Personal and Professional Ethics for Texas CPAs
written by
Raymond J. Clay, Jr., DBA, CPA
Course Information
Prerequisite None
Field of Study Regulatory Ethics
CPE Credit Hours 4
Author Biography
Raymond J. Clay, Jr., DBA, CPA, is Emeritus Professor of Accounting at the University of North Texas. Prior to joining the faculty at North Texas, he spent three years as Director of Professional Development for Union Pacific Corporation. Dr. Clay received his Bachelors and Masters degrees from Northern Illinois University and his Doctorate degree from the University of Kentucky. He has held faculty positions with Indiana State University and Texas Tech University and spent time on the audit staff of Price Waterhouse in their Chicago office. Dr. Clay has held significant committee appointments with the American Accounting Association, American Institute of Certified Public Accountants, and the Institute of Internal Auditors. He is the author of five books, twelve continuing professional education courses, and numerous articles appearing in professional journals. Dr. Clay serves as a consultant for several firms and has twice been named the Outstanding Continuing Education Discussion Leader by the AICPA and three times by the Texas Society of CPAs. He also received the 1999 Leon Radde Educator of the Year Award from the Institute of Internal Auditors, and was named Outstanding Accounting Educator by the Texas Society of CPAs in October 2000.
Course Description This course is approved by the TSBPA to meet the requirements for ethical training. An individual applying for certification must complete a board approved ethics course no more than six months prior to submission of the application. Proof of completion
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of this course must be submitted with the application. Beginning on January 1, 2005, every licensee must take an ethics course that has been approved by the board, every two years. This course has been recently revised to include the most up-to-date changes in the Rules of Professional Conduct issued by the Texas State Board of Public Accountancy. In addition, this course contains enhanced coverage of important issues impacting the Rules of Professional Conduct as well as additional improvements in both form and content.
Learning Objectives Upon successful completion of Personal and Professional Ethics for Texas CPAs, the user should be able to: • identify and discuss ways in which CPAs can go about achieving and maintaining high standards of ethical conduct, • examine the concepts of ethics and ethical reasoning and demonstrate the impact these concepts have on CPAs and the work they perform, • present and discuss the core values of the profession integrity, objectivity, and independence from both an ethical and rules-based point of view, • emphasize the responsibilities of CPAs to maintain and honor the public's trust, • clarify and demonstrate the manner in which the rules of professional conduct are intended to be applied by CPAs in a variety of professional situations, and • discuss, through case analysis, the actions to be taken by CPAs when faced with ethical dilemmas in their professional careers.
Chapter 1. Ethics, Ethical Reasoning, and the Core Values of the Accounting Profession
There are really only two important points when it comes to ethics. The first is a standard to follow. The second is the will to follow it. John Maxwell, author
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1 A. Introduction Why an ethics course? Effective January 1, 2005, every Texas licensee, unless granted retired or permanent disability status or other exemption, must take a four-hour ethics course that has been approved by the Texas State Board of Public Accountancy (TSBPA) every two years. The course shall be designed to teach CPAs to achieve and maintain the highest standards of ethical conduct through ethical reasoning. Along with coverage of the core values of the profession – independence, integrity, and objectivity – the course shall be designed to teach compliance with the spirit and intent of the board's Rules of Professional Conduct. Licensees shall report completion of the course on the annual license renewal at least every second year. By establishing rules of conduct, a profession assumes a self-discipline beyond the requirements of law. Some have criticized professional ethics as a means by which members of a profession set up restrictive practices to preserve their livelihood and protect their own interest. However, M. Baradell took exception to this notion in his 1969 publication, Ethics and the Accountant, when making the following statement: The observance of professional ethics often involves the individual practitioner in forbearance for the benefit of others. This is a fundamental distinction. No professional man is expected to be so altruistic as to disregard the material rewards of his services, but he will deservedly forfeit the respect of his fellow practitioners and of the public at large if he allows these to take on absolute priority over needs of his clients.
Some Reasons for Studying Ethics
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Most of us fail to recognize the moral implications and moral consequences of our decisions. We do not naturally know what is ethical, and because ethics are not inherited, we do not automatically know how to make ethical decisions. Even after years of parental guidance, we still can have some problems with the consequences of our decisions. Thus, we have a responsibility to consider the moral implications and consequences of our behavior prior to entering into that behavior. Specifically the potential impact of our behavior on others who will be affected by that behavior. Ethics provide an essential foundation for business transactions. Our economic system is based on trust and honesty. Although many business transactions are governed by written contracts, the vast majority are made between parties who trust each other. For example, we drop off clothing at a cleaners and all we get in return is a receipt with a number on it. We don't sign a contract with the cleaners or get a listing of the clothing we drop off. This is an example of the many transactions we enter into on a daily basis that are based solely on our trust in the person or entity we are dealing with. Ethics are necessary for interpersonal relationships. Friendships require integrity because we do not like to associate with people who we cannot trust. Think of your closest friends, the people who you share some of your most intimate thoughts and concerns. The people who would be there if you had a problem and comfort you in your time of need. What do we know about these relationships? They are based on trust in the person's actions and behavior. Without trust interpersonal relationships deteriorate. Moral behavior includes both knowing what to do and deciding to do it. Every moral or ethical decision we make is based on two variables (1) knowing what to do, and (2) deciding to do it. The first variable is not too difficult. In a majority of the moral or ethical dilemmas we face in our lives we know what to do. The critical variable in this equation is “deciding to do it.” When is it easiest to be ethical? For most of us we have no problem being ethical when someone is watching. The critical test is what we do in these situations when no one is watching and we believe we have a good chance of getting away with the inappropriate behavior. Doing the right thing is not a “sometimes choice” it's an “every time choice” no matter what the circumstances.
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Our commitment to choose the right path is not fixed in childhood but continues to develop (or weaken) throughout our life. When and from where do we acquire our foundational beliefs about ethics, morality, and values? Most of us acquire these beliefs in our formative years from parental guidance and religious teaching. However, once we reach the age of 21 our behavior is our responsibility. What did you do with the foundational beliefs about ethics and morality when you reached the age of 21? Did you consider them a strong foundation for good behavior or did you decide you had a better idea? Did you adopt a different set of ethical and moral beliefs and are those beliefs an improvement over your early guidance? Only you know whether your behavioral decisions are based on solid fundamental beliefs or more self-serving desires. As service providers, we need to be aware of our responsibility to the public. We are trusted to satisfy the expectations of third parties who avail themselves of our services and our employers who put faith in our abilities and our integrity. People come to us will little knowledge of what CPAs do and less knowledge of how we do it. Thus, when they ask us to perform an audit, review, or compilation or prepare their tax return they have no real knowledge of what it takes to accomplish those tasks or what the finished product should look like. They are relying on us as CPAs to satisfy expectations they are totally unfamiliar with. When we think about it, our responsibility is quite significant. We need to have a periodic reminder of the behavioral responsibilities that are a part of the landscape that is the accounting profession. How often do we as CPAs consider the behavioral responsibilities we have as a result of our Code of Professional Conduct? Studies have shown that the number one reason accounting professionals give for violating the Code of Professional Conduct is, “I didn't know you couldn't do that.” We don't tend to read the Code of Professional Conduct very often because we just don't see the need to do so. However, ignorance is never a good excuse for violating the rules. Thus, the ethics course requirements for CPAs, which are mandatory in over 30 jurisdictions, are designed to provide a periodic reminder to CPAs of their behavioral responsibilities.
Case Analysis
Personal Obligations vs. Professional Obligations
Teri Rogers, CPA, has been employed at Highland Financial as their controller for the past ten months. She loves the Company and her position and finds it to be a great deal better than her previous position with a large public accounting firm. In that position she was frustrated by long hours and audit assignments where she had great responsibility and little authority.
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During a recent review of Highlands loan portfolio Teri was disturbed to find that a powerful and high profile company, Bedford Industries, had loans that totaled almost 24% of the portfolio. State law strictly prohibited any one company from having loans greater than 25% of a financial institution's loan portfolio. When Teri pointed this out to Greg Pitman, Highland's president, he said his good friend Jim Wilson was CEO and the loans were solid as a rock! Teri had some concerns based on the fact that her husband, Mitchell, was sales manager for one of Bedford Industries' divisions, Bedford Equipment. She knew from conversations with Mitchell that financially things were not good at Bedford Industries. Her husband was optimistic that the company would be on solid ground once the economy had an upswing. Also, he told her if Highland approved their pending loan request it would be a big boost to Bedford's economic situation. Teri reviewed the current Bedford loan application and concluded that, if granted, the new loan would push Bedford's loan balance to 28% of Highland's loan portfolio. When she pointed this out to Greg Pitman he said that percentage stuff is just a rough guide for analysis purposes and it's never really considered by anyone but the auditors. He concluded by telling Teri as a CPA he was sure she could make the numbers look good to keep the auditors from raising any issues. Teri discussed the matter with her husband and he said he was confident the loan would help Buford Industries survive and help him keep his job. Also, if she didn't make sure the Highland's numbers pass the auditor's tests, they might both be looking for a job.
What are Teri's professional obligations in this case?
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Professionally, Teri has an obligation to maintain her integrity and objectivity and to perform her job in a manner which protects her employer, its shareholders, other stakeholders, and the public. As a CPA, Teri has agreed to avoid misleading any interested parties as to her employer's financial viability of her. She is also obligated to keep her employer from acting outside any legal requirements to which they are subject.
What are Teri's personal obligations in this case?
Personally, Teri has an obligation to herself to act in a responsible and conscientious manner. She also has a personal obligation to support her family and attend to their needs. She has made a commitment to her family to care for and support them in an honest and conscientious manner.
Which obligations are more important the professional or the personal?
The easiest answer to this question is that both obligations are equally important and by doing the right thing she would satisfy both obligations. This is normally the case in most situations. However, that might not be the conclusion drawn by all people who might find themselves faced with the situation Teri now faces. If she holds to her professional obligation of strict adherence to the laws of the state regarding loan percentages then her company would be in violation of the law and subject to penalties, fines and negative publicity that could drive them out of business. Also, her husband's job appears to be tied to a further escalation of the loan percentage violations by Highland Financial. Thus, if the violations negatively affect both her and her husband's companies they could both lose their jobs. If she sees her personal obligations as the most important then she has the potential to be charged with a violation of the law as well as her professional obligations. When a person is faced with such a dilemma it's often hard to objectively assess the situation and decide on the best alternative. But when a case like this is analyzed by someone not necessarily faced with such a dilemma it is easy to see that the greatest downside occurs when the professional obligations are ignored. Yes, both spouses could lose their jobs, but they won't lose their reputations, their professional experience, or their dignity. Another job is easy to find; starting another career with a stained reputation is much more difficult.
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1 B. The Significance of Honesty, Moral Character, Trust, Ethics, and Values
A plaque is displayed at the entrance of the Vanderbilt University Student Center which reads: Today I'm going to give you two examinations one in trigonometry and one in honesty. I hope you will pass them both, but if you must fail one let it be trigonometry. Madison Sarratt, author
Honesty
Do you consider yourself to be an honest person? Why?
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When asked this question by a friend or colleague, most people respond in the affirmative. We respond this way because we generally consider ourselves to be honest. However, when the person asking that question follows it up with more penetrating questions like: You have never, ever deceived another person? You've never told a lie? We come to the realization that we truly believe we're honest, but most of us have actually been deceitful and lied. It's extremely difficult not to lie. When asked by a colleague or spouse to comment on a new hair style or the way a new outfit makes them look, it's often less harmful to take the safe route and compliment their looks. We rationalize this as a “white lie” that's OK because we have avoided a potentially awkward situation and no one is harmed.
Honesty means to be free from deceit and fraud; to be open and above board in your transactions; and to treat others fairly and justly. If we opened up a dictionary to the word “honesty” would there be a little picture of you next to that word? Some people narrowly define honesty as simply telling the truth. But honesty involves more than what you say; it also involves what you do and how you act. Giving false impressions or evasive answers to hide the truth is being dishonest. Honest people don't try to manipulate the truth by leaving the listener with an incomplete understanding of the facts. Often we believe we are not lying when we make incomplete statements or leave out pertinent information from what we tell other people. Such actions are designed to hide the truth which is just a unique form of lying. Some people narrowly define honesty as simply telling the truth. But honesty involves more than what you say; it also involves what you do and how you act. Giving false impressions or evasive answers to hide the truth is being dishonest. There are two concepts related to honesty and moral behavior that have resulted from research. They are specificity of moral behavior and generality of moral behavior. Specificity of moral behavior claims that people will act in each situation according to the specific demands of the situation. A student may be honest on a math exam but cheat on a spelling exam due to his/her lack of spelling skills. Generality of moral behavior claims that people have stable personality traits that cause them to behave consistently at different times and in different situations. A person who displays a generality of moral behavior follows his/her moral and ethical beliefs in every situation without regard to the type of situation or the outcome that may result.
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Honesty can be a personality trait, but it is not a single trait and it does not act alone when influencing behavior. Honesty is composed of at least three important dimensions.
1. Have very high, well-defined general standards of morality. Honesty requires the ability and willingness to discern right from wrong. 2. Internalize these standards as moral imperatives. The degree to which people have internalized standards of honesty is determined by their moral development. 3. Live a moral life to the degree that violating these standards causes feelings of remorse. Honesty should matter; people should not lie or steal with impunity and think nothing about it.
Some guidelines to consider when one is tempted to lie:
Be sure the benefit you're trying to gain by lying is important enough to risk the loss of trust. To whom are you telling a lie? Is this person important to you or a significant part of your life? If so, think twice or more about lying to them as the loss of trust may significantly change the relationship. Don't lie if you can accomplish your noble goal without lying – remember, necessity is not a fact, it's an interpretation. People often rationalize that “they had to lie.” In most cases this phrase is nothing more than a self-serving statement to excuse bad behavior. In cases where a lie would result in saving the life of another person in a criminal situation then the lie is necessary. However, most lies are told to deceive others and save the person telling the lie from punishment or embarrassment.
