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 Thomson Reuters 2016 © Page 1 of 86 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 Thomson Reuters 2016 © Page 2 of 86 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 Thomson Reuters 2016 © Page 3 of 86 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. Thomson Reuters 2016 © Page 4 of 86 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.