Jamnik, Anton

Ethical code in the public profession

Revista Cultura Económica Año XXIX, Nº 81-82, diciembre 2011

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Jamnik, A. (2011). Ethical code in the public accounting profession [en línea], Revista Cultura Económica, 29(81-82). Disponible en: http://bibliotecadigital.uca.edu.ar/repositorio/revistas/ethical-code-public-accounting.pdf [Fecha de consulta:...... ] Ethical code in the public accounting profession

ANTON JAMNIK Revista Cultura Económica Año XXIX • Nº 81/82 Diciembre 2011: 80-90

I. Introduction codes of conduct that are consistent with AICPA's Code of Professional Conduct. The focus of The American Heritage Dictionary defines this chapter is on professional in profession as “the body of qualified persons in public practice. Consequently, we limit our an occupation or field”. A major characteristic discussion to the CPAs who are obliged to of a “qualified person” is the specialized adhere to the Code of Professional Conduct knowledge of the profession: medical knowledge of the AICPA. The AICPA Code (hereafter, for medical doctors, accounting knowledge the Code) is designed to serve a multitude for certified public accountants (CPAs). of purposes: Professionals have an ethical responsibility • A message that the professional CPA to have acquired the specialized knowledge has a duty to serve the public (Collins and before offering their professional services. Schulz, 1995: 32) Professionals are also expected to keep • A means of conferring legitimacy upon abreast of the knowledge enhancements by the professional body, i.e., the AICPA (Preston continuing professional education. Another et al., 1995: 509) characteristic of professionals is that they • Protecting public interest or a client possess the mental attitude of serving the where the professional delivers a specialized public with the best of their ability so as to service which cannot be easily measured or earn the public trust. How does a profession judged as to its quality (Preston et al., 1995: enforce these ethical responsibilities? By 508; Neale, 1996: 223) self-monitoring, supported by a viable code • Providing a filtering mechanism to limit of conduct. In fact, the existence of a code of the number of professionals to those who are professional conduct is considered a hallmark willing and capable of adhering to the Code of any profession. and unattractive to those who do not abide The Code of Professional Conduct of by it (Neale, 1996: 223). the American Institute of Certified Public In the remainder of this chapter, first, we Accountants (AICPA) is the primary source of briefly discuss the types of services that are guidance for accountants in public practice. provided by CPAs. Of particular importance Similar codes, issued by the Institute of to the discussion of , is ethics Management Accountants (IMA) and the services as an emerging area of assurance Institute of Internal Auditors (IIA), govern services that major public accounting firms accountants and auditors in private practice. have begun to offer in recent years. Second, In recent times, the accounting profession has we provide a brief discussion of the AICPA's developed several recognized subspecialties, Code of Professional Conduct with a focus such as Certified Personal Financial Planner, on its principles, but also examples of its or Certified Fraud Examiner. Each of the rules. Third, the elaborate professional ethics subspecialties have also adopted professional enforcement program is discussed, where