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Be careful that the lie doesn't cause serious unintended consequences – like telling a child that a monster will take him/her away for bad behavior might cause serious long-term anxiety. What often happens in these situations is that years later this child is subjected to intense counseling due to the trauma caused by the poor tactics used to generate desired behavior.
Integrity means to be true at all times to high moral principles and to be consistent in attitudes, behaviors, and speech. The following three steps are essential for a person to act with integrity.
Discern what is right and wrong.
Act on what you have discerned is right, even if it entails a personal cost.
Openly declare that you're acting on your understanding of what you have discerned to be right.
Example
Assume you have just been promoted to partner in your firm. This is a goal that you have worked towards for years and you are so excited about accomplishing this goal. Next Monday you are going to attend your first partners meeting. You are looking forward to this opportunity and the responsibility it demands. When the meeting time arrives you join the other partners and begin dealing with the issues on the agenda.
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When the agenda item of “salaries for new hires” is introduced, the chairman says that the salary committee has decided that beginning salaries for new hires with be 47/52. You are perplexed as to the comment and raise your hand and ask for clarification. The chairman apologizes for not explaining the comment further as this is your first partner's meeting and you are unfamiliar with the shortcuts that are sometimes taken. He explains that the 47/52 comment means that this year the salaries for new hires will be $47,000 for females and $52,000 for males. You are aware that it is against the law to discriminate based on gender, but you are uncertain whether it would be wise to bring this issue up before the entire group at your first partner meeting. However, a person of integrity would! Following the three steps (1) you know it is wrong to discriminate based on gender (2) a person of integrity will act on what they discern to be right even if it entails personal cost, and (3) you should openly declare that you're acting on your understanding of what you have discerned to be right.
Would you have the courage of your convictions if you were placed in such a situation? A person of integrity does not let his/her ego and self-image get in the way of doing what is RIGHT. This is a rather easy and straight-forward violation of rules that could cause this firm to face significant problems. However, there are many situations in our professional careers that are not so obvious but need to be challenged and made right. A person of integrity would do just that. Honesty refers to behaviors that are consistent with reality. Integrity refers to behaviors that are consistent with moral principles.
The Dishonesty Culprit
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What's causing the hole in our moral ozone? We tend to be less concerned with doing the right thing than we are with doing what is most beneficial to us. Why are cheating and lying so common in schools, on sports fields, and in business and politics?
Many people tend to shun their responsibilities to others and focus totally on their personal well-being. I'm sure you recall the saga of the #1 evening news anchor at the #1 national television network, who went on air in front of millions of viewers and told a made-up story of his experience in a Middle Eastern war zone when the helicopter he was in was shot down by enemy gun fire. The story was totally prefabricated and was designed to enhance his position in the new media world. What is better than #1? Why would a person who already had the top position stoop to telling a lie while broadcasting the evening news? Apparently, it's a thing called PRESSURE. Pressure impacts the actions of kids, athletes, coaches, and business professionals. Many people react to the pressure by trying to enhance their status by any means that will help them maintain their lofty position or self-image. This results in behavior that is often dishonest and manipulative. What we call pressure today used to be called temptations. I liked it better when we called it temptations because we could encourage those faced with the temptations to “not give in to the temptations.” We tell people not to give in to the pressure and they react by saying it's impossible not to succumb to the pressure since it's there all the time.
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Lots of people give in to pressure. But pressure is merely an explanation, not a justification. Each of us has a choice when we are faced with mounting pressure. We can give into the pressure and attempt to manipulate the situation by inappropriate means or we can opt for a more manageable environment. Sure it would be helpful if we had less pressure, but it's far more important that we have more character. Do you like the person you look at in the mirror every morning? Are you happy with your work/life balance? Are the people who are most important to you happy with the person you are? If the answer to these questions is yes, it would appear that you have the pressure in your life will under control. If the answers to any of these questions is no, you might need to reexamine your priorities.
Study question 1 / 3 in Chapter 1
Which of the following is not included in the definition of honesty? Be free from deceit and A Being free from deceit and fraud is a large part of being honest. fraud.
An apology is the cure for An apology may relieve some of the guilt associated with honesty, but B dishonesty. an apology is not a cure for dishonesty or a part of the definition.
Treating others fairly and justly is a significant aspect of leading a life of C Treat other fairly and justly. honesty.
Be open and above board in Being open and above board in your transactions means that you are D your transactions. not misleading people or acting in a way that is deceitful.
Study question 2 / 3 in Chapter 1
While honesty refers to behaviors that are consistent with reality, which of the following refers to behaviors associated with integrity? Wholesome is a term dealing with physical, mental or moral health and A Wholesome. has more to do with honesty than integrity.
More important than Honesty and integrity are equally important in achieving the trust and B honesty. respect of others.
At the core of high moral C High moral character is a result of a commitment to integrity. character.
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It's only inconsistent with reality for those who have low moral character D Inconsistent with reality. and tend to be dishonest.
Trust It is written that in one day, Samson slew 1,000 Philistines with the jawbone of an ass. Every day, scores of employees have their trust and commitment killed by the same weapon. Paul Sims Trust is the ability to place reliance on the honesty, integrity, competence and behavior of a person. Think of two people in your life right now that you trust implicitly. If you were to leave town for a business trip for a week you would have no problem leaving your children with either of these individuals. Do you have total reliance on their honesty, integrity, competence and behavior? How long did it take you to develop this level of trust? Was one of the two people you thought of your spouse? How long did it take you to decide that you would like to spend the rest of your life with that person. There is no shortcut to building trust. In fact, rebuilding trust on the rubble of lost credibility is extremely difficult. Building trust in another person takes both time and some effort. Once the trust is established a very strong bond is developed between you and the other individual. Once that trust is broken, it may take a long time for it to reform. Or more likely, the same level of trust with that individual may never be achieved. Where trust is important there are no small lies. A trusting relationship carries with it a responsibility to be honest and truthful with the other party in that relationship. We are much more upset when a person we trust deceives us than we are when a person we have little trust in is deceitful.
The lethal quality of lies last long after they're told. Even lies told years ago can have an immediate poisonous effect on trust whey they're discovered. While honesty and forthrightness may not always pay dividends, dishonesty and concealment always cost. In some settings nothing good may come of admitting wrongdoing, but it can get a lot worse if you don't.
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Lies breed other lies. It's harder to tell just one lie than it is to have just one potato chip. You only have to tell the truth once, but you have to tell numerous lies to back up the original one you told. Don't be seduced by the “fight fire with fire” excuse or all you'll end up with is the ashes of your integrity. Self-justification aside, you can't lie to a liar or cheat a cheater without becoming a liar or cheater. In business, confidence in character is not enough to justify trust. In business, trust also involves the conviction that the person or organization will successfully do what is expected. A person can have a great disposition and charming personality. However, a business associate or customer doesn't necessarily care about your disposition or personality. What they care about is your ability to meet their expectations. Your disposition and personality does not keep the loyalty and commitment of your customers. What keeps them loyal and coming back is your ability to continue to meet their expectations.
Case Analysis – It Was Only a White Lie Kathy Westfield graduated from college with a degree in accounting in May 1990. She began her career on the audit staff of a regional public accounting firm in June, 1990. Her first audit assignment was on the audit of a retail client and her supervisor was Janet Nelson who had been on the audit staff for six years. Early in the audit Janet asked Kathy if she had taken the CPA Exam when she graduated in May. Kathy indicated that she had not taken the exam and hoped to study and take the exam in November. Janet told her she had some material that she could borrow and use in her studies. In reality, Kathy had actually taken the May 1990 CPA Examination, but felt that her performance was not sufficient to have passed any part of the examination. She decided to protect her ego by not telling Janet that she had taken the exam. Kathy performed well on the audit and Janet had consistently complemented her on her efforts and quick grasp of the audit process. In early August, Kathy received her grades on the CPA Examination and to her surprise she passed all parts. She was so excited she immediately called Janet to inform her of the accomplishment. To Kathy's surprise, Janet was less than enthusiastic about the news. Kathy then remembered that she had told Janet that she did not take the CPA Exam in May. She immediately apologized to Janet but the conversation ended quickly. Over the next few days Janet was working on another audit and Kathy did not have a chance to talk to her. On the following Friday Kathy was called into the office of the firm's managing partner, Bob Richards. Bob informed Kathy that Janet was concerned about Kathy's failure to tell the truth about taking the CPA Exam and she would be reluctant to have Kathy work on any of her jobs in the
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future. Bob indicated that he had talked the matter over with three other audit partners and they agreed that it would be difficult to have her assigned to any of their audit engagements. Thus, Bob informed Kathy that she would be given two month's severance pay and they would not indicate the reason for her dismissal to any prospective employer.
Do you believe Janet overreacted to Kathy's failure to admit she had taken the CPA Examination? If so, how would you have handled the situation?
It seems strange that Janet never gave Kathy a chance to explain the situation. Obviously Kathy is young and has a frail ego and was probably protecting that ego when she told Janet that she had not taken the CPA Examination. Perhaps Janet could have told Kathy that she was going to watch her very closely on upcoming engagements and that any further indication of lying would be dealt with in termination. However, many who have discussed this case in the past have agreed with Janet's position as a lack of trust among accounting firm personnel introduces a level of concern that is dysfunctional to the services being performed for clients. People have indicated that having a staff member who was not trustworthy put a significant burden on those responsible for supervising that individual. Only you know what you would be comfortable doing if you were faced with such a situation.
Did the managing partner of the firm act in an appropriate manner?
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Bob Richards was put in a very tough position. He might have felt that a bit more compassion should be accorded Kathy since she was new and perhaps unaware of the significance of her actions. However, Janet is an experienced member of the firm with six years' experience and, while her recommendation might appear harsh, she has to count on Kathy's integrity when involved in future engagements. Also, it appears as though the other partners Bob talked to were in agreement with Janet and seemed to favor Kathy's dismissal. Bob would have a difficult time going against the wishes of so many senior people in the firm.
Janet obviously had a problem with Kathy's personal integrity. Is a person's personal integrity an indication of his/her professional integrity?
I personally find it difficult to believe that a person displays a different sense of integrity in their personal life and their professional life. One's integrity is normally displayed in a consistent manner whether in personal or professional situations. It would appear to be most difficult to constantly switch one's notion of right and wrong. Our integrity is reflected in the character we display to the people we work with and those we spend our leisure time with. For the most part, our character is displayed in a consistent manner and does not tend to change drastically from one situation to another.
Study question 3 / 3 in Chapter 1
In business, confidence in character is not enough to justify trust. In business, trust also involves the conviction that a person or organization will do which of the following? In business, trust comes from meeting the expectations of A Do what is expected. customers and clients. Doing the best you can falls short of a “conviction” on the part B Always do the best they can. the person or organization.
Do the job for the lowest possible C The fee for services is not primary criteria for building trust. fee.
Never make a mistake in judgment Making a mistake or exceeding a time budget will not normally D or exceed the estimated time have a significant impact on trust as long as these are not budget. common occurrences.
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Chapter 2. Effective Leaders and the Generation Gap
2 A. Behavioral Strategies of Effective Leaders
Leadership implies a great deal of responsibility in a firm or organization. Here are some behavioral considerations that you might find helpful when attempting to adjust the behavior of your firm personnel. • Make employees aware of what's important • Have consequences for failure to comply
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• Set a good example • Reinforce behavior with education • Adhere to sound hiring and promotion practices • Use values as a basis for action Now let's move on to expound upon these considerations.
Make Employees Aware of What's Important Employees have a simple way of deciding what's important at work, they watch their bosses. Do you walk the talk? Are your actions consistent with your words? Successful leaders say what they stand for and stand for what they say.
Have Consequences for Failure to Comply Without accountability or sanctions for wrong-doing, employees will conclude that “it doesn't matter what I do.” Good employees don't mind rules and reprimand, what they mind is rules that are not enforced. Good employees tend to be rule followers. If there are no consequences for failure to comply then they ask “why have the rules?” We discipline our children to enforce expected behavior, employees are no different. Without discipline or enforcement there are no rules.
Set a Good Example As a leader you're a role model, and the only decision you have to make is what role you're going to model. One thing we know about professional people when they work for you in your organization – they want to be you! Business professionals want to move up in the organization and the next step is to get to the next level. The next level is normally the level of their current superior. Thus, they want to be that superior and emulate their behavior. Hopefully the behavior of the supervisor will allow the subordinate to move up the line. People hear what we say and see what we do – and believe me, ACTIONS SPEAK LOUDER THAN WORDS!!
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Reinforce Behavior With Education You can train people to do their jobs, or you can train them to do their jobs conscientiously and with integrity. Either way, you get what you train for. Reinforce the HOW with the WHY. It's easy to show them HOW it's much more difficult and time-consuming to explain WHY. Many employers question the cost/benefit of extensive training programs. I have dealt with corporate executives question spending a lot of money on training, because“ we train them and many of them leave.” I normally ask these executives, “what if you don't provide quality training and they stay?”
Adhere to Sound Hiring and Promotion Practices
What criteria has your organization established for hiring and promotion practices? Consistency or expediency? Does your criteria include integrity and ethical conduct? If it does, are those traits imperative or merely desirable? Greater effort put into hiring practices result in much less time being spent on “people problems.”
Use Values as a Basis for Action The primary purpose of values in an organization is to guide employee actions.
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“Words to live by” are merely words – unless you live by them!
Study question 1 / 5 in Chapter 2
Without accountability or sanctions for wrong-doing employees will do which of the following? Implement strong self- It's doubtful that employees would make their own rules if management A discipline for themselves. failed to do so.
