INDEPENDENCE: ETHICAL CONSIDERATION OR REGULATORY REQUISITE?

By William H. Speakman 3rd

Lynn E. Turner, SEC chief accountant, set the tone for "Ethics Under Stress," a forum held by the American Accounting Association, the American Institute of Certified Public Accountants, and the National Association of State Boards of Accountancy on April 23, at Arlington, Va. Turner expressed his concern over the ethical issues arising out of huge publicly owned corporations controlling shell CPA firms. He stressed the need for fidelity to the public trust, which requires total independence, including the appearance of independence. Turner said an expanded focus on the monitoring of independence was in order and that peer review must address the independence issue.

Independence was quickly substituted for ethics as the focal definition at the conference. It was not clear from the various panel discussions how individual ethical behavior is transformed into an institutional ethical behavior when the institution is subject to the ethos of the public marketplace and stakeholder capitalism. Paul Koren, a managing director of American Express Tax and Business Services (TBS) and a partner and director of audit services at Goldstein Golub Kessler LLP, presented an explanation of GGK's present methodology for keeping its distance from TBS. GGK, Koren maintained, operates independently of its parent's influence.

Because independence dominated the discussion, other ethical considerations, such as individual judgment, the influence of political action committees, political contributions in a regulated environment, and corporate fiduciary responsibilities to maximize shareholder value were notably absent from consideration. Independence with respect to valuations and the determination of asset lives in business combinations drew particular attention. Turner expressed his concerns with auditors "running the numbers" for research and development and derivatives valuations.

Douglas R. Carmichael, professor of accountancy at Baruch College, CUNY, brought the discussions into perspective with an historic anthology of the evolution of professional standards from individual rules of conduct (1917­1961) to the 1988 Code of Professional Conduct and the independence standards imbedded in Rules 101 and 102. He presented a background summary of practice integration and the challenges to independence when management services, accounting advocacy services, or executive recruiting services dominated the auditors' relationships. Carmichael concluded his review of the ethical culture of the profession with the 1999 ethics interpretations that address independence in alternative firm practice structures. Professional ethics had evolved from addressing individuals doing what was right to the codification of standards to demonstrate independence.

The Panel Discussion

"Ethical Issues Facing the Profession in the 21st Century" was the morning's panel discussion. Panelists were Robert J. Hyde, chair, Minnesota Board of Accountancy, Robert L. Gray, member, AICPA Professional Ethics Executive Committee, Richard L. Fair, New Jersey state auditor, Mary Beth Armstrong, chair, AAA Ethics Committee, Mary Kurth, RHI Management Resources, and Koren.

The panel quickly moved toward a discussion of independence as it applied to CPAs under the umbrella of consolidators. Koren defended GGK's decision as a way of preserving its practice at a time when larger firms had put pressures on the marketplace. Gray questioned the independence of those that were owned and controlled by nonprofessionals. Armstrong attributed the cause of the concerns to the rapid expansion of professional services into "business" services. Hyde brought up the experience requirements for CPA certification and questioned whether experience in a non­CPA owned entity would qualify for the requisite licensing experience. Kurth said that individuals in industry must always maintain an exit strategy from their employer to maintain independence. Fair brought up the ethical and independence issues relating to access to people in public places. He came close to leading the discussion into the coverage of political action committees--but didn't.

Gray's soliloquy on compliance with the current Code of Professional Conduct drew the attention of the panel. He presented the Code as a challenge to consolidators because it minimized ambiguity and served as a basis for a firm culture. He questioned the wisdom and "rightness" of having CPAs ultimately responsible to non-CPAs and the capital marketplace. He acknowledged that economics and competition forced changes in the form of practice, but this should not force change in the individual mindset. He challenged the propriety of a shell partnership in a relationship with a consolidator recommending the consolidator's products and services to its clients. Gray concluded by questioning whether an attest arm of a publicly owned consolidator was an independent entity or a paper fiction.

Koren related Gray's concerns to his experience as director of audit for an attest firm operating in an alternative structure with a consolidator. He outlined the safeguards for independence that he negotiated for GGK. He stressed the series of protocols and prohibited relationships that ensure independence. Koren said he would not recommend other American Express services to a GGK attest client because that would be a violation of their protocols.

The closing topic concerned advocacy services as they affect independence. Gray expressed his belief that this should be a current issue for the Independence Standards Board, which has the statutory authority. As consolidators and large firms provide legal and other advocacy services, the effect on independence or the apparent lack of independence must be addressed.

William Allen, chair, Independence Standards Board, brought the forum full circle. He stated that "independence is not primarily ethical, but rather regulatory." Allen was quick to recognize that which Carmichael had presented earlier: Ethics in professional practice had been historically focused on individual conduct. He observed that there is no empirical information on which to predict the effects of alternative practice frameworks on professional behavior. Allen pointed out that the public policy­making ISB, at this point in its development, relies on informed intuition instead of empirical research as a basis for decisions. Allen concluded by saying he "used up time without saying very much." However, the "little" he said is of extreme importance. *

William H. Speakman 3rd, CPA, is associated with Talbot Management Corp. and is a member of the NYSSCPA.

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