80 Año XXIX • Nº 81/82 • Diciembre 2011 illustrative cases and descriptive statistics by issuing a report on the fair presentation about the AICPA's disciplinary actions over of the financial statements taken as a whole. a 20-year period are provided. The chapter A vast majority of clients receive a standard ends with a concluding section where some three paragraph audit opinion (called an observations about controversial ethical issues “unqualified” opinion), which is essentially facing the profession are discussed. a bill of health. Variations of this opinion indicate that the auditor is either taking some 1. Public accounting services exceptions (called “modified wording” or a “qualified opinion”, depending on the extent The AICPA has approximately 350,000 of the exception), or states that the financial members, all of whom are CPAs. To be a CPA, statements are not presented fairly (called an most states require that an individual has had “adverse opinion”). If the auditor finds that some experience in public accounting. The he/she is not independent from the client, most distinguishing characteristic of a public then a “disclaimer of opinion” is issued. The accounting practice is to provide audit services Auditing Standards Board of the AICPA is for financial statements of various businesses. responsible for developing the Statements on These financial statements are normally used Auditing Standards that must be followed by by the CPA’s clients to provide information to auditors in the conduct of their . It is stockholders, potential investors, creditors, important to note that the issuance of an and regulatory agencies. However, not all CPAs independent audit opinion can only be made remain in public practice. A large number of by a CPA. The other services listed below can members of the AICPA are in industry, such be provided by individuals that are not CPAs. as those working in accounting departments A compilation is the presentation of of private or public companies. Others are financial information, in the form of financial in private practice (they provide clients with statements, without the CPA expressing any unaudited financial statements, tax and opinion on them. A review is where a CPA has business consulting), government or education. conducted only limited procedures and can While there are some minor differences in give only limited assurance that the financial the ways in which these members keep their statements require no material modification. AICPA membership in “good standing”, they Compilation and review services are normally all are required to adhere to the provisions for non-public companies that may not of the Code. (For example, members in require full audited statements, but do want public practice are generally subject to more some limited assurance about the reliability stringent continuing professional education of their financial statements. requirements than those in industry or The Statement of Standards for Attestation education.) However, due to the importance Engagements, Attestation Standards (AT Section of the public trust to the profession, those in 100) defines an attest engagement as “one public practice are scrutinized more closely in which a practitioner is engaged to issue than others. For this reason, it is important or does issue a written communication that to identify various areas of services provided expresses a conclusion about the reliability of by the CPAs in public practice with some a written assertion that is the responsibility of emphasis on those in ethics audit services. another party”. If the written communication CPAs in public practice provide these services: is about historical financial statements, •Audit services then the attestation is the same as an audit. •Compilation and review services However, a client may want an opinion on • Attestation services its representations related to its own internal •Management advisory services, including controls, or investment performance history, internal audit services or remaining reserves in an oil field. In these •Tax services types of engagements, the CPA will still be held •Assurance services, including ethics to the same level of professional standards audit services as if they were auditing financial statements. The purpose of an audit service is to add Management advisory services, including credibility to financial statements of clients internal audit services, are often referred to

Revista Cultura Económica 81 as consulting services. Most of the consulting is the Code of Professional Conduct”. Also, in a related to the internal operations or planning National Future Forum held in January 1998, for a client. A practitioner has developed an five core values were identified­ for CPAs: expertise in a client’s affairs and is probably continuing education and life-long learning, also an expert in the client’s industry. This competence, integrity, attunement with broad background makes the practitioner a logical business issues, and objectivity (CPA Vision choice to consult on matters related to Project, 1998). Of particular importance to accounting information systems (including this chapter are integrity and objectivity that hardware and software choices), inventory are part of the Code as well. This Code is planning and flows, executive compensation discussed in the next section. arrangements, or designing pension and Among the services identified above, profit-sharing plans. assurance services have gained much attention Tax services relate to corporations, other in recent years as an area of significant businesses, and individuals. The services can growth for the accounting profession. These be limited to only the preparation of federal, services are provided to improve the quality of state, and local tax returns, but frequently information or its context, for decision makers. include advice on merger and acquisition, An example of these assurance services is the tax planning for current tax minimization CPA WebTrustsm service, by which CPAs assess or estate planning, and representation in tax the reliability of information in company web audits from the Internal Revenue Service. sites, and if the information is found to be The tax services area is an example where reliable, the WebTrustsm seal is stamped on the a practitioner is not required to be strictly client’s web site. independent from the client. The practitioner The AICPA's Special Committee on Assurance is expected to be an advocate for the client Services (also known as the Elliott Committee and to minimize the client’s total tax liability. after its chairman, Robert Elliott) has proposed Assurance services, including ethics audit services many areas of assurance services. Of special are defined by an AICPA special committee interest to ethicists is “assessment of ethics- as “independent professional services that related risk and vulnerabilities” (Elliott and improve the quality of information, or its Pallais, 1997: 63). Some accounting firms (e.g., context, for decision makers” (Palfais, 1996: , KPMG Peat Marwick) have 16). Assurance services can include audit already begun offering ethics audit services. and attestation, but also includes other According to KPMG Peat Marwick, the ethics non-traditional services. Assurance services audit has four components (KPMG, 1997). are centered on improving the quality of • An assessment of the ethical climate of information, and frequently involve situations the client encompassing culture, environment, when one party wants to monitor another, motives, and pressures even when both parties work for the same • An assessment of performance incentives - company (Pallais, 1996). Ethics audit services the issue is whether the performance incentives would be an example of the latter service and provide a motivation to behave outside the will be discussed further in a later section. moral norm A recent meeting of the National • The communication of the message Association of State Boards of Accountancy about what is acceptable or unacceptable concluded that regardless of the type of service ethical behavior - this communication covers provided, CPAs are required to have seven issues of ethical policies, procedures, and “competencies” (Haberman, 1998: 17): four training downstream from management of these competencies are technical in nature to employees; it also covers the nature of (e.g., the ability to assess the achievement of upstream communication from employees an entity's objectives); one relates to decision to management making, problem solving, and critical thinking, • Compliance where the policies, procedures, and another one concerns the ability to and offices involved in the enforcement of communicate the scope of work, findings the client's ethics program are assessed. and conclusions. But the one that is most relevant to ethics is “an understanding of Although an ethics audit is designed for