While a company without accountability or sanctions for wrong-doing Cause a company to go out B would surely experience some people problems, there is no guarantee of business. that they would fail.
Seek employment If there was no accountability or sanctions for wrong-doing in a C elsewhere. company most employees would be more likely to stay than leave.
Conclude that “it doesn't Without accountability or sanctions for wrong-doing employees would D matter how we behave.” most likely conclude that it really doesn't matter what they do.
Study question 2 / 5 in Chapter 2
Employees have a simple way of deciding what's important at work. According to this course, how do employees make this decision? Ask older employees how much Asking older employees how much they've been able to get away A they have been able to get away with is a red flag that would not be looked upon as appropriate with. behavior.
Look for the best way to avoid Looking to avoid the boss might be important to the employee, B the boss. but not to the effectiveness of the company.
Watching what the leaders do is a good way to see what's C Watch their leaders. important at work. It's also a good way to know what is considered to be good behavior.
Work hard whenever the boss is Working hard whenever the boss is around is a short-term benefit. D around. It's hard to get ahead with sporadic performance.
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Study question 3 / 5 in Chapter 2
The primary purpose of values in an organization is to do which of the following? Identify the people who you The identification of people you can rely on is normally a function of A can count on. the behavior of each individual person.
Let customers know that the The honesty of a company is based on the behavior of employees B company is trustworthy and being consistent with the company's values. honest.
Impress people who think Values are first and foremost a guide to those in the organization C values are important. rather than to those outside the organization.
Values serve as an important guide to management and D Guide employee actions. employees alike as to the attitude and commitment they should bring to their responsibilities.
2 B. The Generation Gap in the Professional Workplace Check your budget. Typically, you'll find that the largest line item is payroll. Why? Because your people are a key resource to making your company successful. Therefore, it only makes common sense (and bottom-line cents) to ensure you understand your employees and do what you can to retain and develop their skills to avoid or minimize the costs of conflicts and turnover. Linda Gravett & Robin Throckmorton, authors of Bridging the Generation GAP Our ethical beliefs are an integral part of our behavior and our behavior forms the basis for an evaluation of us and our character by all those who observe that behavior. We are all a function of our (1) age, (2) our education, and (3) the complexity of our life experiences. These components are instrumental in the formation of our beliefs about what is right and what is wrong. Most of the negative reactions we have towards others are the result of a lack of understanding concerning why they act the way they do. This is especially true when it comes to individuals from generations that are different from our own. A good way to alter, or temper those negative reactions is to gain a better understanding of the kind of life events and experiences that impacted those generations as they developed their behavioral beliefs.
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Generations in the Workplace
Traditionalists born 1922 to 1943 Baby Boomers born 1944 to 1960 Generation X born 1961 to 1980 Millennials born 1981 to 2000 The actual years that begin and end a particular generation are sometimes subject to debate. However, these four generations are the ones making the impact on the US work place and in order to make that workplace as effective as possible we need to understand the generations that are different from the one we are most associated with. What happens in many organizations is that personnel tend to associate with the people that they feel comfortable with. Most often these are the ones in their same generation. These associations tend to segregate employee groups and cause a lack of cooperation and trust. In order to minimize or eliminate this dysfunctionality what needs to be done is help employees better understand the reasons why each generation may have different likes, dislikes, and personalities. The brief presentation below is an attempt to shed some light on why certain generations act as they do.
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Brief Overview of Generations
(Developed by Ethics Resource Center) Significant World Events
Traditionalists:
Great Depression WW II Pearl Harbor Traditionalists lived through GREAT DEPRESSION, not a 2008 depression where people lost about 15% to 20% of the value of their home. The Great Depression caused people to question whether they could feed, clothe, or house their family. They felt that war was a necessary to protect the life-style they had developed for themselves and their families.
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Baby Boomers:
Era of Economic Prosperity Assassinations: JFK, RFK, MLK Civil Rights Vietnam War Sexual Revolution Baby Boomers lived in an era of economic prosperity. A debt-free country with no war was an ideal place and time for developing the infrastructure of this country. They tended to get along, but to violent measures when their popular beliefs were challenged. Their view of war was much different than that of their traditionalist parents. While their parents supported war as a way to maintain their lifestyle, baby boomers were extremely reluctant to support war – especially one against a third- world country. They also didn't support the taboos of their parents. Where traditionalists kept subjects such as sex and personal relationships private, baby boomers were prone to highlight and celebrate these issues in discussions as well as media.
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Generation X:
Raised in Two-Earner Household Latchkey Kids Rise in Divorce Rates Widespread use of Computers Economic Uncertainty Generation X was a self-reliant group because they had to be. Their baby boomer parents were working 60+ hours a week so they had to rely on themselves. They were the latch-key kids because no one was there when they came home from school. Fifty percent of this generation came from broken homes. They discovered the computer which allowed them to learn a great deal on their own. They became so proficient with the computer they were responsible for the large number of dot-com companies that sprung up in the 70s and 80s.
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Millennials:
Grew up with email, internet, cell phones Violence and Terrorism, Columbine High, 9/11 Globalization Most Scheduled Childhoods in US history Millennials are the most high-tech of all the generations. They acquired their love of technology from their Generation X parents. They grew up in an era of no conventional wars, but they experienced a great deal of violence in their own home towns. The threat from terrorists along with school shootings brought violence right to them up close and personal. They had the most scheduled childhoods in history as their Generation X parents scheduled every minute of every day. Generation X had a poor relationship with their parents so they tried to overcorrect the problem and ended up smothering their millennial problems.
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Study Question 7
Study question 4 / 5 in Chapter 2
Which generation is said to have grown up with email, internet, and cell phones? Millennials were provided with access to technology (including email, internet and A Millennials cell phones) by their Generation X parents early in their lives.
Generation X was the first generation to make extensive use of computer technology. B Generation X However, most of this generation did not have email or internet until later in teenage or early adult years.
Baby Baby Boomers had access to technology in their adult lives, but many resisted due to C Boomers a lack of understanding.
Traditionalists were happy to have a telephone, but were not big users of modern D Traditionalists technology.
Positive Traits
Traditionalists:
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Hard Work Respect Authority Value Loyalty Traditionalists did hard work (coal mines, factories, etc.) but they loved what they had. All they wanted from a job was a check every Friday so they could enjoy and care for their family. Work to traditionalists was a means to an end, not an end in itself. They didn't want to be the boss or own the business they just wanted a pay check and time to spend with their families. They were loyal and many retired from the company they went to work for at age 16. Their biggest fear was having the company factory go out of business. If that happened they would have lost their ability to support their family and been devastated.
Baby Boomers:
Hard Working Idealistic Committed to Harmony Baby Boomers didn't necessarily do hard work but they were hard working. They were workaholics, at work 12 to 14 hours a day. Their job was to build the infrastructure of this country and they worked tirelessly to accomplish this. They are a very idealistic group and committed to harmony. They were committed to harmony because they had to be. There were so many of them they had to work together. This was the first generation that was given a grade in their school report cards for “works and plays well with others.”
Generation X:
Entrepreneurial Flexible and Self-Reliant Comfortable with Technology GenerationXers are very entrepreneurial. They started all those dot-com companies in their bedrooms in their pajamas. They were flexible and self-reliant because they had to be. They didn't have a lot of parental guidance. Their baby boomer parents could buy the computers and buy the VCRs. They couldn't operate the computers or
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program the VCRs. But the Generation Xers made themselves extremely tech savvy and taught themselves how to effectively use technology.
Millennials:
Tech-Savvy Appreciative of Diversity Skilled Multi-Taskers Millennials are very Tech Savvy. They were encouraged by their Generation X parents to embrace technology and were provided with a multitude of high-tech devices. They spent many hours learning to use these devices and have become tech- experts. They are appreciative of diversity as a result of the effects of immigration by foreign nationals into this country. Many of the millennials' classmates were the children of these foreign nationals and they became very comfortable associating with persons of different ethnicity. Millennials are skilled multi-taskers. They have many interests and they enjoy spending time with a multitude of diverse activities. Their problem is they don't spend a great deal of time with any one activity. Because they have so many activities they enjoy, they can only spend a limited amount of time on each activity.
Negative Traits
Traditionalists:
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Conformers Resist Change Traditionalists were conformers. They did what society expected them to do. The average age of traditionalists when they married was 23 years old for males and 20 years old for females. Society thought marriage and raising children with good values and a positive self-image was their job, whether they agreed with that or not.
Baby Boomers:
Sense of Entitlement Workaholics Self-Centered Baby Boomers felt they had a sense of entitlement. They were the ones chosen to build the infrastructure of this country and they worked extensively to meet this objective. They became a very self-centered group with a huge ego that they needed to have stroked periodically.
Generation X:
Skeptical and Cynical Lazy, Slackers Question Authority Figures Generation X: They are a skeptical and cynical group. A lot of people lied to generation X. Don't lie to generation X as they will lose all respect and trust in you. A president lied to them and he was impeached. Religious leaders lied to them, when they told them the thing they were doing were sins and they would burn in hell. And then those religious leaders were put in jail for doing the very things they told generation X not to do. Madison-avenue lied to them by telling them if they bought and used certain products they would become skinny, beautiful, and live happily ever after. They bought and used the products and they didn't get skinny, or beautiful, or live happily ever after. Their parents lied to them: “when you coming home dad, I don't know when, but we'll get together then.” They question authority figures (like bosses) as they rarely had an authority figure around and they did quite well making their own decisions.
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Millennials:
Lack Literacy Fundamentals Very Short Attention Span Not Loyal to Employers Org. Millennials: They lack literacy fundamentals (LOL, BFF, LMAO). Time is so valuable to them that they can't waste it by texting in full sentences. They have many interests and do many things very well. However, they spend very little time on any one thing. They have the attention span of a gnat. They are not loyal to employing organizations. They were looking for a job when they got this one and they will soon believe the grass to be greener somewhere else and be off to a new job experience.
Study Question 8
Study question 5 / 5 in Chapter 2
Which of the following statements applies mostly to traditionalists? They have a very short Millennials are the generation that does a great many things well, but A attention span. noting for a long time. So they are thought to have a short attention span.
Traditionalists are conformers. They tended to do what society expected B They are conformers. them to do.
They are skeptical and Generation X is a generation that is highly skeptical and cynical as a result C cynical. of being deceived by many people whom they trusted.
D They are workaholics. Baby Boomers are the workaholics.
Workplace Attributes
Traditionalists:
Work and Family Life Never Met – They left the job at the work place and they didn't let the stress or problems affect their home life. Disciplined and Pragmatic. Look for Stability.
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Assume People Will Stay in Their Jobs for a Long Time – They don't quite understand the devil-may-car approach to job loyalty demonstrated by generation X and the millennials.
Baby Boomers:
Belief that Hard Work = Long Hours – If you don't work 12 hours a day a few times a week then you're slacking off. Long-Term Commitment to Employing Organization. Self-Motivated – Their ego keeps them motivated. Do Not Appreciate Feedback – Especially negative feedback.
Generation X:
Desire for Work-Life Balance – Their baby boomer parents worked on Saturday and it ruined their home life, they're not going to do that. Less Hierarchical, Prefer Flexible Work Structures – They don't see the need for bosses. Expect to have Multiple Employers, Even Multiple Careers. For First Time, Women in Workplace Educated as much as Men – This was the first generation where women significantly broke through the corporate “glass ceiling” and were sought out by corporate America.
Millennials:
Excellent at Integrating Technology into Workplace – Many of them are tech experts and can assist your organization with technology integration. Demand Immediate Feedback and Recognition – Because their gen X parents gave them immediate feedback, telling them immediately when they were good or bad. Expect to have many Employers, Multiple Careers.
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Accustomed to Rules and Regulations, Expect them to be Enforced.
Some Additional Characteristics
Traditionalists
They are past oriented and history absorbed. Their lives and opinions are shaped by what worked in the past. What worked in the past is a good approach to fixing today's problems. History offers valuable lessons that can help us make the future better. Their spending style is conservative. No matter how small the paycheck a portion went into savings. Credit was a slippery slope to money problems. “Payment on time” meant you made monthly payments until the item was paid for and then you took it home. They are extremely brand-loyal and they buy “made in America.” Be aware of the importance of gender roles to this generation. They have traditional ideas about the roles of men and women from their life experiences. According to this generation women should not be race car drivers. They have very definite opinions about the roles of males and females. They are excellent candidates for part-time or project based work. They are not going to work 40 hours a week or be interested in long term commitments, but they have an abundance of knowledge the can be beneficial to an organization.
Baby Boomers
They think of themselves as stars of the show. Their parents doted over them, mothers making their comfortable home and fathers trying to provide them with the tools of success. America had to change to accommodate their needs: schools, playgrounds, medical facilities, toys and sports equipment, and entertainment. They tend to be optimistic. Their fathers provided them with a free and potentially prosperous American that they were entrusted to develop and build. They were given a country and they were confident in their ability to make it a great success. They have pursued their own personal gratification, uncompromisingly, and often at high price to themselves and others. They rarely failed they just weren't successful due to the circumstances. Don't like the job, get another one; bad marriage, find a new mate; bad investment decision, apologize and start again. Boomers need help with “soft skills.” They tend to have an abundance of textbook knowledge, but their people skills are sometimes less than stellar. They don't
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understand why members of other generations don't want to work 80 hours a week like they do.
Generation X
Gen Xers are self-reliant. Absentee parents left this group on their own to fend for themselves. Parents worked to reap the good life and the children were often ignored. Almost 50% of them experienced broken homes. While this devastated them personally, it created a self-reliant, independent group of people. They are seeking a sense of family. This often manifests itself in the form of surrogate families made up of friends and acquaintances. The TV sitcom “Friends” is based on this X generation phenomenon. They like informality. Their childhood was formal and in line with the rules because of their Boomer parents. Thus, they seek a more informal and laid-back life style. Casual Fridays (and every other day of the week for that matter) is how they want to live. Make the work environment less “corporate” and more fun and Gen Xers will fit right in. They are attracted to the edge. Boomers were consumed with their jobs. To Gen Xers a job is “just a job.” Their activities tend to find them on the edge: rock climbing, paint ball, bungee jumping, etc. The popular X Games were named in their honor!
