The Public Interest in Accounting
Following the disclosure of numerous accounting scandals in the early 2000s at companies such as Enron and WorldCom, the accounting profession and professional bodies turned their attention to examining how to rebuild the public trust and confidence in financial reporting. Stuebs and Wilkinson point out that restoring the accounting profession’s public interest focus is a crucial first step in recapturing the public trust and securing the profession’s future. 45 Copeland believes that in order to regain the trust and respect the profession enjoyed prior to the scandals, the profession must rebuild its reputation on its historical foundation of ethics and integrity. 46
In response to widespread financial statement fraud and the failure of accountants and auditors to meet their professional responsibilities, regulatory bodies have turned their attention to developing ethics education requirements for university accounting students. In the United States, the state boards of accountancy are charged with protecting the public interest in licensing candidates to become CPAs. The National Association of State Boards of Accountancy (NASBA) provides a forum for discussion of the different state board requirements to develop an ideal set of regulations in the Uniform Accountancy Act. In 2009, NASBA revised its Rule 5.2 on education and set an either/or approach that recom- mends either the integration of the course material throughout the undergraduate and/or graduate curriculum or a three-hour stand-alone course in ethics. 47
Even before NASBA’s involvement, in 2003 the Texas legislature reacted to the implosion of Enron and its subsequent bankruptcy that shocked the Houston business community by questioning the Texas State Board of Public Accountancy (TSBPA) about how the CPAs at Andersen failed to see the ethical problems at Enron that led to its financial statement fraud. The board called for a mandated three-unit course in ethics for applicants initially taking the CPA exam, effective July 1, 2005. Rule 511.58 details that the required course “should provide students with a framework of ethical reasoning, professional values and attitudes for exercising professional skepticism, and other behavior that is in the best interest of the public and profession and include the core values of integrity, objectivity, and independence.” 48
Other states requiring a stand-alone ethics course at the time of this writing included California, Colorado, Maryland, New York, and West Virginia. The Colorado Board of Accountancy requires a separate course in accounting ethics beginning July 1, 2015, 49 while the California Board is phasing in that requirement during the 2014–2017 period. 50
The California and Texas requirements provide a broad framework to identify the foun- dation of accounting ethics education. According to the California requirements, “Ethics Study Guidelines” means a program of learning that provides students with a framework of ethical reasoning, professional values and attitudes for exercising professional skepticism, and other behavior that is in the best interest of the investing and consuming public and the profession, and the core values of integrity, objectivity, and independence consistent with International Education Standard 4 (IES 4) of the International Accounting Education Standards Board (IAESB), the International Federation of Accountants Code of Ethics (IFAC Code) and the AICPA Code. 51 These international organizations will be discussed more fully in Chapter 8.
Professional Accounting Associations The accounting profession is a community with values and standards of behavior. These are embodied in the various codes of conduct in the profession. The AICPA is a voluntary association of CPAs with nearly 370,000 members in 128 countries, including CPAs in busi- ness and industry, public accounting, government, education, student affiliates, and interna- tional associates. Other professional associations exist in the United States. The Institute of Management Accountants (IMA), with a membership of more than 60,000, is the worldwide
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Chapter 1 Ethical Reasoning: Implications for Accounting 19
association for accountants and financial professionals working in business. We discuss eth- ics standards of the IMA later in this chapter. The Institute of Internal Auditors (IIA) is an international professional association representing the internal audit profession with 175,000 members. We look at the IIA’s standards in Chapter 3. On an international level, the largest professional accounting association is the Institute of Chartered Accountants [equivalent to CPAs] in England and Wales (ICAEW) that has over 138,000 members worldwide. A truly global professional association is the International Federation of Accountants (IFAC). IFAC is a global professional body dedicated to serve the public interest with 173 members and associate members in 129 countries representing approximately 2.5 million accountants. Standards related to IFAC will be discussed in Chapter 8.
AICPA Code of Conduct Given the broader scope of membership in the AICPA and the fact that state boards of accountancy generally recognize its ethical standards in state board rules of conduct, we emphasize the AICPA Code of Professional Conduct in most of this book. Moreover, the previously discussed ethics education requirement pertains to those students who sit for the CPA exam, so it seems only natural to focus on AICPA rules. The Principles section of the AICPA Code, which mirrors virtues-based principles, are discussed next. We discuss the Rules of Conduct that are the enforceable provisions of the AICPA Code in Chapter 4. Later in this chapter, we explain the IMA Statement of Ethical Professional Practice.