82 Año XXIX • Nº 81/82 • Diciembre 2011 a company's internal purposes, it is clear 2. AICPA’s code of professional conduct that there could be external ramifications. The fact that a company has conducted an The AICPA's mission statement charges its ethics audit may have positive implications CPA members with the responsibility to “serve with outside regulatory agencies, suppliers, the public interest in performing the highest customers, or prospective employees. quality of professional services” (AICPA, 1988: Ethics audit services are partly governed by vii). The Code calls for honorable behavior, Statements on Auditing Standards promulgated even at the sacrifice of personal interest. Various by the Auditing Standards Board (1997). steps are necessary to prepare the CPA for However, there are significant differences these services. These steps include education, between ethics audits and financial audits. For certification, licensing, and practice, but also a example, an ethics audit is used to identify a mental ability and commitment to discharging client’s areas of vulnerability in comparison one's responsibility with care and diligence. with its industry benchmarks. This is different (Note that all states require CPAs in public from the comparison of a company’s ethical practice to be licensed. A CPA may choose not performance with absolute ethical philosophies. to be a member of the AICPA, and thus not It is also different from a financial audit subject to the AICPA Code. However, most where the fairness of financial statements is state licensing authorities have adopted the assessed against generally accepted accounting AICPA Code as their ethical and professional principles. KPMG Peat Marwick LLP states standards). that an ethics audit is a “positive confirmation The AICPA's Code of Professional Conduct of the existence and effective implementation states, in its preamble, that being a member of best ethical practices” (KPMG, 1996). is voluntary, but by accepting membership A concern about the multitude of services one assumes an obligation to the public, provided by CPAs is that conflict of interest clients, and colleagues. To guide behavior, may arise from an auditor performing the the AICPA has instituted a Code that has financial audit, as well as other services. This four components: is said to threaten auditor independence. As • Principles of professional conduct discussed in the next section, independence • Rules of conduct is one of the major rules in the Code. In • Interpretations of rules of conduct the past, it was not uncommon for auditors • Rulings by the Professional Ethics Division to decline engagements or not provide of the AICPA and its Trial Board. additional services if there was any threat, real or perceived, to their independence. We Table 14.1. AICIPA’s Principles of Professional will return to a discussion of the magnitude Conduct of this issue in the final section. Suffice it is to say here that today, it is common for CPAs to Principle and AICPA Directives avoid this problem by offering various services from separate divisions of the audit firm, so 1. RESPONSIBILITIES as to minimize issues of conflict of interest. - In carrying out their responsibilities In one case, the accounting firm split into as professionals, members should exercise two separate entities: Andersen World-wide sensitive professional and moral judgments split into Arthur Andersen to provide audit in all their activities. and tax services and Andersen Consulting 2. THE PUBLIC INTEREST to provide management advisory services. - Members should accept the obligation to Recently, however, Andersen Consulting has act in a way that will serve the public interest, alleged that Arthur Andersen is also providing honor the public trust, and demonstrate management advisory services to its big clients commitment to professionalism. against the contract that resulted in the split 3. INTEGRITY of Andersen in the first place. - To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.