Millennials
They want to have a say about when they work. Flex hours, no weekends, your time and my time are well defined. They want to have a say about how they do their work. Their approach to getting their work done is basically their responsibility. If they want to modify their approach it will be wise to let them do so as it will greatly enhance their performance. They don't expect you to be their best friend, but when you evaluate them or critique them, they want you to do it in a friendly way (just like their parents did). It's OK for you to be the boss and them to be the worker. If they're super let them know. If they need improvement explain that “many people have problems with this but I'm sure you will be good at it in no time.” They are most comfortable in large organizations where roles are well defined and the workplace structure is more ridged. They are not necessarily self-starting entrepreneurs. They want work to fit into their lives, as opposed to the other three generations who let their lives fit into the work schedule.
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Chapter 3. Principles, General Standards and Core Values of the AICPA Code of Professional Conduct and the Accounting Profession Ability is what you're capable of doing. Motivation determines what you do. Attitude determines how well you do it. Lou Holtz, Football Coach and Sports Commentator
3 A. Principles of the AICPA Code of Professional Conduct Introduction
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The Principles of the Code of Professional Conduct of the American Institute of Certified Public Accountants (AICPA) express the profession's recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethical and professional conduct. The Principles call for an unswerving commitment to honorable behavior, even in the sacrifice of personal advantage. The Principles that we will discuss on the following page include: • Responsibilities • The Public Interest • Integrity • Objectivity and Independence • Due Care • Scope and Nature of Services
Responsibilities: In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities. Exercising sensitive ethical and moral judgments requires a CPA to perform in a manner that enhances both the confidence and the respect of those who avail themselves of the CPA's services. The Public Interest: Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism. The public interest is defined as the collective well-being of the community of people and institutions the profession serves. A dedication to professional excellence by CPAs in performing professional services is essential in honoring the public trust. Integrity: to maintain and broaden public confidence, members should perform all professional services with the highest sense of integrity. Integrity is measured in terms of what is right and just. In the absence of specific rules, standards, or guidance, or in the face of conflicting opinions, a member should test decisions and deeds by asking: “Am I doing what a person of integrity would do?” Objectivity and Independence: A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services. Objectivity is a state of mind, a quality that lends value to a member's services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest. Independence precludes relationships that may appear to impair a member's objectivity in rendering attestation services.
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Due Care: A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability. The quest for excellence is the essence of due care. Members should be diligent in discharging responsibilities to clients, employers, and the public. Diligence imposes the responsibility to render services promptly and carefully, to be thorough, and to observe applicable technical and ethical standards. Scope and Nature of Services: A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of professional services. The public interest aspect of CPAs' services requires that such services be consistent with acceptable professional behavior for CPAs. Integrity requires that service and the public trust not be subordinated to personal gain or advantage.
General Standards of the Profession
Sections 1.300 and 2.300 of the AICPA Code of Professional Conduct include the General Standards of the profession for both members in public practice and members in business, respectively. These standards constitute the basic responsibilities that a CPA has when performing professional services.
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Professional Competence. Undertake only those professional services that the member or member's firm can reasonably expect to be completed with professional competence. The member must possess the competence necessary to perform the professional services prior to the start of the engagement. Due Professional Care. Exercise due professional care in the performance of the professional services. In all engagements and in all responsibilities, each member should undertake to achieve a level of competence that will assure that the quality of the member's services meets the high level of professionalism required of those possessing the CPA credential. Planning and Supervision. Adequately plan and supervise the performance of professional services. Adequate planning is a key ingredient in providing relevant and useful conclusions to those who rely on a CPA's professional services. Supervision is necessary to guarantee a consistent level of competence applied throughout the engagement. Sufficient Relevant Data. Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed. Useful conclusions and recommendations are best achieved if they are the product of an analysis and assessment of data that bears upon the issues being addressed.
Relevance of the Principles and General Standards
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How a practicing CPA views the Principles and General Standards of the AICPA Code of Professional Conduct often has a direct correlation to the impact they make on that CPA's performance. Some CPAs pay little or no attention to the Principles or General Standards because, to these CPAs, they represent nothing more than glowing rhetoric designed to influence the image of CPAs in the eyes of their constituents. They view them as descriptions and definitions that governing bodies are required to promote, but are impossible to apply in the competitive environment in which CPAs are required to practice. Some CPAs embrace the notions embodied in the Principles and General Standards and attempt to make them an integral part of the attitude they bring to the performance of professional services. Where do you fall on the relevance of the Principles and General Standards? It's easy to be cynical and unconcerned with non-technical issues when things are good. However, in the ebb and flow of the business world a positive attitude and attention to integrity and professional effort can enhance the chance for long term success.
Core Values of the Accounting Profession Independence, integrity, and objectivity represent the core values of the accounting profession. They are the values that allow accounting professionals to generate the kind of trust and confidence that is necessary in effectively discharging their responsibilities. These core values represent the concepts that gave rise to the accounting profession. Providing clients and employer with reliable information that is prepared and disseminated in an independent and objective manner, with a high degree of integrity, has generated a high level of confidence in CPAs and the accounting profession. Thus, these core values underscore the basis for the one product CPAs are responsible for delivering – BELIEVABILITY! If a CPA ever loses his/her believability they have lost the element of trust and thus the ability to provide information that clients and other third parties are willing to rely upon. Independence is of critical importance to the attest function performed by CPAs. Whether the client is a public or nonpublic entity, the issue of independence is what provides financial statement users with the comfort level necessary to rely on the financial statements provided for their use.
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Integrity refers to a person's honesty. If a person lacks integrity, he/she cannot be trusted to act in a manner consistent with high moral and ethical standards. For the efforts of accounting professionals to be effective they must be trusted to present an honest characterization of factual information. Objectivity refers to the ability to act in an unbiased manner. Accounting professionals are being trusted to disseminate information that reflects a level of economic reality that is never intended to mislead or dictate preconceived conclusions.
Study question 1 / 3 in Chapter 3
The Principles of the AICPA Code of Professional Conduct includes a Principle dealing with The Public Interest. According to this Principle, a CPA should act in a way that will: (1) serve the public interest and (2) honor the public trust in addition to which one of the following? Protect the public from possible CPAs can identify problems, and report problems, but they cannot A financial problems. be expected to protect the public from possible financial problems.
Satisfy all members of the It is highly unlikely that CPAs could ever satisfy all members of the B public. public not matter how hard they try.
Demonstrate commitment to Commitment to professionalism is an important part of the Public C professionalism. Interest Principle.
Be available to members of the It would be unreasonable to expect CPAs to be available to D public at all times. members of the public at all times.
Study question 2 / 3 in Chapter 3
The Principles of the AICPA Code of Professional Conduct express the Profession's recognition of its responsibilities to all but which one of the following? A Colleagues. Members definitely have a responsibility to their colleagues.
B Clients. A primary responsibility of members is to their clients.
C The Public The public expects CPAs to act in a responsible manner.
D Competitors. The Principles do not recognize a CPA's responsibility to their competitors.
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3 B. Independence, Integrity, and Objectivity Independence (Section 1.200) Due to the significant changes in the independence standards that have taken place, and continue to take place, the Texas State Board of Public Accountancy's Rules of Professional Conduct, includes the following independence rule: A person in the performance of professional services or professional accounting work, including those who are not members of the AICPA, shall conform in fact and in appearance to the independence standards established by the AICPA and the board, and, where applicable, the U.S. Securities and Exchange Commission, the U.S. General Accounting Office, the PCAOB and other national or international regulatory or professional standard setting bodies. This independence rule requires Texas CPAs to comply with applicable independence standards for attestation engagements issued by the regulatory or professional standards setting body with jurisdiction over the type of engagement being performed. A complete discussion of the array of independence standards embraced by the AICPA, SEC, and PCAOB is beyond the scope of this course. For a complete discussion of the current independence rules you may visit the following websites: AICPA: www.aicpa.org SEC: www.sec.gov PCAOB: www.pcaobus.org
Integrity And Objectivity (Sections 1.100 and 2.100) Integrity refers to a certificate or registration holder's honesty. Objectivity refers to a certificate or registration holder's ability to avoid bias and approach professional assignments with an attitude of impartiality. The concepts of integrity and objectivity form the basis for the willingness of third parties to rely on the work of accounting professionals. Whether in industry, government, or public practice, CPAs generate one product – believability!
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CPAs are hired to perform a variety of services that often involve analysis, evaluation, and summarization of technical issues. These services normally require an expertise that is not possessed by the third party requesting the assistance. Further, if the third party does not possess the expertise to perform the work, they probably are unable to evaluate the reliability of the finished product. In such circumstances, the CPA is in a position to take advantage of the situation and perform in a less than conscientious and professional manner without the third party knowing. This is the type of unethical behavior that the rule on integrity and objectivity is designed to prohibit. However, the rule is only a compilation of words designed to describe desired behavior. It is up to the CPA him/herself to put the words into action! Acting with integrity and objectivity in the performance of a professional service requires a CPA to perform that service in a conscientious, competent, and professional manner whether or not the requesting party has the ability to understand and evaluate the service.
The formal language of the Rule on Integrity and Objectivity requires a person in the performance of professional accounting services or professional accounting work to maintain integrity and objectivity, be free from conflicts of interest and not knowingly misrepresent facts nor subordinate his/her judgment to others. In tax practice, however, a person may resolve doubt in favor of his client as long as any tax position taken complies with applicable standards such as those set forth in Circular 230 issued by the IRS and the AICPA's Statements on Standards for Tax Services. A conflict of interest may occur if a person performs a professional accounting service or professional accounting work for a client or employer and the person has a relationship with another person, entity, product, or service that could, in the person's professional judgment be viewed by the client, employer, or other appropriate parties as impairing the person's objectivity. If the person believes that the professional accounting service or work can be performed with objectivity, and the relationship is disclosed to and consent is obtained from such client, employer, or other appropriate parties, then the rule shall not operate to prohibit the performance of the professional accounting service or work because of a conflict of interest. A person shall not concurrently engage in the practice of public accountancy and in any other business or occupation which impairs independence or objectivity in rendering professional accounting services or work, or which is conducted so as to augment or benefit the accounting practice unless these rules are observed.
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Study question 3 / 3 in Chapter 3
If an engagement requires a CPA to be independent, that engagement should not be which one of the following? A An audit engagement. A CPA must be independent to perform an audit engagement.
B A review engagement. A CPA must be independent to perform a review engagement.
A contingent fee arrangement cannot be a part of an engagement that Performed for a C requires a CPA to be independent. To do so would cast doubt about the contingent fee. results of such an engagement.
Performed prior to the D The timing of an engagement does not normally impact end of a fiscal year.
3 C. Ethics Scenarios Scenario 1 Patrick Kelly, CPA, is a partner with the public accounting firm of Adams & Lockhart. Patrick is currently preparing a bid on a very big engagement with Global Manufacturing Company. Patrick would like to give himself some advantage in the bidding process and he knows his major competition in securing the engagement will come from the firm of Farris & Moore, LLP. Patrick asks his neighbor, who is an acquaintance of the CEO of Global, if he could intervene on his behalf by telling the CEO that Adams & Lockhart are more qualified, competent, and capable than Farris & Moore. The neighbor does believe that Adams & Lockhart is a good firm, but he has little knowledge of the quality of Farris & Moore. If the neighbor decided to intervene on Patrick's behalf would there be any violation of the Rules of Professional Conduct? It would appear that Patrick has violated the Principles of Professional Conduct as reflected in the AICPA Code of Professional Conduct. The Principle dealing with Responsibilities states, “In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities.” In addition, the Principle of Integrity states, “To maintain and broaden public confidence, members should perform all professional responsibilities with the
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highest sense of integrity.” Patrick's actions seem to violate both of these Principles. Asking another individual to make statements that indicate that Patrick's firm is superior to another firm is an example of an irresponsible request that would imply a lack of integrity. CPAs must not attempt to mislead others in a desire to acquire personal gain.
Scenario 2 Laurie Ben, CPA, has been a partner in the public accounting firm of Ben & Nelson for the past ten years. In her capacity as partner, Laurie performs the annual audit of Rally Enterprises for the past eight years. Recently the president of Rally Enterprises requested Laurie to accompany him to the bank and assist him with the negotiation of a new line of credit for the company. Laurie agreed to accompany the president to the bank but indicated that she would not take part in and direct negotiations with the bank. Laurie was introduced to the bank loan officer as an independent consultant along to help the president evaluate the terms of the new agreement. During the discussion of the new line of credit, Laurie made several suggestions to the company president about the negotiations in the presence of the bank loan officer. Could Laurie's actions constitute a violation of the Rules on Independence? Laurie has taken on the appearance of someone serving as a promoter of the company and its interests. Her introduction as a consultant along to evaluate the terms of the new agreement might even justify the assumption by a third party that she was a member of management or the company's board. Her discussion with the president during the negotiations also reflects a consultation type role acting as an advocate of the client. Such behavior is inappropriate for an individual performing an attest engagement for the company. The independence rules prohibit a CPA from being a promoter of an attest client and require the CPA to maintain his/her objectivity and independence in both fact and appearance throughout the period of the professional engagement.
