Accountants' Professional Ethics

Thursday, January 1, 2004 - 01:00

There has never been a time when more appropriate focus has been put on the ethics of individuals and professionals in the business environment. The recent mega-bankruptcies of Enron, WorldCom and the actions of their outside auditors and the cases of Martha Stewart, Dennis Kozlowski and Frank Quattrone, just to mention a few, has effected the entire free-market economy and brought to light the need for enforcement of the ethics which guide and regulate our business environments.

There are codes of conduct that form the basis for ethical behavior specifically for business professionals, including codes for attorneys and accountants. Although there are differences between these codes of conduct, many of the underlying principles are the same. A business group of senior financial managers known as Financial Executives International (FEI), in their member's code of ethics, uses phrases such as:

• Act with honesty and integrity
• Avoid conflicts of interest in personal and professional relationships
• Provide information that is accurate, complete, objective and timely
• Comply with the rules and regulations of federal, state and local governments
• Act in good faith, responsibly, without misrepresenting material facts or allowing one's independent judgment to be subordinated
• Proactively promote ethical behavior in the work environment

Obviously all of these phrases are clear and easy to understand regardless of one's business or professional status. So being ethical is an easy concept to grasp.

Ethics Guidelines For Accountants

For practicing Certified Public Accountants there are at least two main "governing" bodies that draft, review and enforce the codes of conduct and ethics guidelines to be used by their members. The AICPA, American Institute of Certified Public Accountants, and the respective state boards of accountancy. The following discussion highlighting the actual principles of the AICPA's Code of Professional Conduct states what is expected of professionals practicing accounting. The words taken from the code are indeed "simple English" and easy to understand.

The AICPA Code Of Professional Conduct

The AICPA has several committees that participate in the final formulation of its Code of Professional Conduct, including the Professional Ethics Executive Committee, which helps set standards for its individual members and member firms and addresses major issues such as independence and the disciplinary process when violations of the code occur.

The AICPA Code of Professional Conduct consists of two sections: (1) the Principles and (2) the Rules. In the preamble to the code they state: The Principles provide the framework for the Rules, which govern the performance of professional services by its membersÉ The Principles call for an unswerving commitment to honorable behavior, even the sacrifice of personal advantage. For our purposes we will discuss the Principles, as they are the foundation of appropriate professional behavior. The basic principles of the

AICPA Code of Professional Conduct are:
• Responsibilities
• The Public Interest
• Integrity
• Objectivity and Independence
• Due Care
• Scope and Nature of Services

Responsibilities. This principle states that members need to exercise sensitive professional and moral judgments in all their activities, are responsible for cooperating with each other to improve the art of accounting and should maintain the public's confidence and enhance the traditions of the accounting profession.

The Public Interest. Here, the AICPA orders its members to act in a way that will serve the public interest, honor the public trust and demonstrate their commitment to professionalism. This principle stresses that members of the AICPA are expected to discharge their responsibilities with integrity, objectivity and due professional care with a genuine interest in serving the public and in return for the public faith, members should continually seek to demonstrate their dedication to professional excellence.

Integrity. Members are to maintain and broaden the public confidence and perform their professional responsibilities with the highest sense of integrity. This principle goes on to state that members are to be honest and candid within the constraints of client confidentiality and never subordinate the level of service and public trust to personal gain. Specifically, this principle states that "Integrity is measured in terms of what is right and just." Included in the AICPA's principle of Integrity is the idea that members must observe the form and spirit of their technical and ethical standards knowing that a circumvention of these standards is an improper subordination of judgment. The principle of integrity also states that members should observe the other principles of objectivity, independence and due care.

Objectivity and Independence. Objectivity must be maintained and members should be free of conflicts of interest when discharging their professional responsibilities. Objectivity is a state of mind and a distinguishing feature of the accounting profession. Objectivity also includes being impartial and intellectually honest. Independence in the AICPA's code precludes relationships that may appear to impair a member's objectivity when rendering attestation services. This independence must be in fact and appearance and be free of conflicts of interest. To remain independent, members must continually assess their client relationships and public responsibilities to assure that these principles are adhered to.