Revista Cultura Económica 83 4. OBJECTIVITY AND INDEPENDENCE Section 400, related to responsibilities to - A member should maintain objectivity colleagues. It doesn’t have any rules at this and be free of conflicts of interest in time. However, concurrent with the issuance discharging professional responsibilities. of the new Code in 1988, the AICPA also A member in public practice should be approved a mandatory quality peer review independent in fact and appearance when program, where CPA firms provide reviews of providing auditing and other attestation the quality of practice in other CPA firms and services. present recommendations for improvement. 5. DUE CARE The AICPA also established a number of - A member should observe the practice-monitoring committees to facilitate profession's technical and ethical standards, these peer reviews for CPA firms. strive continually to improve competence The final component of the Code, Rulings and the quality of services, and discharge by the Professional Ethics Division and the professional responsibility to the best of Trial Board of the AICPA, relates to the the member's ability. AICPA's activities to enforce the rules and their 6. SCOPE AND NATURE OF SERVICES interpretations. These issues are discussed in - A member in public should observe the next section. the Principles of the Code of Professional Conduct in determining the scope and 3. Enforcement of the Code of Conduct nature of services to be provided.1 Violations of the Code can be diverse and There are six principles in the Code. numerous. A detailed listing and discussion These principles and the AICPA directives of these violations is beyond the scope of this related to them are listed in table 14.1. They chapter. Here are several examples: provide the basic foundation of ethical and A CPA was engaged to prepare the financial professional conduct that is expected of statements of a company and then audited the CPA. However, due to their conceptual nature, these principles are not enforceable. those same financial statements - a violation Nevertheless, they point to the importance of the rule of independence. of public interest (Principles 1 and 2) and A practitioner prepared a fraudulent tax the requisite moral characteristics of CPAs return on a client’s behalf. in public practice (Principles 3-6). A practitioner did not have the necessary The Rules of Conduct and the Interpretations technical skills to perform required work for of the Rules of Conduct are more specific in an engagement - a violation of competence. nature than the Principles, and as such, they A CPA did not release documents to a are enforceable. A detailed discussion of these client - a violation of Rule 501-1 requirements. rules and their interpretation is beyond the These violations result in disciplinary scope of this chapter but may be found in the actions by the AICPA, such as admonishment, AICPA publications and standard auditing termination or suspension of membership in texts. To show the general tenet of the rules, the Institute. Since 1975, the Joint Trial Board we provide a summary here: of the AICPA has been the source of disciplinary Section 100: Independence, Integrity, action with the participation of some state and Objectivity (e.g., Rule 102-2 prohibiting societies. This cooperation has recently been conflict of interest) expanded to include virtually all 50 states Section 200: General Standards and and has resulted in the establishment of the Accounting Principles (e.g., Rule 201-1 Joint Ethics Enforcement Program (JEEP) requiring competence) since 1995. JEEP maximizes the resources Section 300: Responsibilities to Clients (e.g., for investigation and eliminates duplication Rule 301-1 prohibition of dissemination of (News Report, 1995). any confidential client information obtained Penalties for violation of the Code range during the course of an audit) from a recommendation that a member take Section 500: Other Responsibilities and remedial or corrective action, to a permanent Practices (e.g., Rule 501-1 forbidding retention expulsion from the AICPA. For example, a of client records) member who has violated the Code may be