Scenario 3 Frank Phillips, CPA, is a supervisor with the public accounting firm of Hoyt & Miller. Frank normally runs two or three jobs at a time and is thought to be a year or two from admission to the partnership. When Frank gets pressed for time on engagements he delegates responsibilities to junior staff members that he thinks can handle the tasks with little direction. Recently Frank told a first year staff employee to do the best she could on a review engagement since he would be involved with an audit client where a few significant problems had surfaced. Frank was so tied up on the audit client that he instructed the junior staff person to perform some analytical procedures
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and ask the controller a series of questions that Frank had used in the last review performed for this client. Frank was not concerned with allowing the junior staff person to do a majority of the work since the financial statements were never used for external purposes. Evaluate Frank's performance as it relates to the review engagement. Frank is required to plan and supervise each engagement that he has responsibility to lead. Frank obviously ignored these responsibilities as he had an inexperienced staff person do a majority of the work on the engagement completely unsupervised. When a CPA spreads him/herself too thin short cuts and inappropriate delegation of responsibilities can result in violations of the Principles of Professional Conduct of the AICPA Code of Professional Conduct. A CPA has a responsibility under the General Standards to adequately plan and supervise the performance of professional engagements. By violating this Standard Frank has put himself, and his firm in jeopardy of being charged with a serious violation of professional conduct. The actions also have the potential to negatively impact his client as the resulting financial statements may be unreliable and an unsound basis for financial decisions.
Chapter 4. Texas Rules of Professional Conduct If we only had one Rule in this company, it would be the Golden Rule. If we've got that one right, no other rules are necessary. Jim Blanchard
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4 A. General Provisions Preamble and General Principles (501.51)
(Amended to be effective December 7, 2011, 36 Tex Reg 8231)
These rules of professional conduct were promulgated under the Public Accountancy Act, which directs the Texas State Board of Public Accountancy to promulgate rules of professional conduct “in order to establish and maintain high standards of competence and integrity in the practice of public accountancy and to ensure that the conduct and competitive practices of licensees serve the purposes of the Act and the best interest of the public.” The Public Accountancy Act (The Act) is designed to assure the public that persons practicing public accountancy possess the competence, experience, and integrity to act in a manner which enhances the public trust in the performance of their professional practices. The Texas State Board of Public Accountancy has the power and authority to interpret The Act and adopt rules considered necessary to maintain the integrity of the profession. The services usually and customarily performed by those in the public, industry, or government practice of accountancy involve a high degree of skill, education, trust, and experience which are professional in scope and nature. The use of professional designations implies possession of the competence associated with a profession. The public, in general, and the business community, in particular, rely on this professional competence by placing confidence in reports and other services of accountants.
The public's reliance, in turn, imposes obligations on persons utilizing professional designations, both to their clients, employers and to the public in general. These obligations include:
• Maintaining independence in fact and appearance while in the client practice of public accountancy, • Continuously improving professional skills, • Observing Generally Accepted Accounting Principles (GAAP) and Generally Accepted Auditing Standards (GAAS) when required, • Promoting sound and informative financial reporting, • Holding the affairs of clients and employers in confidence,
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• Upholding the standards of the public accountancy profession, and • Maintaining high standards of personal and professional conduct in all matters.
These rules recognize the First Amendment rights of the general public as well as licensees and do not restrict the availability of accounting services. However, public accountancy, like other professional services, cannot be commercially exploited without the public being harmed. While information as to the availability of accounting services and qualifications of licensees is desirable, such information should not be transmitted to the public in a misleading fashion. The rules are intended to have application to all kinds of professional services performed for the public in the practice of public accountancy, including services relating to accounting, auditing and other assurance services, taxation, financial advisory services, litigation support, internal auditing, forensic accounting, and management advice and consultation. These rules also recognize the duty of certified public accountants to refrain from committing acts discreditable to the profession. These acts, whether or not related to the accountant's practice, impact negatively upon the public's view of the profession. In the interpretation and enforcement of these rules, the board may consider relevant interpretations, rulings, and opinions issued by the boards of other jurisdictions and appropriate committees of professional organizations, but will not be bound thereby.
Definitions (Selected)(501.52)
(Amended to be effective June 10, 2015, 40 Tex Reg 35642)
Act means the Public Accountancy Act, Chapter 901, Occupations Code. Attest Service An audit or other engagement required by the board to be performed in accordance with auditing standards adopted by the American Institute of Certified Public Accountants (AICPA), Public Companies Accounting Oversight Board (PCAOB), or other national or international accountancy organization recognized by the board. A review, compilation or other engagement required by the board to be performed in accordance with standards for accounting and review services adopted by the AICPA or another national or international accountancy organization recognized by the board.
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An engagement required by the board to be performed in accordance with standards for attestation engagements adopted by the AICPA or other national or international accountancy organization recognized by the board. Any other assurance service required by the board to be performed in accordance with professional standards adopted by the AICPA or other national or international accountancy organization recognized by the board.
Board means the Texas State Board of Public Accountancy. Client means a party who enters into an agreement with a license holder or a license holder's employer to receive a professional accounting service or professional accounting work. Client Practice of Public Accountancy – The offer to perform or the performance by a person for a client or a potential client of professional accounting services or professional accounting work, and also includes: • the advice or recommendations in connection with the sale or offer for sale of products (including the design and implementation of computer software), when the advice or recommendations routinely require or imply the possession of accounting or auditing skills or expert knowledge in auditing or accounting; and • the performance of litigation support services. Financial Statements means a presentation of financial data, including accompanying notes, derived from accounting records and intended to communicate an entity's economic resources or obligations at a point in time, or the changes therein for a period of time, in accordance with generally accepted accounting principles or other comprehensive basis of accounting. Incidental financial data to support recommendations to a client or in documents for which the reporting is governed by Statements on Standards for Attestation Engagements and tax returns and supporting schedules do not constitute financial statements for the purpose of this definition.
Good standing means compliance by a licensee with the board's licensing rules, including the mandatory continuing education requirements and payment of the annual license fee, and any penalties and other costs attached thereto. In the case of board-imposed disciplinary or administrative sanctions, the person must be in compliance with all the provisions of the board order to be considered in good standing. Person means an individual, sole proprietorship, partnership, limited liability partnership, limited liability company, corporation or other legally recognized
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business entity that provides or offers to provide professional accounting services or work as defined under “preparation engagement.” Professional Accounting Services or professional accounting work means services or work that requires the specialized knowledge or skills associated with certified public accountants, including: • issuing reports on financial statements; • providing management or financial advisory or consulting services; • preparing tax returns; • providing advice in tax matters; • providing forensic accounting services; and • providing internal auditing services. Preparation engagement is the privilege for an out-of-state person to provide certain Professional Accounting Services or Professional Accounting Work in Texas to the extent permitted under Chapter 517 of this title (relating to Practice by Certain Out of State Firms and Individuals).
Report means an opinion, report or other document, prepared in connection with an attest service that states or implies assurance as to the reliability of financial statement(s); and includes or is accompanied by a statement or implication that the person issuing the opinion, report, or other document has special knowledge or competence in accounting or auditing. A statement or implication of assurance as to the reliability of a financial statement or as to the special knowledge or competence of the person issuing the opinion, report, or other document includes any form of language that is conventionally understood to constitute such as statement or implication. A statement or implication of special knowledge or competence in accounting or auditing may arise from the use by the issuer of the opinion, report, or
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other document of a name or title indicating that the person is an accountant or auditor; or the language of the opinion, report, or other document itself. Numerous definitions are included in Rule 501.52, most of which are common terms used in the accounting profession. If a formal definition of a specific term included in the Rules of Conduct is required, refer to Rule 501.52 for information.
Applicability (501.53)
(Amended to be effective December 7, 2011, 36 Tex Reg 8231)
Certificate or registration holders in the client practice of public accountancy must follow all the rules of professional conduct. No certificate or registration holder shall issue, or otherwise be associated with, financial statements that do not conform to the accounting principles described in Rule 501.61 dealing with Accounting Principles. Certificate or registration holders not engaged in the client practice of public accountancy must follow the following rules. • 501.73 – Integrity and Objectivity • 501.74 – Competence • 501.77 – Acting Through Others • 501.78 – Withdrawal or Resignation • 501.90 – Discreditable Acts • 501.91 – Reportable Events • 501.92 – Frivolous Complaints • 501.93 – Responses • 501.94 – Mandatory Continuing Professional Education
4 B. Professional Standards Employees have a simple yet accurate way of figuring out what's important at work. They just look at what their leaders pay attention to – what the bosses talk about and focus on. The Walk the Talk Company
Auditing Standards (501.60)
(Amended to be effective December 7, 2011, 36 Tex Reg 8232)
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An audit represents a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. A person shall not permit his/her name to be associated with financial statements in such a manner as to imply that he/she is acting as an auditor with respect to such financial statements, unless he/she has complied with applicable Generally Accepted Auditing Standards (GAAS). Statements on Auditing Standards (SAS), issued by the AICPA, auditing standards included in Standards for Audit of Government Organizations, Programs, Activities and Functions issued by the United States General Accounting Office, and in other pronouncements having generally recognized authority, are considered to be interpretations of GAAS, and departures from such pronouncements must be justified. The PCAOB has the authority to set auditing standards for the audits of public companies. Audit professionals are required to keep abreast of the current auditing standards that apply to their audits. In addition, professional competence requires that CPAs performing audits have knowledge of the business and industry in which the audit client operates.
Accounting Principles (501.61)
(Amended to be effective October 10, 2012, 37 Tex Reg 8017)
A certificate or registration holder shall not issue a report asserting that financial statements are presented in accordance with generally accepted accounting principles (GAAP) if such statements contain a departure from GAAP which has a material effect on the financial statements taken as a whole. A person practicing under the practice privilege as provided for in paragraph 901.462 of the Public Accountancy Act (relating to Practice by Out-of-State Practitioner With Substantial Equivalency Qualifications), shall not issue a report asserting that financial statements are presented in conformity with GAAP if such financial statements contain any departure from such accounting principles which has a material effect on the financial statements taken as a whole, unless the person practicing under that practice privilege can demonstrate that by reason of unusual circumstances the financial statements would otherwise be misleading. Generally accepted accounting principles are defined as pronouncements of the Financial Accounting Standards Board and pronouncements of its predecessor entities, that have not been superseded, and similar pronouncements issued by other entities having similar generally recognized authority.
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Financial statements may contain a departure from GAAP if the certificate or registration holder can demonstrate that due to unusual circumstances the financial statements would otherwise have been misleading. When a CPA feels a departure from GAAP is warranted, he/she must describe the departure, the approximate effects thereof, if practicable, and the reasons why compliance with GAAP would result in a misleading financial statement.
Other Professional Standards (501.62)
(Amended to be effective June 11, 2014, 39 Tex Reg 4432)
A person in the performance of consulting services, accounting and review services, or tax services shall conform to the professional standards applicable to such services. For the purpose of this section, such professional standards are considered to be interpreted by: A. Statements on Standards on Consulting Services (SSCS); B. Statements on Standards for Accounting and Review Services (SSARS); C. Statements on Standards for Attestation Engagements (SSAE); D. Statements on Standards for Tax Services (SSTS); E. Statements on Standards for Financial Planning Services (SSFPS); or F. Statements on Standards for Valuation Services (SSVS). Similar pronouncements by other entities having national or international authority recognized by the board. Much of the work performed by a CPA in relation to financial statements and financial analysis is controlled by standards issued by bodies designated by council of the AICPA to provide such guidance. It is incumbent upon the CPA to be aware of the standards that govern the areas of financial reporting and analysis in which they are involved. This awareness includes knowledge of the standards in general and the ability to research specific requirements related to the task being performed.
Financial Statement Standards (501.63)
(Adopted to be effective April 11, 2012, 37 Tex Reg 2402)
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A licensee who is not an employee or officer of a business entity or governmental agency shall not submit the business entity's or governmental agency's financial statements to a client or third party unless the person complies with the Statements on Standards for Accounting and Review Services (SSARS) issued by the AICPA and other professional standards adopted by the board. A licensee who is an employee or officer of a business entity or governmental agency may prepare the business entity's or governmental agency's financial statements and may issue non-attest transmittals or information regarding non-attest transmittals if the transmittals or information do not purport to be in compliance with standards for accounting and review services adopted by the AICPA or another national or international accountancy organization recognized by the board.
4 C. Responsibilities to Clients We could change the world tomorrow if all the millions of people around the world acted the way they believe. Jane Goodall
Receipt of Commissions and Other Compensation (501.71)
(Amended to be effective December 7, 2011, 36 Tex Reg 8233)
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A person shall not for a commission, compensation or other benefit recommend or refer to a client any product or service or refer any product or service to be supplied to a client, or receive a commission, compensation or other benefit when the person also performs services for that client requiring independence. This prohibition applies during the period in which the person is engaged to perform any of the services requiring independence and during the period covered by any of the historical financial statements involved in such services requiring independence. A person who receives, expects or agrees to receive, pay, expects or agrees to pay, other compensation in exchange for services or products recommended, referred, or sold by him/her shall, no later than the making of such recommendation, referral, or sale, disclose to the client in writing the nature, source, and amount or an estimate of the amount when the amount is not known, of all such other compensation. The disclosure shall be made regardless of the amount or nature of the other compensation involved. This section does not apply to payments received from the sale of all, or a material part, of an accounting practice.
Contingency Fees (501.72)
(Amended to be effective February 17, 2008, 33, Tex Reg 1093)
A contingent fee is a fee for any service where no fee will be charged unless a specified finding or result is attained, or in which the amount of the fee is otherwise dependent upon the finding or result of such service. However, a person's non- contingent fees may vary depending, for example, on the complexity of the services rendered. Fees are not considered contingent if fixed by courts or governmental entities acting in a judicial or regulatory capacity, or in tax matters if determined based on the results of judicial proceedings or the findings of governmental agencies acting in a judicial or regulatory capacity, or if there is a reasonable expectation of substantive review by a taxing authority. A person shall not perform for a contingent fee any professional accounting services or professional accounting work for, or receive such a fee from, a client for whom the person performs professional accounting services or work requiring independence.
