Ethics, principles and their application by the Accounting profession is the topic of this article, and although this may sound like a very boring, and somewhat stuffy subject; it would happen to be quite the opposite today. The corporate world has set the ethics and principles, used by accounting professionals for hundreds of years back to the dark ages. The recent Enron, Martha Stewart, and HealthSouth scandals have caught the interest of the average reader, and astounded the country’s accounting profession and legal system. What are ethics, principles, and how did we manage to get so far away from our responsibility?
Ethics and Principles
Ethics and principles deal with the expected behavior and accountability of the accounting profession. In other words, the kind of behavior other people expect from accountants. In most situations, the average citizen isn’t familiar with all the codes and regulations imposed by the government; at the same time, if they reside in the United States, they are held subject to all those codes and regulations. At this point, many individuals and businesses turn to an accountant for help in dealing with the tax and legal requirements of living and working in the United States. There is an issue of trust that enters the relationship, since the individual does not know or understand all the codes, regulations, and laws about finance. If the accountant is to remain as a trusted advisor, he or she can’t lie to their customer, the public, or the government.
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But, thanks to Enron, HealthSouth, and several others, lying has been the accepted behaviour from the company CEOs, CFOs, and Accounting Comptroller. What has this done to consumer confidence in corporate America, and their accountants? It has eroded public faith.
When you become an accountant, you should be familiar with the standards and rules of the position, accept personal responsibility for the foreseeable consequence of your actions, and realize the long-term affects of your behaviour on the accounting industry and the citizens. At all times, an accountant should conduct themselves with integrity, dignity, and respect for the position held in society.
Unfortunately, this position, like so many others is being abused and neglected when it comes to morals and ethics. Today, we are forced to legislate morals and ethics into the accounting profession, and many others. Although this doesn’t normally work, the lawmakers have needed a response to the public reaction of these corporate scandals, and legislation of ethics has been the chosen response.
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Other than the courtroom, the accounting profession has its own board of peers that oversees the discipline of members that do not behave in the moral and ethical way they are expected. Suspension of their license, termination of their right to practice, and eve payments of investigation, fines, and penalties associated with their behavior are very common.
Let’s hope as the upcoming generation of accountants is ready to don the cap of an accounting professional, they’re also ready to be responsible in the performance of the public interests.
AICPA Code of Conduct
One of the basic principles of professional conduct for CPAs is integrity. The AICPA Code of Professional Conduct (AICPA Code) states that CPAs must be "honest and candid within the constraints of client confidentiality" (emphasis added). Rule 301 under the AICPA Code clearly states a professional accountant's responsibility to hold client information confidential. It says a member in public practice "shall not disclose any confidential client information without the specific consent of the client." The AICPA provides no guidance for CPAs not in public practice like Watkins, but she and other employees have a legal duty of loyalty to their employer.
Since Watkins was not involved in the preparation of Enron's financial statements, she was likewise not subject to Interpretation 501-4 under the AICPA Code titled "Negligence in the Preparation of Financial Statements or Records." Further, since she was not part of the Andersen external audit of Enron, Watkins was not subject to the SEC Rule 10A that requires prompt reporting by CPAs to the board and the SEC itself of any illegal client acts of which they become aware.
Different Role, Different Dilemmas
Some of the ethical dilemmas faced by CPAs in industry are very different from those faced by CPAs in public accounting firms. For example, let’s say you are a CPA working at a publicly traded corporation and, after seeing disappointing financial results, your boss, the CEO, instructs you to book a transaction differently so the company meets income expectations. What do you do? If complying with the request would result in the fraudulent recording of a transaction, you should disclose the situation to your audit committee and, hopefully, your boss would be fired. But what if the CEO asked you to do something “on the edge,” but not clearly illegal or in violation of professional standards? Under what circumstances would complying with your boss’ instruction be unethical?
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If a public accounting firm’s client were to consider doing something unethical, the public accounting firm should, of course, counsel against that course of action and then, if the counsel is rejected, resign from the engagement. But would you, as a CPA in industry, be expected to resign in the earlier example? What about your salary, your career, and your family? You could consider going public with your situation, and whistleblower laws protect employees to some degree. But doesn’t a CPA in industry also have a duty of confidentiality to his or her employer?
The major difference between a CPA working in a public accounting firm versus one in private industry is how each defines the “client.” While public accounting firms work for, and are paid by, the company that hired them for an independent audit, their ultimate client is always the public. The public accounting firm’s purpose is crystal clear: to protect the public interest. It is their raison d’etre. But who is the ultimate client for a CPA working in private industry? The CPA’s employer, or the public? The profession’s ethical literature provides little guidance.