84 Año XXIX • Nº 81/82 • Diciembre 2011 recommended by the Professional Ethics and adjudicated. These complaints “can come Division to take a continuing professional from a variety of sources, including clients, education course. If the member does not third parties such as federal, state and local comply with the recommendation, the Ethics governments; and other CPAs, especially Division may refer him/her to the Trial Board successor accountants and auditors. The state for a hearing. The Trial Board may suspend a board must investigate each complaint to member for up to two years or expel him or assess its merit and, if necessary, determine her for violating the Code. In cases where a the appropriate corrective action” (Ruble, punishable crime by imprisonment for more 1997). than one year has occurred, the member is The disciplinary actions taken by state boards automatically suspended or terminated from of accountancy and state societies of CPAs AICPA membership. A similar penalty can be may also be the result of court action against imposed for filing a false income tax return a member. For example, a criminal conviction on a client's behalf. in a court of law may automatically result in The disciplinary actions of the Joint Trial suspension or termination of membership Board are publicized in the AICPA's newsletter, in state societies and the AICPA, as well as The CPA Letter. Generally, this means that a loss of practice license by the state board of similar action has been taken by the professional public accountancy. state society of CPAs in the state where the As stated earlier, violations of the AICPA violator has membership. (Note that a CPA Code may require a hearing by the Ethics can have membership in more than one state Division of the AICPA or its Trial Board. State society. Furthermore, a CPA can get licensing societies of CPAs have similar mechanisms, from various state boards of CPA for practice and they cooperate closely with the AICPA. in multiple states.) These state societies Virtually, all states boards have joined with the have codes of professional conduct for their AICPA to create the Joint Ethics Enforcement membership that are identical with, or similar Program (JEEP). This program has developed to the AICPA Code (AICPA, 1997: 6). a detailed manual for effective and efficient On the surface, the actions taken by the treatment of code violations. According to AICPA and/or state societies of CPAs may appear the AICPA’s professional standards and the provisions of the JEEP manual (AICPA, 1997), to be insignificant in nature, since membership there are two distinct methods of dealing with in these associations is voluntary and one can member violations. The first is suspension or resign at any time. In reality, an action such termination of membership without a hearing, as termination of membership, may indeed i.e., automatic disciplinary actions. The second tarnish one's reputation as a CPA to the extent is the AICPA disciplinary action process where that one would voluntarily leave the profession provisions are made for a hearing. altogether. Also, considered the fact that the The automatic sanctions are generally the practice of public accounting requires licensing result of court actions or other govern­mental by governmental regulatory agencies such as (e.g., Securities and Exchange Commission) state boards of public accountancy. The AICPA actions against CPAs. As soon as notification and/or state society’s actions to terminate or is received by the secretary of the AICPA, a suspend membership may precede or succeed suspension or termination notice is automatically revocation or suspension of practice licenses mailed to the member via registered or certified by state boards of accountancy. Thus, the CPA mail. If the member does not appeal, then may be barred from practice, involuntarily, the action is viewed as final and publicized for a period of time or forever, depending in The CPA Letter. However, if the member on the nature of the violation. appeals in writing, then the Trial Board State boards of public accountancy have forwards the appeal to an ad hoc committee been set up to enforce state accounting laws. for a decision. If the appeal is granted, then These boards are generally charged with the the case is forwarded to the Ethics Division for responsibility of overseeing the accounting appropriate action. Otherwise, the automatic profession in their states. Consequently, decision is affirmed and publicized in The CPA they have mechanisms by which complaints Letter. The disciplinary action is termination against CPAs are documented, investigated, in cases of:

Revista Cultura Económica 85 • crime punishable by imprisonment individual who was found to have violated for more than a year; the AICPA Code. We present descriptive • willful failure to file an income tax data to show the extent of the disciplinary return when required by law; actions taken over a 20-year period. This • filing false or fraudulent income tax information is extracted from a disciplinary return on own or client behalf; and action database we have compiled from an • willful aid in preparation and examination of The CPA Letter published from presentation of a false and fraudulent 1977 until 1996. income tax return of a client. Case 353 occurred in 1990. The individual Membership will be revoked or suspended was found to have violated the AICPA Code without a hearing if the member's practice by having assisted in the preparation of a false license is suspended or revoked as a disciplinary tax return and having obstructed justice by action by a governmental agency. lying about it (i.e., perjury). The information The cases that do not result in automatic came from conviction in the court of law suspension or termination of membership and automatically resulted in termination of are Code violations that have been brought to AICPA membership. the attention of state societies or the AICPA A summary of the 20-year data is presented through complaints made by individuals, in table 14.2. The data is classified by the clients, or other CPAs. JEEP processes these type of disciplinary action (termination, cases. The member can plea guilty and/ suspension, and other) and by the source of or resign from the AICPA and state society action (automatic or hearing). The averages membership. In this case, the Trial Board per year are also provided. These are calculated may recommend acceptance of the member's by dividing the raw numbers by 20 years resignation, but require that the member (1977-1996). Finally, we have divided the appear for a hearing by the Trial Board at average yearly disciplinary actions by the a later date. If the member does not plead average number of members in the AICPA guilty or the Trial Board does not accept the over the 20-year period to find the average member's resignation, a panel is set up by number of disciplinary actions per 10,000 the Trial Board for investigation of the case. AICPA members. The Trial Board may choose not to accept a Several observations from table 14.2 are member's resignation due to the seriousness interesting to note. First, a majority of cases of a violation. They may feel that, to serve were automatic disciplinary actions. Out of the public interest, the member needs to be the 488 terminations, 330 were automatic as publicly expelled. The panel may decide compared with 158 that resulted from the that no action is necessary, or may schedule Joint Trial Board hearings. Similarly, of the a hearing. The result of the hearing may 250 cases of suspension, 138 were automatic be that no action is necessary or that the as compared with 112 that resulted from member must be admonished, suspended, hearings. The exception was “other” cases terminated, or must perform some activity that resulted in admonishment, censure or such as taking a certain amount of hours other types of disciplinary actions. None of of continuing professional education. The these cases was the result of an automatic member can appeal this decision within disciplinary action. Thus, overall, of the 803 thirty days, and if granted, the Trial Board cases, 468 were subjects of automatic action will review the decision and will uphold it, as compared with 335 hearings by the Joint change it, or find the member innocent and Trial Board. inform the member of its decision. If the Second, a related observation is that a decision is that a violation had occurred for majority of the cases, automatic or hearing, which disciplinary action is taken, then the resulted in the termination of the violator decision is publicized in The CPA letter. from the AICPA membership. Of the 468 automatic cases, 330 resulted in termination 4. Illustrative disciplinary actions of membership. Similarly, 158 of the 335 hearing cases resulted in termination of the To illustrate the disciplinary actions against violator. Suspension was next followed by CPAs, we first present the facts about an «other» disciplinary actions.

