integrity and objectivity in the public interest requires subordination of all other interests, including the CPA’s own interest as a business person.

Fortunately, most clients want to act morally and legally and when tempted to do otherwise they welcome a virtuous response from their CPA. For the few who do not, we should remember that helping them obtain an unjust result is the same as helping them to steal.

We are at the dance because the public trusts us. Let’s keep it that way.

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.

Published in CPA Report, Second Edition, 2015. CPA Report is a quarterly magazine published by the South Carolina Association of Certified Public Accountants.

[1] Kapnick, Harvey, Accounting And Financial Reporting In the Public Interest, Arthur Andersen & Co. 1974, Vol. 1

What Should You Do?

Assume you are preparing the annual income tax return of a multi-member limited liability company and discover the manager of the company has made unauthorized advances to himself unbeknownst to the other members of the company. If after confirming the situation with the manager and being instructed to not disclose it to anyone, what should you do?

In the absence of extraordinary circumstances, a prudent CPA likely would resign from the engagement because the client’s lack of integrity would pose an unacceptable threat to the CPA’s own ability to act with integrity. More difficult to predict is whether a CPA would also breach client confidentiality by disclosing the advances to the other members to prevent further harm.

Weighing against disclosure are legal (South Carolina Code of Laws §40-2-190) and ethical (AICPA Code of Professional Conduct §1.700.001) rules that prohibit unauthorized disclosure of confidential client information except under specific circumstances. But, there is no exception for this situation because the profession believes the public interest is better served by a confidentiality rule conducive to a client for sharing relevant information that otherwise might be kept secret. Confidentiality is a fundamental value of the profession and breaching it can have serious financial and career implications for a CPA. Thus, the duty to maintain confidentiality is a powerful negative force in deciding whether to disclose.

On a more direct and personal level, one can view the aspirational and altruistic calling of the accounting profession to serve the public interest and the CPA’s concomitant duty to act always with the highest sense of integrity to be in conflict with the duty to maintain confidentiality in a situation like this. One may perceive the public interest is better served by breaching confidentiality than not breaching, in particular when innocent non-clients are likely to be harmed by non-disclosure. Because it is difficult to predict what action will better serve the public interest, a CPA must exercise judgment and act with integrity (see the AICPA Code at §0.300.030).

The concept of acting with integrity means a whole lot more than just being honest. The following excerpt from Ronald Duska’s book Accounting Ethics (Willey-Blackwell 2011) vividly illustrates what it means to act with integrity.

Limiting the concept of integrity simply to being honest is analogous to describing Walt Disney’s story of Pinocchio merely as the tale of a boy whose nose grew when he lied. Certainly, the story tells us not to lie, just as integrity tells us to be honest. But honesty is not a synonym for integrity. Lying and dishonesty are merely symptoms of the lack of integrity, and identifying the lack of integrity only with lying does not embrace the core meaning, any more than Pinocchio’s growing nose is the whole story of Pinocchio.

What does the story tell us? Think back. Geppetto creates a special puppet, Pinocchio, who walks and talks by himself. But he is a wooden puppet, not a real boy. To be a real boy, Pinocchio must become morally complete. What does it take for Pinocchio to become “whole, entire, and undiminished” – that is, to achieve integrity – and become a real boy?

First, he must develop a conscience. Since puppets don’t come equipped with consciences, he is given Jiminy Cricket. But Jiminy is external to Pinocchio. With Jiminy, Pinocchio hears from the outside what is right and wrong. The code of conduct, which Jiminy represents, is not yet part of Pinocchio. He needs to internalize that code. Similarly, just learning the rules of a profession is not enough. An accountant must internalize and live by those rules.

In his incomplete state, Pinocchio goes off to school. On the way, he meets Gideon and Honest John (who is anything but honest), who entice Pinocchio to join a puppet show. They promise him fame, convincing him that a puppet who can walk without strings and talk by himself will become an instant celebrity. Pinocchio soon learns, though, that celebrity and fame do not make him complete. As a matter of fact, celebrity and fame entrap Pinocchio when the puppet – master puts Pinocchio in a cage because he is too valuable to be set free.