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Discussion
It makes me sad to realize that in the last couple years this discipline of accounting has been so useful and respected has been under pressure and looked down upon, due to multiple behaviors by big companies that have resorted to accounting fraud in order to report greater earnings for their own purpose as well as to fool investors. Prominent companies and CEOs have been authors of such fraud which has weakened the business industry. Companies like Enron, Tyco, WorldCom and others have been an example of how high profile unethical behavior has become. It has been increasingly visible that ethics were overlooked for the sake of profits. Some will argue that given that the goal of a firm is to maximize profits for shareholders, ethics should take a backseat to profits; however in this paper I will try to show that good business ethics in accounting are increasingly important and that it should be the norm for every firm.
I am a firm believer of strong ethics in accounting because I believe ethics provide the foundation on which a civilized society can exist. More people will benefit from transparent accountability. Without strong ethical behavior this very old discipline will collapse. More than just a concern for firms, individuals who intend to make a living in this discipline must make efforts to conduct themselves in a good way, in their quest for wealth fame and knowledge. Integrity in this case has to come first.
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It has often be said that in business it is good to be greedy, because it is this greed that makes one move on and achieve greater profits. Thus whenever we instill to many moral codes, we will take away the motivation for individual to excel, thus making the firm weaker. However I think such belief is extremely shortsighted; I think people can get motivated even if they have other values that are much higher than just getting profits. I think people shouldn’t do everything for profit, especially engaging in unethical behavior. The goal of firms and the people who work in it should focus on getting owners wealth not just profit, and wealth requires more than just making money, but also having trust from the organization, the society and everyone who can be directly or indirectly affected by the way an accounting firm conducts its business.
It is sad that accounting has suffered from such bad reputation in the last years, however a bigger question is how can accounting as a profession move out of such dark times and regain the confidence of every body by going back to its roots and mission which is to conduct audits and book keeping using moral rules and correct business practices. The solutions I believe are with government intervention and high punitive measures against those who break the rules as well as educational institutions and firms telling future accounts that moral integrity should come first. The government can only do so much, after all this is a capitalistic market, thus a greater responsibility lays on individuals themselves and the supporting institutions. Moral integrity should be rewarded, as gaining profits has been up to date.
In considering the impact of ethical values on a society, Chuck Colson made the following observation:(1)
Societies are tragically vulnerable when the men and women who compose them lack character. A nation or a culture cannot endure for long unless it is under girded by common values such as valor, public-spiritedness, respect for others and for the law; it cannot stand unless it is populated by people who will act on motives superior to their own immediate interest. Keeping the law, respecting human life and property, loving one's family, fighting to defend national goals, helping the unfortunate, paying taxes--all these depend on the individual virtues of courage, loyalty, charity, compassion, civility, and duty.
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In 2002, the accounting profession was under attack with the fall of Enron/Andersen and WorldCom. The government was forced to intervene and help curb such problems that seemed to widespread.
The government has made efforts in punishing unethical behavior in accounting. We can see the fate of firms and individuals who have been unethical up to date: “Jurors on Wednesday convicted one of the former executives from Enron's defunct broadband unit to be retried after his original case ended in a hung jury last year.
The verdict came six days after another jury convicted Enron founder Ken Lay and former Enron CEO Jeff Skilling of fraud, conspiracy and other charges in one of the biggest business scandals in U.S. history.”(2)
The biggest contribution the government has made is the creation of the Sarbanes-Oxley act, which intends to take away unethical behavior from firms by putting all auditing into very strict rules:
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"An Act to protect investors by improving the accuracy and reliability of corporate disclosure.”
There are two ways in which the act helps a move back to the values and principles of Guardian morality. The first is fairly obvious: The restrictions in section 201 on the provision of any non-audit services to audit clients that the Public company Accounting Oversight Board (PCAOB) determines to be impermissible, drastically reduce the potential rewards of following Commercial norms.
The second way in which Sarbanes-Oxley encourages movement back toward the traditional professional values of Guardian morality is perhaps less obvious. The establishment of the PCAOB brings with it a separation of Guardian and Commercial considerations at the institutional level. The act gives the PCAOB the authority to set the following (for the audits of public companies):
- Auditing standards
- Quality control standards
- Ethics standards, and
- Independence standards.