86 Año XXIX • Nº 81/82 • Diciembre 2011 Table 14.2 AICPA’s disciplinary action statistics 1977-1996

Source Disciplinary action Automatic Hearing Total Average per 10,000

Termination 330 158 488 1.1 (16.5/year) (7.9/year) (24.4/year) Suspension 138 112 250 0.5 (6.9 /year) (5.6/year) (12.5/year) Other (e.g., admonish 0 65 65 0.1 or censure) (0/year) (3.25/year) (3.25/year) Total 468 335 803 (23.4/year) (16.75/year) (40.15/year) Average per 10,000 1.0 0.7 1.7 1.7

1977 331

Membership size: 130 1996 938 324 Average 227 634 Source: Disciplinary Action Database compiled by the authors from the CPA Letter.

Third, the average per 10,000 membership of conduct and has an elaborate disciplinary indicates that overall, only 1.7 people (1 program in place to enforce the Code. automatic and 0.7 from hearing) were disciplined Surveys of CPAs (e.g., Cohen and Pant, 1991) per year. Out of these 1.1 were terminated, indicate that the Code and its enforcement 0.5 were suspended, and 0.1 were subjected are viewed as effective for the professional to other disciplinary actions. body. This does not, however, mean that the A conclusion from this data is that violations profession has been free from criticism. While of the Code by the AICPA members are rare. CPAs, in general, do not believe that unethical The assumption is that all major cases are behavior leads to success, they do perceive detected and adjudicated by the AICPA, state that opportunities exist in the accounting boards of accountancy, and state societies of profession to engage in unethical behavior. CPAs. There are, of course, unreported or This is because surveys of CPAs indicate that undetected violations of the Code as well. some clients request fraudulent alteration of Thus, the true level of ethical behavior is tax returns or financial statements (Finn et not possible to observe. However, it is in the al., 1988). best interest of a self-regulating profession Critics allege that these client pressures, to expose unethical behavior. With this in causing ethical problems for the profession, mind, there are several significant overall are partly due to the professionals having ethical controversies facing the profession abandoned the legitimacy of ethical character, and these are discussed in the next section. that was the norm in the early 1900s. Critics support this allegation by noting that, in the early 1900s, there were virtually no general 5. Controversial ethical issues in the auditing or accounting standards, while today accounting profession there is a large complicated set of standards and rules. Critics claim that today's CPAs As discussed in the previous sections, the rely on “following the rules” rather than accounting profession has developed a code focusing on what is the best, fairest, or clearest