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A person shall not perform an engagement as a testifying accounting expert for a contingent fee. A testifying accounting expert is one that at any time during the proceedings becomes subject to disclosure and discovery under the procedural rules of the forum where the matter for which his/her services were engaged is pending. A consulting accounting expert may become a testifying accounting expert when the client for whom he/she is working makes his/her work available to a testifying expert. A consulting accounting expert who is working on a contingent fee basis should work closely with his/her client to ensure that he/she does not inadvertently become a testifying expert through the actions of his client. An accounting expert may not accept a contingent fee for part of an engagement and a set fee for part of the same engagement. A consulting accounting expert who becomes a testifying expert may not accept a contingent fee for the part of his/her work done as a consultant, but must be compensated on a set fee basis for all of the work performed on the same engagement. A consulting accounting expert who enters into a contingent fee engagement should reach an agreement, preferably in writing, with the client as to how he/she will be compensated should he/she become a testifying expert prior to beginning the engagement.
Competence (501.74)
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(Amended to be effective December 7, 2011, 36 Tex Reg 8234)
A person shall not undertake any engagement for the performance of professional accounting services or professional accounting work which he/she cannot reasonably expect to complete with due professional competence, including compliance with applicable professional standards. (See Rules 501.60, Auditing Standards; 501.61, Accounting Principles; and 501.62, Other Professional Standards). Competence to perform professional services or work involves both the technical qualifications of the person and the person's staff and the ability to supervise and evaluate the quality of the work being performed. If a person is unable to gain sufficient competence to perform professional accounting services or work, the person shall suggest to the client the engagement of someone competent to perform the needed professional accounting service or professional accounting work, either independently or as an associate. The person may have the knowledge required to complete the professional services with competence prior to performance. In some cases, however, additional research or consultation with others may be necessary during the performance of the professional services.
The competent performance of professional accounting services or professional accounting work by a CPA licensed in the State of Texas includes the following elements: • The exercise of due professional care. • Adequate planning of the engagement and supervision of subordinates. • Obtaining and maintaining sufficient documentation to afford a reasonable basis for conclusions and recommendations in relation to any professional services performed.
Confidential Client Communications (501.75)
(Amended to be effective June 13, 2013, 36 Tex Reg 545)
Except by permission of the client or the authorized representative of the client, a person or any partner, officer, shareholder, or employee of a person shall not voluntarily disclose information communicated to him/her by the client relating to, and in connection with, professional accounting services or professional accounting work rendered to the client by the person. Such information shall be deemed confidential.
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Nothing in this Rule shall be construed as prohibiting disclosure of information required to be disclosed by: • the professional standards for reporting on the examination of financial statements identified in Chapter 501B; • applicable federal laws, federal government regulations, including requirements of the PCAOB; • a summons under the provisions of the Internal Revenue Code of 1986 and its subsequent amendments, the Securities Act of 1933 and its subsequent amendments, or the Securities Exchange Act of 1934 and its subsequent amendments, or a court order signed by a judged under certain circumstances; • the public accounting profession in reporting on the examination of financial statements; • a congressional or grand jury subpoena; • investigations or proceedings conducted by the board; • ethical investigations conducted by private professional organizations of CPAs; or • in the course of peer reviews. Additionally, this section does not prohibit the disclosure of information already made public, including information disclosed to others not having a confidential communications relationship with the client or authorized representative of the client.
Records and Work Papers (501.76)
(Amended to be effective December 7, 2011, 36 Tex Reg 8234)
Records
A person shall return original client records to a client or former client within a reasonable time (promptly, not to exceed 10 business days) after the client or former client has made a request for those records. Client records are those records provided to the person by the client or former client in order for the person to provide professional accounting services to the client or former client. Client records also include those documents obtained by the person on behalf of the client or former client in order for the person to provide professional accounting services to the client or former client. Client records include only the original client documents and do not include the electronic and hard copies that the firm produces. The person shall provide these records to the client or former client, regardless of the status of the client's or former client's account and cannot charge a fee to provide such records.
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Such records shall be returned to the client or former client in the same format, to the extent possible, that they were provided to the person by the client or former client. The person may make copies of such records and retain those copies.
A person's work papers, to the extent that such work papers include records which would ordinarily constitute part of the client's or former client's books and records and are not otherwise available to the client or former client, shall also be furnished to the client within a reasonable time (promptly, not to exceed 20 business days) after the client has made a request for those records. The person can charge a reasonable fee for providing such work papers. Such work papers shall be in a format that the client or former client can reasonably expect to use for the purpose of work papers. Work papers which constitute client records include, but are not limited to: • documents in lieu of books of original entry such as listings and distributions or cash receipts or cash disbursements; • documents in lieu of general ledger or subsidiary ledgers, such as accounts receivable, job cost and equipment ledgers, or similar depreciation records; • all adjusting or closing entries and supporting details when the supporting details are not fully set forth in the explanation of the journal entry; and • consolidating or combining journal entries and documents and supporting detail in arriving at final figures incorporated in an end product such as financial statements or tax returns.
Work Papers
Work papers, regardless of format, are those documents developed by the person incident to the performance of his/her engagement which do not constitute records that must be returned to the client in accordance with preceding information under the subheading of Records. Work papers developed by a person during the course of a professional engagement as a basis for, and in support of, an accounting, audit, consulting, tax, or other professional report prepared by the person for a client, shall be and remain the property of the person who developed the work papers. For a reasonable charge, a person shall furnish to his client or former client, upon request from his client made within a reasonable time after original issuance of the document in question: • a copy of the client's tax return; or • a copy of any report or other document previously issued by the person to or for such client or former client provided that furnishing such reports to or for a client
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or former client would not cause the person to be in violation of the portion of Rule 501.60, Auditing Standards, concerning subsequent events.
This rule imposes no obligation on the person who provides services to a business entity to provide documents to anyone involved with the entity except the authorized representative of the entity. Documentation or work documents required by professional standards for attest services shall be maintained in paper or electronic format by a person for a period of not less than five years from the date of any report issued in connection with the attest service, unless otherwise required by another regulatory body. Failure to maintain such documentation or work papers constitutes a violation of this section and may be deemed an admission that they do not comply with professional standards. As a practical matter, it is recommended that a person obtain a receipt or other written documentation of the delivery of records to a client.
Acting Through Others (501.77)
(Amended to be effective February 17, 2008, 33 Tex Reg 1095)
A person is often in a position to supervise and direct the efforts of subordinates. A person shall not permit others including non-CPA owners and employees, to carry out on his/her behalf, either with or without compensation, acts, which, if carried out by the person, would place him/her in violation of these rules of professional conduct. The Board shall consider that the conduct of any non-CPA owner or employee in connection with the business of a licensed firm is the conduct of that licensed firm for the purposes of the rules of professional conduct.
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Withdrawal Or Resignation (501.78)
(Amended to be effective December 7, 2011, 36 Tex Reg 8235)
If a person cannot complete an engagement to provide professional services and professional accounting work or employment assignment in a manner that complies with the requirements of this section, the person shall withdraw from the engagement or resign from the employment assignment. If a person withdraws from an engagement or resigns from an employment assignment pursuant to this section, the person shall inform the client or employer of the withdrawal or resignation. Any withdrawal or resignation shall preferably be in writing. A person shall comply with the requirements of Rules 501.75 (Confidential Client Communications) and 501.90 (Discreditable Acts) regarding confidential information of clients and employees during and after a withdrawal or resignation. For the purposes of this section, an engagement commences once an engagement letter is signed by the client, time is charged to the engagement, or compensation is received by a person in connection with an engagement or employment assignment.
4 D. Ethics Scenarios Scenario 1
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Ed Grey, CPA, is the assistant controller of Fairchild Manufacturing Company. Ed has been with Fairchild for five years and has developed a strong reputation as a technically competent individual and a team player for the company. Recently, the controller of Fairchild, Mike Green, asked Ed to postpone the recording of certain expenses of the current year to early in the next year. Ed noted that the expenses he was asked to postpone were material and would result in an overstatement of net income for the year. When Ed pointed this out to Mike, he was told that this was a temporary measure that was being done to keep the company from violating certain loan covenants. Mike indicated that revenue projections for the upcoming year were quite good and next year's income level would be adequate to avoid having any loans called. Ed is concerned by the request and is upset about the request. What guidance in the Rules of Professional Conduct apply to Ed Grey's situation? Obviously Ed is being asked to falsify the company's financial statements. This would be a violation of the Accounting Principles rule as the financial statements would not be in accordance with GAAP. Also, based on an AICPA interpretation, if a CPA knows his/her company is manipulating their financial statements he/she must inform the external accountant of that fact. Thus, Ed does have some guidance to follow in addressing this situation. However, if Ed refuses to go along with the controller's wishes he will probably lose his job. Do the Texas State Board's Rules of Professional Conduct require Ed to resign from his job as a result of this situation? If so, is he further required to inform the bank of the manipulation and its impact on the loan covenants? According to Rule 501.78 (Withdrawal or Resignation) Ed is required to resign from the employment situation if he is not able to complete an employment assignment. With respect to informing the bank of the situation, Ed is under no obligation to inform the bank of what he knows. The Sarbanes-Oxley Act has Whistle-Blower provisions that are designed to protect employees who choose to inform third parties about the inappropriate actions of their employer. However, the reality of the situation is that most individuals would not feel comfortable divulging such information to a third party due to the negative repercussions that may take place.
Scenario 2 Rogers and Watson, CPAs have performed the audit work for Simplex Corporation for five years. During the current audit an analysis of estimated bad debts expense was made by the audit partner and he concluded that the amount of the estimate of bad debts expense on the Simplex trial balance was materially understated. The controller
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of Simplex takes exception to the amount proposed by the audit partner and challenges his analysis. The partner stands firm on his analysis of the bad debts expense and refuses to show the controller the specific analysis he performed. The partner states that the analysis is a part of the CPA firm's work papers and does not constitute a client original record that must be shared with the client. The controller contends that the analysis must be faulty as there is no way the partner's estimate of bad debts is reliable. Does the CPA firm have a responsibility to show the analysis to the client, or is the partner correct in his contention that this analysis does not constitute a client original record? According to the Rules of Conduct, work papers developed by a CPA during the course of a professional engagement as a basis for, and in support of, an accounting audit, consulting, tax or other professional report prepared by the CPA for a client, shall remain the property of the CPA who developed the work papers. Also, giving the controller access to the analysis serves no useful purpose and will merely cause further discussion and delay in the issuance of the audit report. The CPA's analysis is the evidence he used in supporting the basis for his opinion.
4 E. Responsibilities to the Public Practice of Public Accountancy (501.80)
(Amended to be effective June 10, 2015, 40 Tex Reg 3565)
A person may not engage in the practice of public accountancy unless he/she holds a valid license or qualifies under a practice privilege. A person may not use the title or designation “certified public accountant,” the abbreviation “CPA,” or any title, designation, word, letter, abbreviation, sign, card, or device tending to indicate that the person is a CPA unless he/she holds a valid license issued by the board or qualifies under a practice privilege. A license is not valid for any date or for any period prior to the date it is issued by the board and it automatically expires and is no longer valid after the end of the period for which it is issued. Any licensee of this board in good standing as a CPA or public accountant may use such designation whether or not the licensee is in the client, industry, or government practice of public accountancy. However, a licensee who is not if the client practice of
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public accountancy may not in any manner, through use of the CPA designation or otherwise, claim or imply independence from his/her employer or that the licensee is in the client practice of public accountancy.
Firm License Requirements (501.81)
(Amended to be effective June 15, 2015, 40 Tex Reg 3566)
A firm may not provide or offer to provide attest services or use the title “CPA's,” “CPA Firm,” “Certified Public Accountants,” “Certified Public Accounting Firm,” or “Auditing Firm” or any variation of those titles unless the firm holds a firm license issued by the board or qualifies under a practice privilege. A firm license is not valid for any date or for any period prior to the date it is issued by the board and it automatically expires and is no longer valid after the end of the period for which it is issued. A firm license does not expire when the application for license renewal is received by the board prior to its expiration date. An expiration date for a firm license may be extended by the board, in its sole discretion, upon a demonstration of extenuating circumstances that prevented the firm from timely applying for or renewing a firm license. A firm is required to hold a license issued by the board if the firm establishes or maintains an office in this state. A firm is required to hold a license issued by the board and an individual must practice through a firm that holds such a license, if for a client that has its principal office in this state, the individual performs: • a financial statement audit or other engagement that is to be performed in accordance with SAS; • an examination of prospective financial information that is to be performed in accordance with SSAE; or • an engagement that is to be performed in accordance with auditing standards of the PCAOB or its successor.
Each advertisement or written promotional statement that refers to a CPA's designation and his/her association with an unlicensed entity in the client practice of public accountancy must include the disclaimer: “This is not a CPA firm.” This disclaimer must be included in conspicuous proximity to the name of the unlicensed entity and be printed in type not less bold than that contained in the body of the advertisement or written statement. If the advertisement is in audio format only, the disclaimer shall be clearly declared at the conclusion of each such presentation.
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The requirements of the immediately preceding paragraph do not apply to a person performing services: • as a licensed attorney at law of this state while in the practice of law or as an employee of a licensed attorney when acting within the scope of the attorney's practice of law; • as an employee, officer, or director of a federally-insured depository institution, when lawfully acting within the scope of the legally permitted activities of the institution's trust department; or • pursuant to a practice privilege. On the determination by the board that a person has practiced without a license or through an unlicensed firm in violation of paragraph “5” above, the person's certificate shall be subject to revocation and may not be reinstated for at least 12 months from the date of revocation. A person who is employed by an unlicensed firm that offers services that fall within the definitions of the client practice of public accountancy as defined in Rule 501.52 (see paragraphs 4 and 8 under Rule 501.52 earlier in this course) and Section 901.003 of the Texas Public Accountancy Act (Practice of Public Accountancy) must comply with the disclaimer requirement (This is not a CPA firm) found in the first paragraph on this page.