Due Care. Due Care in the code speaks of members observing the technical and ethical standards of the profession while striving, to the best of their ability, to improve the competence and quality of the services they provide. In other words Due Care is the pursuit of excellence through competent performance of the professional's duties. And competence is attained through education and experience on an on-going basis.

Scope and Nature of Services. This idea embodies all of the above principles that a member is expected to observe when determining whether or not to provide specific services to a client. Logically, if the principles of objectivity, conflicts of interest, independence, integrity and the like can not be adhered to, the scope and nature of the services a professional can provide is directly affected. The spirit of these principles must be met and satisfied before a member can appropriately perform services requested by his client. Basically, the member must assess whether an activity is consistent with their role as a professional.

The "Decision Tree"

The Code of Professional Conduct applies to all AICPA members whether in public practice or business and industry. Often, in business and industry, when corporate financial executives are challenged with an ethics issue, they are not sure where and to whom to turn to or how to begin to resolve the problem. For this purpose, the AICPA, in consultation with the Business and Industry Executive Committee, designed the Decision Tree which guides an individual working as a CPA in private industry through the process of tackling ethical issues.1 Many of these points regarding ethics issues have been suggested by AICPA members from their experience.

The most significant ones are:
• Try to resolve the issue within your organization
• Be aware of your obligations to the company's outside accountants. Don't knowingly misrepresent facts or fail to disclose material information to them
• Regarding the recording of transactions and preparation of financial statements, remember not to subordinate your judgment on material issues
• Be cognizant of ethics policies and statements in place at your company
• Always maintain your professional skepticism
• Keep documentation related to the issues, including your thoughts and conclusions during the decision making process
• If it becomes impossible to continue working at a company, seek employment elsewhere
• If the issue is severe consult with persons you respect outside the company and consider if you need to consult an attorney

The Decision Tree begins with identifying the issue and asks the question - Does the company have an ethics policy and process in place to give you guidance? If it does, it is recommended that you follow the company's guidance and if you choose to deviate, you must be prepared to justify why you did and document the reasons. If it does not have an ethics policy the first step is to talk with your manager and decide your level of satisfaction with his response. If you are satisfied with the response, decide if you need to take additional steps, but if you're not satisfied, it is suggested that you talk with another senior executive that you trust.

Again, gauge your level of satisfaction and if you are satisfied decide if you need to take additional steps. If you are not satisfied, it is suggested that you talk with the company's Ethics Committee, if one exists. Again, measure your satisfaction and if you are satisfied, determine if you need to take additional steps, and if you are not satisfied try to talk to the Audit Committee of the Board, if one exists, or if does not, talk to the Board of Directors directly.

During this process remember to maintain all the related documentation and determine if the company's internal control system and culture changed in response to this issue. Finally, if your issue is not resolved to your satisfaction, you must consider if it is appropriate for you to continue your employment with the company and whether you should report the issue to the outside accountants, regulatory agencies, banks, owners or other parties.

Today's business environment is abounding with civil and criminal lawsuits related to accounting ethics issues. One of the nation's largest accounting firms collapsed over charges of ethics violations and obstruction of justice. Shareholders and employees have been severely harmed and worldwide confidence in the integrity of our business system is now in constant question. Even the "biggest and best" of our stalwart financial and manufacturing corporations have been drawn into the spotlight for ethics violations and have paid billions in fines and penalties, all with promises to do better in the future. Professional guidelines are just that, guidelines. They are requirements and/or suggestions as to how to gauge one's moral and ethical behavior, but ultimately each one of us is aware of "right and wrong" and knows what honesty means. The government has enacted new legislation to help in the process of compliance and governance, but the burden is on each of us to raise our individual standards to a level of compliance with the ethics guidelines promulgated by our respective governing bodies in order to restore the confidence in our business environments.1 The CPA Letter, Member Segment Supplements, September 2002.

William A. Eber, a Senior Manager of Margolin, Winer & Evens LLP, holds a CPA. He may be reached at weber@mwellp.com.