Revista Cultura Económica 87 presentation of accounting information. As also in appearance, which can be observed technical expertise has become the cornerstone by third parties. The auditor may, in fact, of the CPA practice, the legitimacy of technique exercise independence from the client even has replaced the legitimacy of character if he or she has financial interest in the (Abbott, 1988: 190). Even within this technical company. However, to assure independence expertise, critics argue that some CPAs have in appearance, the auditor is prohibited ignored their clients' , in from having any direct interest such as stock which earnings have been manipulated in ownership in the client or significant indirect some cases. For example, Lomas Financial interest such as ownership of stocks in the Corporation has filed a US$300 million lawsuit client by the CPA's close relatives. against its auditors, alleging that two audit Critics argue that independence rules partners collaborated with the management must also be addressed in cases of providing of Lomas Financial Corporation to conceal conflicting services to the client. For example, risky financial practices that contributed to how can an auditor be independent of his or the company's failure (MacDonald, 1997). her client in conducting a financial audit if Similarly, a large potential area of concern the auditor is also the one who had provided for CPA firms is the exposure to lawsuits from advice in the development or purchase of consulting engagements. The largest lawsuit the client's accounting system? Similarly, yet filed against a CPA firm (US$4 billion) the profession has been criticized for taking was related to a consulting engagement by an inadequate responsibility for detecting accounting firm to develop and implement fraudulent financial reporting by clients in a “turnaround plan” for Merry-Go Round situations where auditor's self interest has Enterprises (MacDonald, 1997). The suit alleges been on the line. These allegations have fraud, fraudulent concealment, negligence, and resulted in Congressional investigations of lack of independence. These are issues that the profession. For example, Senator Metcalf are normally raised in an audit engagement investigated the profession in 1976 (US Senate, lawsuit. William Brewer, an attorney, states “It's 1976), while Senators Moss did the same in an unusual suit. Big Six accounting firms have 1978 (US Senate, 1978)2. generally not been sued for their consulting The profession's response has been to set work. However, it's a sign of the times. You'll up commissions to investigate these issues, see many more of these cases in the future as and to provide recommendations, based on accountants hold themselves out as business which new pronouncements could be issued. consultants” (MacDonald, 1997: 312). For example, in response to Senators Metcalf In other cases, rapid changes in the and Moss investigations, the AICPA established information technology have brought the the Commission on Auditors' Responsibilities in CPA's knowledge under question. The new the mid-1970s (The Cohen Commission, 1978). information technology has also changed the The recommendations from this commission public need for CPA services. For example, led to the establishment of another commission whereas traditional audited financial to investigate fraudulent financial reporting statements were issued three or four months (The Treadway Commission, 1987), and later to after the closing of the client's fiscal year, another commission (COSO, 1992) that made the new technology has made it possible to a long list of recommendations. As a result of provide the information on line and in real the recommendations of these commissions, time. As mentioned earlier, the profession the profession has taken significant steps to has responded by developing the WebTrustsm enhance its guidance for practitioners by service to respond to this need. issuing new pronouncements. The revised Perhaps the most significant ethical Code of Conduct issued in 1988 (AICPA, challenge to the profession is the question 1988) tightened the Code requirements by of independence. It has been alleged that eliminating some ambiguous and controversial auditors systematically violate the Code's sections. Specifically, the new Code allows for independence rule. The Code is clear in advertising by CPAs that was prohibited by the its direction of the need for independence, earlier code. In the same year, the Auditing not only in fact (which is unobservable), but Standards Board issued a package of nine

88 Año XXIX • Nº 81/82 • Diciembre 2011 new Statements on Auditing Standards (dubbed planning the audit for detection of fraud and expectation gap standards) to provide better other illegal acts (Auditing Standards Board, guidance to the auditors in their conduct 1997). More needs to be done to clarify the of the financial audit. More recently, the CPA's responsibility to the public. For example, Auditing Standards Board responded to the should the CPA engage in whistle-blowing Treadway Commission (1987) and COSO when an illegal act or fraud is detected to (1992) reports by issuing a new Statement on have been committed by a client? As critics Auditing Standards No. 82, that requires auditors argue, at the present time, “the resolution to plan the audit so that if fraud exists, it of conflicts between an 's client, can be detected (Auditing Standards Board, on the one hand, and the general public, 1997). In the past, the profession steadfastly on the other, is usually balanced in favor of denied responsibility to plan the audit for the client. The legal system supports this the purpose of detecting fraud, although outcome, at least for the time being” (Epstein it maintained that if fraud was indicated in and Spalding, 1993: 271). Others argue that the course of the normal audit, it would be the source of this problem is the weight that investigated. is placed on confidentiality at the expense Other contemporary ethical issues confronting of public interest (Collins and Schulz, 1995). the profession include confidentiality, public confidence, and serving the public interest. II. Conclusion Confidentiality The CPA is entrusted with a large amount The accounting profession has developed of information from the client. The auditor an elaborate Code of Conduct complete is prohibited to share this information with with a continuing education and an effective others, except in response to court order and enforcement program. However, more needs to other exceptional situations. For example, be done to make accountants more responsive the auditor can provide financial ratios to to public expectations to enhance public trust. industry trade groups so long as specific client While the profession has been forthcoming information is not revealed. However, the in its responses to Congressional hearings auditor cannot use confidential information and private commission recommendations for self or other financial interests such as in the past two decades, more is needed trading stocks based on the insider information to continue building a more trustworthy gathered in the course of the audit. profession. This is especially urgent in light of the speedy change that is fostered by the Public confidence age of information technology. The profession allows CPAs to advertise, but through its ethic rulings, it limits the type of advertising to those that enhance public References confidence. For example, contingent fees and commissions are not allowed for referral of Abbott, A. (1988). The System of Professions: attest function services (i.e., audits, compilation An Essay on the Division of Expert Labor. and reviews), but allowed for management Chicago, IL, University of Chicago Press. advisory services. Contingent fees and referral AICPA (1988). Code of Professional Conduct. commissions were prohibited altogether AICPA, New York. until 1988, when the AICPA council voted (1997). Joint Ethics Enforcement Program to change the rule, under pressure from the (JEEP). Manual of Procedures. New York. Federal Trade Commission (Mintz, 1990: 3). AICPA Auditing Standards Board (1997). Nevertheless, critics argue that advertising Statement on Auditing Standards No. has helped change public accounting from a 82: Consideration of Frau in a Financial profession to a business (Mason, 1994). Statement Audit. New York. Serving the public interest AICPA. CPA Vision Project (1998) “CPA As stated earlier, the profession has only vision project identifies top five core recently begun to accept responsibility for values”. The CPA Letter l, June, 9.