Jiminy Cricket helps Pinocchio escape, only to see him lured to Pleasure Island, where he can engage in the self-centered pursuit of pleasure without restraint. Unrestrained pleasure, however, does not lead to his completeness either. Rather, it turns him into a jackass, including ears and a tail. With Jiminy’s help, Pinocchio flees the island and returns to Geppetto’s workshop.

Meanwhile, Geppetto, who had gone to sea to rescue Pinocchio from Pleasure Island, has been swallowed by a giant whale, Monstro. Pinocchio, with wisdom and self-control, devises a plan to rescue Geppetto. After the brave and selfless act of entering Monstro’s belly, Pinocchio finally becomes a real boy. He is complete. He has integrity.

The story of Pinocchio illustrates that lying is only a symptom of the lack of integrity. People lie because they are self-absorbed. They lie to prevent unpleasantness, look better, avoid a harm, or gain an advantage. People with integrity do not need to lie, because their values are sound. Moreover, they have the wisdom to recognize that there is nothing for which they should compromise those values. Individuals with integrity have the courage to live with the consequences of the truth and the self-assurance to give others their due (justice) without unduly fearing for themselves.

Beginning with Plato and Aristotle, traditional ethical theories have placed a high emphasis on integrity, or wholeness. A person was not whole unless he or she possessed what were called the four cardinal virtues – wisdom, justice, temperance, and courage. The individual had integrity only if he or she had all four virtues; each virtue required the others.

With a fuller understanding of what the AICPA Code means by “act with integrity”, would you ever breach client confidentiality to prevent harm to a non-client? What do you think the public expects of a person of high integrity under those circumstances?

Complex ethical dilemmas deserve careful consideration of duties, virtues, and the likely consequences of action. Thinking about hypothetical dilemmas helps develop good ethical decision making skills necessary to avoid being overwhelmed by powerful situational forces in real life.

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.

Published in CPA Report, First Edition, 2015. CPA Report is a quarterly magazine published by the South Carolina Association of Certified Public Accountants.

SCACPA and AICPA’s Joint Ethics Enforcement Process

It is a sad day for everyone when a CPA has to respond to an ethics investigation concerning his or her professional conduct. Although unpleasant as it may be for us to investigate and discipline fellow CPAs, doing so effectively is a critical function necessary to maintain the public trust in the accounting profession and thereby protect our special status in society as accounting professionals.

SCACPA’s bylaws require each member, whether in public or private practice and regardless of membership in the AICPA, to conduct himself or herself in accordance with the Principles and Rules of the AICPA’s Code of Professional Conduct. Members are automatically suspended or expelled from membership without further investigation when certain authorities such as the state Board of Accountancy, the Securities & Exchange Commission, the Public Company Accounting Oversight Board, or the Internal Revenue Service have found a member guilty of certain types of misconduct.

Otherwise, when information is received by SCACPA of a member’s potential violation of the Code, an investigation is begun pursuant to SCACPA’s agreement with the AICPA under the Joint Ethics Enforcement Program. Essentially, SCACPA, as is the case with most other state societies, refers all such information to the AICPA professional ethics division for investigation and, if necessary, discipline.

Within 90 days of becoming aware of potential misconduct, AICPA’s professional ethics division will determine whether or not to open a formal investigation. If opened, an investigator will send an inquiry letter to any firm or member indicated as being involved in the matter. Although an inquiry letter may be sent to a firm, ultimate findings are made only with respect to an individual member and not the member’s firm.

A member under investigation by the professional ethics division is sent an opening letter at his or her last-known address shown on the membership records of the AICPA or SCACPA. This letter reminds the member of his or her obligation under AICPA’s bylaw 7.4.6 to cooperate during the investigation. The opening letter also describes the subject matter under investigation and requests the member submit relevant documents and other information for consideration. Unless it is clear from the information obtained that the member has not violated the Code, the member will be offered an opportunity to meet or have a telephone interview to discuss and respond to the issues in the investigation prior to an ultimate finding being made.