The Principles of the AICPA Code are aspirational statements that form the foundation for the Code’s enforceable rules. The Principles guide members in the performance of their professional responsibilities and call for an unyielding commitment to honor the public trust, even at the sacrifice of personal benefits. While CPAs cannot be legally held to the Principles, they do represent the expectations for CPAs on the part of the public in the performance of professional services. In this regard, the Principles are based on values of the profession and traits of character (virtues) that enable CPAs to meet their obligations to the public.
The Principles include (1) Responsibilities, (2) The Public Interest, (3) Integrity, (4) Objectivity and Independence, (5) Due Care, and (6) Scope and Nature of Services. 52
The umbrella statement in the Code is that the overriding responsibility of CPAs is to exercise sensitive professional and moral judgments in all activities. By linking profes- sional conduct to moral judgment, the AICPA Code recognizes the importance of moral reasoning in meeting professional obligations. That is one reason why we discuss the clas- sic moral philosophies later in the chapter.
The second principle defines the public interest to include “clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of CPAs to maintain the orderly functioning of com- merce.” This principle calls for resolving conflicts between these stakeholder groups by recognizing the primacy of a CPA’s responsibility to the public as the way to best serve clients’ and employers’ interests.
Integrity has been discussed already in this chapter. As a principle of CPA conduct, integrity recognizes that the public trust is served by (1) being honest and candid within the constraints of client confidentiality, (2) not subordinating the public trust to personal gain and advantage, (3) observing both the form and spirit of technical and ethical standards, and (4) observing the principles of objectivity and independence and of due care.
Objectivity requires that all CPAs maintain a mental attitude of impartiality and intel- lectual honesty and be free of conflicts of interest in meeting professional responsibilities. Independence applies only to CPAs who provide attestation services (i.e., auditing), not tax and advisory services. The reason lies in the scope and purpose of an audit. When conducting an audit of a client’s financial statements, the CPA gathers evidence to support
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20 Chapter 1 Ethical Reasoning: Implications for Accounting
an opinion on whether the financial statements present fairly, in all material respects, the client’s financial position and the results of operations and cash flows in accordance with GAAP. The audit opinion is relied on by the public (external users), thereby triggering the need to be independent of the client entity to enhance assurances. In tax and advisory engagements, the service is provided primarily for the client (internal user) so that the CPA might become involved in some relationships with the client that might otherwise impair audit independence but do not come into play when providing nonattest services; nonattest services do require objectivity in decision making to protect the public interest.
Independence is required both in fact and in appearance. Because it is difficult to determine independence in fact because it involves identifying a mindset, CPAs should avoid relationships with a client entity that may be seen as impairing objective judgment by a “reasonable” observer. The foundational standard of independence is discussed in the context of the audit function in Chapter 4.
The due care standard (diligence) calls for continued improvement in the level of com- petency and quality of services by (1) performing professional services to the best of one’s abilities, (2) carrying out professional responsibilities with concern for the best interests of those for whom the services are performed, (3) carrying out those responsibilities in accor- dance with the public interest, (4) following relevant technical and ethical standards, and (5) properly planning and supervising engagements. A CPA who undertakes to perform professional services without having the necessarily skills violates the due care standard. The requirement for continuing education to maintain one’s CPA certificate helps meet the due care standard. Most states now require CPAs to complete a specified number of continuing education hours in ethics to maintain their license to practice.
What follows is an example of the importance of the due care standard. Imagine if a CPA were asked to perform an audit of a school district and the CPA never engaged in governmental auditing before and never completed a course of study in governmental auditing. While the CPA or CPA firm may still obtain the necessary skills to perform the audit—for example, by hiring someone with the required skills—the CPA/firm would have a hard time supervising such work without the proper background and knowledge.
The due care standard also relates to the scope and nature of services performed by a CPA. The latter requires that CPAs practice in firms that have in place internal qual- ity control procedures to ensure that services are competently delivered and adequately supervised and that such services are consistent with one’s role as a professional. Also, CPAs should determine, in their individual judgments, whether the scope and nature of other services provided to an audit client would create a conflict of interest in performing an audit for that client.
A high-quality audit features the exercise of professional judgment by the auditor and, importantly, a mindset that includes professional skepticism throughout the planning and performance of the audit. Professional skepticism is an essential attitude that enhances the auditor’s ability to identify and respond to conditions that may indicate possible misstate- ment of the financial statements. It includes a questioning mind and critical assessment of audit evidence. Professional judgment is a critical component of ethical behavior in accounting. The qualities of behavior that enable professional judgment come not only from the profession’s codes of conduct, but also the virtues and ability to reason through ethical conflicts using ethical reasoning methods.