Advertising (501.82)
(Amended to be effective December 7, 2011, 36 Tex Reg 8236)
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A person shall not use or participate in the use of: • any communication having reference to the person's professional services that contains a false, fraudulent, misleading or deceptive statement or claim; nor • any communication that refers to the person's professional services that is accomplished or accompanied by coercion, duress, compulsion, intimidation, threats, overreaching, or vexatious or harassing conduct.
Following are definitions that are relevant to the Advertising rule. A “false, fraudulent, misleading or deceptive statement or claim” includes, but is not limited to, a statement or claim which: • contain a misrepresentation of fact; • is likely to mislead or deceive because it fails to make full disclosure of relevant facts; • is intended or likely to create false or unjustified expectations of favorable results; • implies educational or professional attainments or licensing recognition not supported in fact; • represents that professional accounting services can or will be completely performed for a stated fee when this is not the case, or makes representations with respect to fees for professional accounting services that do not disclose all variables that may reasonably be expected to affect fees that will in fact be charged; • contains other representations or implications that in reasonable probability will cause a reasonably prudent person to misunderstand of be deceived; • implies the ability to improperly influence any court, tribunal, regulatory agency or similar body or official due to some special relations; • consists of self-laudatory statements that are not based on verifiable facts; • makes untrue comparisons with other accountants; or contains testimonials or endorsements that are not based on verifiable facts.
Broadcast – Any transmission over the airwaves or over a cable, wireline, Internet, cellular, e-mail system or any other electronic means. Coercion – Compelling by force so that one is constrained to do what his/her free will would otherwise refuse. Compulsion – Driving or urging by force or by physical or mental constraint to perform or forbear from performing an act. Direct Personal Communication – Either a face-to-face meeting or a conversation by telephone.
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Duress – Any conduct which overpowers the will of another. Harassing – Any word, gesture, or action which tends to alarm and verbally abuse another person. Intimidation – Willfully to take, or attempt to take, by putting in fear of bodily harm. Overreaching – Tricking, outwitting, or cheating anyone into doing an act which he would not otherwise do. Threats – Any measure of such a nature and extent as to unsettle the mind of anyone on whom it operates, and to take away from his acts that free and voluntary action which alone constitutes consent. Vexatious – Irritating or annoying.
It is a violation of these rules for a person to persist in contacting a prospective client when the prospective client has made known to the person, or the person should have known the prospective client's desire not to be contacted by the person. A person is allowed to solicit existing clients, potential clients that invite solicitations and non-clients that are currently being serviced by other certificate or registration holders. However, the rules of conduct make it clear that once a potential client declines a solicitation it is a violation of the rules to persist in contacting that potential client. In the case of an electronic or direct mail communication, the person shall retain a copy of the actual communication along with a list or other description of parties to whom the communication was distributed. Such copy shall be retained by the person for a period of at least 36 months from the date of its last distribution. The requirements found in paragraph “4” above do not apply to anyone when: • the communication is made to anyone who is at that time a client of the person; • the communication is invited by anyone to whom it was made; or • the communication is made to anyone seeking to secure the performance of professional accounting services. In the case of broadcasting, the broadcast shall be recorded and the person shall retain a recording of the actual transmission for at least 36 months.
Firm Names (501.83)
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(Amended to be effective December 7, 2011, 36 Tex Reg 8236)
Rules Applicable to All Firms
A firm name may not contain words, abbreviations or other language that are misleading to the public, or that may cause confusion to the public as to the legal form or ownership of the firm. A firm licensed by the Board may not conduct business, perform or offer to perform services for or provide products to a client under a name other than the name in which the firm is licensed. A word, abbreviation or other language is presumed to be misleading if it: • States or implies the quality of services offered, special expertise, expectation as to outcomes or favorable results, or geographic area of service. • Includes the name of a non-owner of the firm. • Includes the name of a non-CPA, except as provided in the first and second bullets on the next page. • States or implies educational or professional attainment not supported by fact. • States or implies licensing recognition for the firm or any of its owners not supported in fact. • Includes a designation such as “and company,” “company,” “associates,” “and associates,” “group” or abbreviations thereof or similar designations implying that the firm has more than one employed licensee unless there are at least two employed licensees involved in the practice. Independent contractors are not considered employees under this subsection. A word, abbreviation or other language is presumed not misleading if it: • Is the name, surname, or initials of one or more current or former CPA owners of the firm, its predecessor firm or successor firm. • Is the name, surname, or initials of one or more current or former foreign practitioner owners of the firm, its predecessor firm or successor firm who are or would have been eligible to practice public accountancy in this state under paragraph 513.2 relating to Application for Registration of Foreign Practitioners. • Indicates the legal organization of the firm. • States or implies a limitation on the type of service offered by the firm, such as “tax,” “audit,” or “investment advisory services,” provided the firm in fact principally limits its practice to the type of service indicated in the name. The board may place conditions on the licensing of a firm in order to ensure compliance with the provisions of this section.
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Additional Requirements Based on Legal Form or Ownership
The names of a corporation, professional corporation, limited liability partnership, professional limited liability company or other similar forms of ownership must contain the form of ownership or an abbreviation thereof, such as “Inc.,” “P.C.,” “L.L.P.” or “P.L.L.C,”; except that a limited liability partnership organized before September 1, 1993 is not required to utilize the words “limited liability partnership” or any abbreviation thereof. The following apply to Sole Proprietorships: • The name of a firm that is a sole proprietor must contain the surname of the sole proprietor as it appears on the individual license issued to the sole proprietor by the Board. • A partner surviving the death of all other partners may continue to practice under the partnership name for up to two years after becoming a sole proprietorship, notwithstanding the information in penultimate paragraph below. The name of any current or former owner may not be used in a firm name during any period when such owner is prohibited from practicing public accountancy and prohibited from using the title “certified public accountant,” “public accountant” or any abbreviation thereof, unless specifically permitted by the board. A firm licensed by the board is required to report to the board any change in the legal organization of the firm and amend the firm name to comply with this section regarding firm names for the new organization within thirty days of the effective date of such change. This section regarding firm named does not affect firms licensed by the board prior to the effective date of this section (December 7, 2011), but does apply to any change in legal organization or name that occurs after the effective date of this section. Nothing in this subsection prohibits the board from placing conditions on the licensing of a firm pursuant to paragraph “5” above in this section at the time of renewal of the firm license.
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Form of Practice (501.84)
(Amended to be effective February 17, 2008, 33 Tex Reg 1097)
A person may practice public accountancy only in a sole proprietorship, partnership, limited liability partnership, limited liability company, corporation or other legally recognized business entity that provides professional accounting services or professional accounting work, organized under the laws of the State of Texas or an equivalent law of another jurisdiction, or as an employee of one of these entities.
Complaint Notice (501.85)
(Amended to be effective December 7, 2011, 36 Tex Reg 8237)
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When a person receives a complaint that an alleged violation of the Act or Rules of Professional Conduct has occurred, a person shall provide the complainant a statement that : Complaints concerning Certified Public Accountants may be addressed in writing to: Texas State Board of Public Accountancy 333 Guadalupe, Tower 3, Suite 900 Austin, TX 78701-3900 Other means of communication include: Telephone: (512) 305-7866 Email: [email protected] Fax: (512) 305-7854
4 F. Responsibilities to the Board/Profession
You can train people to do their jobs, or you can train them to do their jobs with INTEGRITY. Either way, you'll probably get what you train for. The Walk the Talk Company
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Discreditable Acts (501.90)
(Amended to be effective October 8, 2014, 39 Tex Reg 7919)
Most codes of conduct or professional codes of ethics include a rule dealing with discreditable acts. These rules are designed to provide the profession's regulatory body with the ability to discipline a member for committing an act that is considered inappropriate even though that specific act is not identified in the Code. Having such a rule eliminates the need to provide a specific rule in the code of conduct for all the possible member violations. A person shall not commit any act that reflects adversely on that person's fitness to engage in the practice of public accountancy.
No attempt is made to provide a person with an all-inclusive list of those acts that the Board would consider a discreditable act. However, the Board has included examples of those acts that they would consider to be discreditable in the Code of Professional Conduct. Some of those acts are listed below: • Fraud or deceit in obtaining a certificate as a CPA or in obtaining registration under the Act or in obtaining a license to practice public accounting. • Dishonesty, fraud, or gross negligence in the practice of public accountancy. • Violation of any of the provisions of Subchapter J or paragraph 901.458 of the Act (relating to Loss of Independence) applicable to a person certified or registered by the board. • Final conviction of a felony or imposition of deferred adjudication or community supervision in connection with a criminal prosecution of a felony under the laws of any state or the United States. • Final conviction of any crime or imposition of deferred adjudication or community supervision, an element of which is dishonesty or fraud under the laws of any state or the United States, a criminal prosecution for a crime of moral turpitude, a criminal prosecution involving alcohol abuse or controlled substance, or a criminal prosecution for a crime involving physical harm or the threat of physical harm. • Cancellation, revocation, suspension or refusal to renew authority to practice as a CPA or a public accountant by any other state for any cause other than failure to pay the appropriate registration fee in such other state.
• Suspension or revocation of or any consent decree concerning the right to practice before any state or federal agency or licensing body for a cause which in the opinion of the board warrants its action.
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• Knowingly participating in the preparation of a false or misleading financial statement or tax return. • Fiscal dishonesty or breach of fiduciary responsibility of any type. • Failure to comply with a final order of any state or federal court. • Repeated failure to respond to a client's inquiry within a reasonable time without good cause. • Intentionally misrepresenting facts or making a misleading or deceitful statement to a client, the board, board staff or any person acting on behalf of the board. • Giving intentional false sworn testimony or perjury in court or in connection with discovery in a court proceeding or in any communication to the board or any other federal or state regulatory or licensing body. • Threats of bodily harm or retribution to a client. • Public allegations of a lack of mental capacity of a client which cannot be supported in fact.
• Voluntarily disclosing information communicated to the person by an employer, past or present, or through the person's employment in connection with accounting services rendered to the employer, except: o by permission of the employer; o pursuant to the Government Code, Chapter 554 (commonly referred to as the “Whistle Blowers Act”); o pursuant to a court order signed by a judge, a summons, a congressional or grand jury subpoena, or applicable laws, federal government regulations, including requirements of the PCAOB; o in an investigation or proceeding by the board; o in an ethical investigation conducted by a professional organization of CPAs; o in the course of a peer review under paragraph 901.159 of the Act (relating to Peer Review); or o any information that is required to be disclosed by the professional standards for reporting on the examination of a financial statement. • Breaching the terms of an agreed consent order by the board or violating any Board Order. The board has found in paragraph 519.7 of this title (relating to Misdemeanors that Subject a Certificate or Registration Holder to Discipline by the Board) and paragraph 525.1 (relating to Applications of the Uniform CPA Examination, Issuance of CPA Certificate, or a License) that any crime of moral turpitude directly relates to the practice of public accountancy. A crime of moral turpitude is defined as a crime involving grave infringement of the moral sentiment of the community. The board has found in paragraph 519.7 that any crime involving alcohol abuse or controlled substances directly relates to the practice of public accountancy.
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Reportable Events (501.91)
(Amended to be effective December 7, 2011, 36 Tex Reg 8237)
A licensee or certificate holder shall report in writing to the board the occurrence of any of the following events within 30 days of the date the licensee or certificate holder has knowledge of these events: • The conviction or imposition of deferred adjudication of the licensee or certificate holder of any of the following: o A felony. o A crime of moral turpitude. o Any crime of which fraud or dishonesty is an element or that involves alcohol abuse or controlled substances. o Any crime related to the qualifications, functions, or duties of a public accountant or CPA, or to acts or activities in the course and scope of the practice of public accountancy or as a fiduciary. • The cancellation, revocation, or suspension of a certificate, other authority to practice, or refusal to renew a certificate or other authority to practice as a CPA or a public accountant, by any state, foreign country, or other jurisdiction. • The cancellation, revocation, or suspension of the right to practice as a CPA or a public accountant before any governmental body or agency or other licensing agency. • An unappealable adverse finding in any state or federal court or an agreed settlement in a civil action against the licensee or certificate holder concerning professional accounting services or professional accounting work or a finding of a breach of fiduciary duty, fraud or misappropriation. • The loss of a professional license from another state or federal regulatory agency such as an insurance license or a securities license, resulting from an unappealable adverse finding.
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The written report required by this Rule as indicated in the first paragraph on the previous page shall be signed by the licensee or certificate holder and shall set forth the facts which constitute the reportable event. If the reportable event involves the action of an administrative agency or court, then the report shall set forth the title of the matter, court or agency name, docket number, and date of occurrence of the reportable event. Nothing in this rule imposes a duty upon any licensee or certificate holder to report to the board the occurrence of any of the events indicated in the first paragraph on the previous page either by or against any other licensee. As used in this rule, a conviction includes the initial plea, verdict, or finding of guilt, plea of no contest, or pronouncement of sentence by a trial court even though that conviction may not be final or sentence may not be actually imposed until all appeals are exhausted. A crime of moral turpitude is defined in this chapter as a crime involving grave infringement of the moral sentiment of the community and further defined in paragraph 501.90 relating to Discreditable Acts and paragraph 519.7 related to Misdemeanors that Subject a Certificate or Registration Holder to Discipline by the Board.