Revista Cultura Económica 89 Cohen, R., Pant, L.W. (1991). “Beyond News Report (1995) “New era in ethics bean counting: Establishing high ethical enforcement.” Journal of Accountancy, standards in the public accounting August, 13. profession”. Journal of , 10, Pallais, D. (1996) “Assurance services: Where 45-56. we are; where we’re going.” Journal of Collins, A., Schulz, N. (1995). “A critical Accountancy, 182(3) September, 16-17. examination of the AICPA Code of Preston, A. M., Cooper, D. J., Scarbrough, Professional Conduct”. Journal of Business D. P. (1995)” Changes in the code of Ethics, 14, 31-41. ethics of the US accounting profession, COSO (1992). Internal Control: Integrated 1917 and 1988: The continual quest for Framework. Harborside, NJ. legitimization.” Accounting, Organizations Elliott, R. K., Pallais, D. M. (1997) “First: and Society, August, 507-46. Know your market”. Journal of Accountancy, Ruble, M. R. (1997) “Letter from the state July, 56-63. board: What should you do next?” Journal Epstein, M. J. and Spalding, A. D. (1993) of Accountancy, 183(5) May, 75. The Accountant’s Guide to Legal Liability The Cohen Commission (1978). “Report, and Ethics. MA, Irwin, Boston. Conclusions, and Recommendations.” Finn, D. W., Chenko, L. B., Hunt, S. D. AICPA, New York, . (1988). “Ethical problems in public , December 27, 1997: accounting: The view from the top.” 147, B147. Journal of Business Ethics, 7, 605-15. The Treadway Commission (1987) Report Haberman, L. D. (1998). “Regulatory of the National Commission on Fraudulent reform at NASBA.” Journal of Accountancy. Financial Reporting. AICPA, New York. February, 16-17. US Senate Subcommittee on Reports, KPMG (1996) Innovating Best Ethical Accounting and Management of the Practices. Montvalle, NJ. Committee on Governmental Affairs; KPMG, Marwick, Peat (1997). “Creating the the Metcalf Committee (1976). The moral organization.” KPMG Internet Web Accounting Establishment. US Government Site. Montvalle, NJ. Printing Office, Washington DC. KPMG, Marwick, Peat, LLP. MacDonald, US Senate; the Moss Committee (1978) E. (1997) “Trustee files $4 billion lawsuit Report of the Committee on Auditors’ against Ernst & Young.” The Wall Street Responsibilities. US Government Printing Journal, December 2, 240, B12. Office, Washington DC. Mason, E. (1994). “Public accounting: No longer a profession?” The CPA Journal, 64(6) July, 34-7. Mintz, S. (1990) Cases in Accounting Ethics and Professionalism. McGraw-Hill, New York. Neale, A. (1996) “Conduct, misconduct and 1 Source: AICPA (1988) accounting.” Journal of Business Ethics, 15, 2 219-26. A detailed discussion of these investigations and the profession’s response to them is beyond the scope of this chapter; they are stated here to show the significance of the issues.

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