If a substantive response from the member is not received within 30 days of mailing the opening letter, a follow-up request, known as a letter of noncooperation, is sent. If a substantive response is not received within 30 days of the letter of noncooperation, the matter is acted upon for the failure to cooperate, which should and usually does result in expulsion of the member by the AICPA’s Joint Trial Board.

At the conclusion of each investigation, a written summary of the investigation is provided to either the AICPA’s Technical Standards Subcommittee or Independence/Behavioral Standards Subcommittee (depending on the nature of the violation) along with specific recommendations as to findings. Except for situations where an investigation is deferred pending the completion of related litigation, the professional ethics division attempts to complete its investigation, reach a finding, and obtain the subject member’s concurrence within 15 months. This may vary depending on the complexity of the case and responsiveness of the member.

The subcommittee may find: (a) no prima facie evidence of a violation of the Code; (b) prima facie evidence of a violation; or (c) that the member has failed to cooperate in the investigation. In the first instance, the member under investigation is advised that the investigation has been closed but may be reopened if new information becomes available that warrants such action.

When there is a finding of a violation and depending on its gravity, the subcommittee may: (a) issue a letter of required corrective action with directives; (b) offer an opportunity of a settlement of the charges; or (c) refer the case to a hearing panel of the Joint Trial Board.

A letter of required corrective action is the least severe sanction as it only directs a member toward additional action such as completion of specific continuing education courses or special supervision over similar services in the future. Of particular note about letters of corrective action is that they are not required to be published as are all other sanctions.

Settlement offers include either admonishment, suspension or expulsion and are non-negotiable; all cases involving settlement offers are referred to the AICPA Professional Ethics Executive Committee (PEEC) for concurrence prior to being sent to a member. If not accepted by a member, the matter is automatically referred to the Joint Trial Board. Where the findings in a settlement agreement involve deficiencies in a compilation or attest engagement or other matters that could indicate deficiencies in the design of, or compliance with, the firm’s quality control policies and procedures and the member’s firm is enrolled in either the AICPA Peer Review Program or Center for Public Company Audit Firms Peer Review Program, the settlement agreement will usually be forwarded to the administering entity responsible for supervision of the firm’s peer review.

When a matter is of such a nature that a letter of corrective action is deemed an inadequate response and settlement cannot be agreed, it is referred to a hearing panel of the Joint Trial Board. After a hearing and if the member is found guilty, a hearing panel must decide whether to expel or suspend the member from the AICPA and SCACPA or admonish the member. If the decision is to suspend or admonish, the panel may require some additional action similar to that contained in a letter of required corrective action. All guilty findings and the resulting sanctions of the Joint Trial Board are published.

In deciding which sanction to impose after a finding of guilty, a hearing panel will take all of the facts and circumstances presented into consideration, including the attitude of the guilty member, the extent of actual or potential damage to third parties, actions taken by the member since the infraction, etc. However, in the absence of unusual extenuating circumstances, expulsion is most likely for the most serious matters such as a violation of the independence rules or reckless disregard of the confidentiality rule and lack of integrity as those matters are hallmarks of the accounting profession.

Furthermore, when a member has been found guilty of willfully refusing to cooperate with the professional ethics division, the sanction is ordinarily expulsion. Lack of cooperation in the critical function of self-policing the profession through investigation of potential misconduct is a serious offense that threatens the existence of the profession and violates a specific promise each member makes before being granted membership in the AICPA and SCACPA.

George DuRant, CPA/ABV, CFF, ASA is a member of DuRant, Schraibman & Lindsay, LLC. He has been a member of SCACPA and AICPA since 1975 and is currently serving as a member of the AICPA’s Joint Trial Board.

Published in CPA Report, Second Edition, 2014. CPA Report is a quarterly magazine published by the South Carolina Association of Certified Public Accountants.