Frivolous Complaints (501.92)
(Amended to be effective February 17, 2008, 33 Tex Reg 1098)
A person who, in writing to the board, accuses another person of violating the rules of the board shall assist the board in any investigation and/or prosecution resulting from the written accusation. Failure to comply with the requirements of this rule, such as not appearing to testify at a hearing or to produce requested documents necessary to the investigation or prosecution, without good cause is a violation of this rule. A person who makes a complaint against another person that is groundless and brought in bad faith, for the purpose of harassment, or for any other improper purpose shall be in violation of this rule. When a CPA becomes aware of a violation of the Rules of Professional Conduct by another CPA, the former appears to have both a moral and professional obligation to report such violation to the board. Many times this is considered an unpleasant task and the violation goes unreported. We may excuse this type of conduct in ourselves as
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a “professional courtesy” or a desire to avoid “getting involved.” When such violations result in harm to innocent and unsuspecting 3rd parties, the entire profession suffers. As uncomfortable as this may be, we can only strengthen our profession by aiding the board in prosecuting those who violate the rules and tarnish the profession's image.
Responses (501.93)
(Amended to be effective December 7, 2011, 36 Tex Reg 8238)
A person shall substantively respond in writing, within 30 days, to any communication from the board (in this section, the term board includes board staff) requesting a response. The board may specify a shorter time for response in the communication when circumstances so require. The time to respond shall commence on the date the communication was mailed, delivered to a courier or delivery service, faxed or e-mailed to the last address, facsimile number, or e-mail address furnished to the board by the applicant or person. A person shall provide copies of documentation and/or work papers, within 30 days, in response to the board's request at no expense to the board. The board may specify a shorter time for response in the communication when circumstances so require. The time to respond shall commence on the date the request was mailed, delivered to a courier or delivery service, faxed or e-mailed to the last address, facsimile number or e-mail address furnished to the board by a person. A person may comply with this subsection by providing the board with original records for the board to duplicate. In such a circumstance, upon request the board will provide an affidavit from the custodian of records documenting custody and control of the records. Failure to respond substantively to written communications, or failure to furnish requested documentation and/or working papers, constitutes conduct indicating lack of fitness to serve the public as a professional accountant. Each applicant and each person required to be registered with the board under the Act shall notify the board, either in writing or through the board's website, of any and all changes in either such person's mailing address or telephone number and the effective date thereof within 30 days before or after such effective date.
Mandatory Continuing Professional Education (501.94)
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(Amended to be effective October 12, 2011, 36 Tex Reg 6768)
The fundamental purpose of continuing education is to enhance the licensee's professional competence. A professional person is required to be knowledgeable about the current technical and ethical standards of his/her profession. This requirement reflects the expectation that a person holding out to perform professional services will be fully aware of the requirements and technical standards related to those services. Each certificate or registration holder shall comply with the mandatory continuing professional education (CPE) reporting and the mandatory CPE attendance requirements of Chapter 523 of this title (relating to Continuing Professional Education). Certificate or registration holders are required to complete 120 hours (50 minutes = 1 hour) of continuing professional education every three years, with a minimum of 20 hours in any one year and every two years a 4-hour State Board approved Ethics course. Once an individual's license has been suspended a third time by the Board for failing to complete the 120 hours of CPE, the individual's certificate shall be subject to revocation and may not be reinstated for at least 12 months from the date of the revocation.
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Licensees are required to report CPE credit hours during the applicable reporting period. The annual reporting period begins on the licensee's birthday. Because there are few curriculums designed and offered by State CPA Societies, it is most important for the licensee to design his/her own curriculum. Licensees should consider the following as they plan their approach to mandatory CPE: • Begin planning the upcoming years' CPE courses soon after your birthday. • Consider the timing of CPE courses for the upcoming year. (Consider when courses best fit into your schedule and what months would be most inconvenient.) • List subject matter that would be most appropriate considering: work assignments; new technical pronouncements; personal attributes in need of improvement; and expertise that would enhance your career and professional relevance. • Review CPE literature from State CPE Societies, private organizations, AICPA, etc. for courses that will satisfy your professional education needs. • Schedule courses, send in registration fee, AND ATTEND THE COURSE! CPE credit hours may be claimed for non-technical courses limited to not more than 20 credit hours in the reporting period. Licensees should consider scheduling non- technical CPE courses during each reporting period. Courses in this category would include such subjects as communications, time management, behavioral science, practice management, and interpersonal skills.
Study question 1 / 1 in Chapter 4
A frivolous complaint as defined in the Texas Rules of Professional Conduct occurs under which of the following circumstances? The State Board takes all complaints brought to them by clients A minor annoyance by a CPA is of CPAs and would not characterize any of them as frivolous. A reported to the State Board by a Such complaints would be examined to determine the nature client of the CPA. and seriousness of the issue.
The complaint involves a monetary issue between a client and a CPA There is no minimum or maximum monetary amount that would B and the amount of the issue is less cause a complaint by a client to be labeled as frivolous. than $100.
A complaint by a client against a A CPA firm is responsible for the actions of all of the members of CPA firm that is based on the C their professional staff whether they are CPAs or not. The actions actions of a staff member of the of any non-CPA staff member that is thought to be a problem by firm who is not a CPA. a client would be investigated vigorously by the Texas State
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Board.
When a CPA lodges a complaint against another CPA for the One CPA complains to the State sole purpose of harassing the complained against CPA, such Board about another CPA and the complaint would be considered a frivolous complaint by the complaint is submitted for the D State Board. However, the complaining CPA might have action purpose of harassing the CPA taken against him/her if the Board determined that the against whom the complaint was complaint was merely implemented for harassment purposes lodged. and had no valid basis.
4 G. Scenarios: Responsibilities to the Public/Board Scenario 1 Dave Nelson, CPA, was asked to speak at a meeting of the Rotary Club in the city where he has a public accounting practice. During the presentation he explains to the audience that a major part of his practice involves defending clients before the Internal Revenue Service who have been charged with some form of tax violation. When asked by a person in the audience about his success rate in defending his clients he tells the audience that he has been in this business so long that most of the revenue agents know him well and they rarely, if ever, challenge the basis he presents in defending his clients. Have Nelson's comments caused him to violate any Rules of Professional Conduct? Dave has used false and misleading inferences in his answer to the question from the audience. He has implied the ability to influence members of the internal revenue service and thus cause his clients to receive favorable treatment. This constitutes false advertisement on Dave's part and could also be construed as an act discreditable to the profession. The Texas State Board's Rules of Professional Conduct prohibit any form of solicitation that is likely to create unjustified expectations of favorable results or the ability to influence regulatory officials. Such tactics in the solicitation of clients are not only unprofessional but bring a negative image to members of the profession.
Scenario 2
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The public accounting firm of Darcy & Bass sponsor an annual CPE day in which they invite client personnel in need of continuing education hours. In addition to client personnel, the firm also invites a few local CPAs who are sole practitioners in town. One of the sole practitioners, Milt Spencer, spends time during every coffee break, during lunch, and even during the class sessions talking to the clients of D&B about his desire to provide them with accounting, compilation, review, audit, and tax services. He tells them that since his firm is smaller than D&B he can provide the same quality at a lower price. Evaluate Spencer's conduct with regard to the Rules of Professional Conduct. Most people who observe the conduct of Mr. Spencer would probably view it as inappropriate behavior. However, nothing in the Code of Professional Conduct prohibits Mr. Spencer from solicitation of clients currently being served by another CPA. However, if Mr. Spencer persisted in his attempt to lure these clients away from D&B after the potential clients told him they were not interested in changing accounting firms, he would be guilty of “harassing conduct” and subject to disciplinary action. Additionally, there is the possibility that the behavior of Mr. Spencer could be challenged based on false and misleading advertisement. He has told the clients of D&B that “he can provide the same quality at a lower price.” This could be construed as misleading advertisement as it is a violation of the Code of Professional Conduct to make qualitative statements in an advertisement that are based on mere opinion and not substantiated by fact. Statements about the “quality” of one practitioner's service vs. another's are not appropriate and are most often based on opinion rather than provable fact.
4 H. Texas State Board of Public Accountancy: Peer Assistance Program Peer Assistance to Licensees 502.1
(Amended to be effective April 10, 2013, 38 Tex Reg 2221)
The board adopts the provisions of the HEALTH & SAFETY CODE, Chapter 467, PEER ASSISTANCE PROGRAMS, in its entirety, including any amendments by the Texas Legislature.
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Should the board receive information regarding a licensee indicating possible substance abuse or other mental issue, the board may, in addition to any other action: • Refer the licensee to an approved peer assistance program; or • Require the licensee to participate in or complete a course of treatment or rehabilitation. If the board receive a complaint or other information constituting possible violations of other board rules, including chemical dependency on drugs or alcohol, or mental health issues, they may take action as appropriate under this title and the Act regarding those possible violations in addition to making a referral as noted above. An approved peer assistance program that receives a report or referral under paragraph “2” above or a report under paragraph 467.005(a) of the Health and Safety Code, may intervene to assist the licensee to obtain and complete a course of treatment and rehabilitation.
The Texas State Board of Public Accountancy Policy Statement of the Peer Assistance Oversight Committee 502.2
(Amended to be effective April 10, 2013, 38 Tex Reg 2221)
The Texas State Board of Public Accountancy has established the Peer Assistance Oversight Committee to oversee the activities of the Texas Society of Certified Public Accountants' peer assistance program as mandated under the Texas Health and Safety Code, Chapter 467. The Peer Assistance Oversight Committee operates under the premise that impairments caused by substance abuse and mental illness are treatable. The Peer Assistance Oversight Committee's responsibilities include, but are not limited to: • Protecting the public from CPAs whose ethical, behavioral, and technical violations due to chemical dependency and/or mental illness have harmed, or have the potential to harm the public; • Encouraging CPAs, CPA candidates, and accounting students to seek assistance for impairment due to chemical dependency and/or mental illness; • Cooperating with the Texas Society of CPA's peer assistance program in promoting confidential assistance to CPAs, CPA candidates, and accounting students who suffer from chemical dependency and/or mental illness; • Disseminating information about the peer assistance program to CPAs, CPA candidates, and accounting students.
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The Realities of Substance Abuse
Alcohol
According to the Centers for Disease Control and Prevention: “Binge drinking rates in the U.S. are at a much higher rate than previously thought – 38 million binge drink
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four times a month – consuming an average of eight drinks each time. Those 65 and older reportedly binge drink more often, up to five or six times a month.” The frequency of binge drinking is higher in households with an income of $75,000.00 or more. Overconsumption of alcohol is the third leading preventable cause of death in the U.S. each year. Twenty percent of U.S. alcoholics are highly functioning, middle-aged, well-educated with stable jobs and families. More than 11% of full-time workers between the ages of 18 and 49 have an alcohol problem in a given year. Alcoholism costs society an estimated $148 billion annually. Also, 10 to 12 percent of people who drink become dependent. Alcohol addiction is not a matter of loose morals or bad choices or ethnic backgrounds. Dependency is a brain chemical disease. The uncontrolled drinking is just a symptom.
Prescription Drugs
The Substance Abuse & Mental Health Services Administration issued a news release in December 2011.
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They report that while the overall rate of substance abuse treatment admissions among adults in the U.S. has remained nearly the same from 1999 to 2009, there has been a dramatic rise (430%) in the rate of treatment admissions for the abuse of prescription drugs during this period. At least this speaks positively for the fact that many are seeking help in this area.
References
1. American Institute of Certified Public Accountants, Code of Professional Conduct, (NY: AICPA, 2014). 2. American Institute of Certified Public Accountants, SQCS No. 8, A Firm's System of Quality Control (Redrafted), (NY: AICPA, 2010). 3. Carter, Stephen L., Integrity, (NY: Basic Books, 1996). 4. Cherrington, Owen J. and David J. Cherrington, Moral Leadership and Ethical Decision Making, (Provo, UT: CHC Forecast, Inc., 2000). 5. Cottell, Phillip G. Jr., and Terry M. Perlin, Accounting Ethics: A Practical Guide for Professionals, (London: Quorum Books, 1990). 6. Josephson, Michael, Ethical Commentaries, (Los Angeles: Josephson Institute, 2010 – 2014). 7. Gravett, Linda and Robin Throckmorton, Bridging the Generation GAP, (Franklin Lakes, NJ: Career Press, 2007). 8. Howard, Ronald and Clinton Korver, Ethics for the Real World, (Boston: Harvard Business Press, 2008). 9. Huntsman, Jon M., Winners Never Cheat – Even in Difficult Times, (Upper Saddle River, NJ: Wharton School Publishing, 2009). 10. Lancaster, Lynne and David Stillman, When Generations Collide, (NY: Harper Collins, 2005). 11. Stock, Gregory, The Book of Questions: Business, Politics, and Ethics, (NY: Workman Publishing, 1991).
Glossary for "Personal and Professional Ethics for Texas CPAs"
AICPA American Institute of Certified Public Accountants.
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AICPA Code of Professional Conduct A collection of codified statements issued by the American Institute of Certified Public Accountants that outline a CPA's ethical and professional responsibilities; the code establishes standards for auditor independence, integrity and objectivity, responsibilities to clients and colleagues and acts discreditable to the accounting profession
Conflict of interest A situation in which private interests or personal considerations may affect or may be perceived to affect a CPA's judgment in acting in the public interest.
Ethics Standards of professional conduct and business practices adhered to by professionals in order to enhance their profession and maximize idealism, justice and fairness when dealing with the public, clients and other members of their profession.
Independence To be free from conflicts of interest and bias, self-governing, impartial, not subject to control by others, not requiring or relying on something else, not contingent, and acting with integrity and objectivity (i.e., with judgment that is unimpaired and without bias or prejudice). It is subject to Ethics Rule 101.
Integrity A fundamental trait of character that enables a CPA to withstand client and competitive pressures that might otherwise lead to the subordination of judgment.
Objectivity Impartiality, intellectual honesty, and freedom from conflicts of interests.
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