Furthermore, the PCAOB shall conduct inspections of registered firms, conduct investigations, and discipline firms.(3)
The universities are being a big part of the movement by having greater number of classes that teach ethics and good decision-making. School are teaching that the purpose of ethics in business is to help man and human to follow a common business code of conduct, and help them with their decision making, after all there will be thousand chances that they the young professionals may find in which they may choose an unethical behavior. After all most unethical behavior in the past couple of years is result of wrong interpretation of existing accounting rules: When PCAOB board member Charles D. Niemeier spoke at the AICPA Annual SEC and PCAOB Conference in December 2004, he said: “The most disturbing aspect of Enron and similar scandals was not that what was done was wrong, but that what was done was right. Enron did not ignore the rules and regulations, but instead took them and used them to achieve results that were never intended.”(4)
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After Universities, ethical behaviors are pushed along by the AICPA which maintains and enforces a code of professional conduct for public accountants. The Institute of Management Accountants (IMA) and the Institute of Internal Auditors (IIA) also maintain a code of ethics. This is an important movement since we see accounting organizations recognizing that profits are not the only purpose of accounting but getting it in an ethical way is.
It was scary the direction that accounting was taking, when firms over and over again, used bad accounting for their benefits. It became important for ethical values to gain importance once again, and to put into the minds of young accountants that profit was not the only goal, and greed is not the way to assure success, instead increasing wealth by following ethical standards was.
Alternative business structures are forms of non-CPA ownership of public accounting firms, firms have also dealt with the issue of providing partnership status to employees who are not CPAs. As consulting services became more and more lucrative to accounting firms, the employees providing those services obviously became more and more valuable. Many of these services were offered in areas outside the traditional CPA's domain and were conducted by non-CPAs. These individuals were contributing equally to the firms' bottom lines and were demanding the stature and recognition of full-fledged partners. To recognize this change in professional landscape, he new UAA defines a CPA firm as one in which a simple majority of ownership, in terms of financial interest and voting rights, belong to individuals licensed as CPAs.
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Although the non-CPA owner is not required to maintain a Professional Code of Ethics in order to maintain a professional license, it is believed that because the majority of the shareholders are CPAs, all of the firm's employees and shareholders will maintain the necessary integrity, objectivity, and independence. This position is further strengthened by the UAA requiring firm registration. Historically, the acceptance of commissions and contingent fees has not been permitted under the AICPA Code of Ethics and state law. Currently, contingent fees may be accepted in certain instances, such as when representing an individual in an examination by a revenue agent, and referrals may be accepted as long as the practice is fully disclosed to the client. Most states ban the acceptance of commissions when the licensee is providing audit, review, or compilation services. The acceptance of commissions is allowed in some states under certain conditions, and only when the practice is fully disclosed to the client. What is particularly interesting about this issue is that this rule was established to protect the client by ensuring that the licensee remained completely objective. However, the rule change is driven by the client and the marketplace. In other words, clients want their CPAs to advise them on financial instruments. Traditionalists would say that commissions and contingent fees will create a lack of independence and objectivity.
Conclusion
The fact that the need for fraud examiners is so great suggests that the problem is structural and systemic. The accounting industry and its regulatory agencies have become inbred. Executives move freely between accounting firms, clients, government, and the regulatory agencies assigned to safeguard the public interest. The public, of course, is not represented. The foxes have taken over the hen house.
Nowhere is that more apparent than at the top where political contributions have created a quid-pro-quo understanding that drives deregulation even when it's clearly contrary to the public interest.
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The system of checks and balances has clearly been corrupted, and the dilemma for reformers is the same, whether addressing the practices of mega accounting firms, desperate CFOs, purchasable politicians, or rubber-stamps regulatory agencies.
In the meantime, we can enjoy the spectacle of all the major players doing their qubit imitations, spinning in both directions at once, assuring us of their innocence while pocketing the cash.
Flegm, Eugene H.. "Accounting at a Crossroad" The CPA journal December 2005 http://acct.tamu.edu/smith/ethics/EthicsPowerPoint.ppt
Smith, Murphy L. "Presentation on Ethics in Business and Society" 27 June 2006 http://acct.tamu.edu/smith/ethics/EthicsPowerPoint.ppt
Gaa, James C. "How Can Professional Values Be Saved?." The CPA journal 4 August 2003 http://www.nysscpa.org/cpajournal/2004/304/infocus/p28.htm
GREENAWALT, MARY BRADY. Ethics in Accounting", http://www.bookrags.com/other/business/ethics-in-accounting-ebf-01.html
Romal, J.B; & Hibschweiler, A.m. (2004,JUNE). Improving Professional ethics: Steps for Implementing Change. The CPA Journal Online
