Category Archives: Ethics

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.

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.