September 2002

Steering the Accounting Profession Past the Ethical Icebergs

An article in the August CFO magazine reported that 17% of CFOs surveyed have been pressured by their CEOs to misrepresent financial results; 5% said that their reporting practices have violated GAAP. And these are just the individuals that admit to being in those situations—the tip of the iceberg of the profession’s ethical problems.

Icebergs do not form suddenly or melt quickly, and so it is with accounting ethics: The problems we know about are only the beginning, and solving them won’t be easy. Professional associations have a key standards enforcement role to play in any solution.

The professional standards-setting and the ethics enforcement processes themselves are often characterized as moving at a glacial pace, but the traditional standards-setting role is now in flux. For example, the Sarbanes-Oxley Act of 2002 creates a new Public Company Accounting Oversight Board, and the events of the last year have made legislators and the public question the accounting profession’s ability to set and enforce its own regulations.

The Sarbanes-Oxley Act deals with public companies and their auditors. But standards enforcement and ethics are issues for the entire profession, including auditors of nonpublic companies and CPAs in industry, academia, and the nonprofit and government sectors. The NYSSCPA needs to take an active role in proposing, adopting, and promulgating higher standards and better enforcement and education programs to prevent ethics violations. This includes educating CPAs and the general public about the profession’s ethical standards, how they’re formed and enforced, and what role various organizations play.

In New York, two groups regulate the CPA profession’s ethics: the statutory licensing entity, the State Board of Regents, regulates licensed CPAs with the advice of the New York State Board for Public Accountancy; and the NYSS-

CPA regulates its voluntary members. The two organizations have missions that are usually compatible but rarely identical. In New York, the board sets and enforces standards for attest services, and the society sets and enforces standards for both attest and nonattest services. The board’s statutory status gives it the authority to impose fines and suspend or revoke licenses. The NYSSCPA has no statutory authority and its ability to terminate or suspend membership is effective only if that disciplinary action is made public. Terminations and suspensions of members for professional ethics violations are published in The Trusted Professional, but are rarely reported by major media.

At both the N.Y. State Board and the NYSSCPA, the wheels of the current ethics enforcement mechanism turn slowly. If an ethics complaint filed with the NYSSCPA is also under investigation by the N.Y. State Board, the NYSSCPA defers its investigation, upon request of the respondent, until the board closes its case, and each requires its own investigative process. Consequently, some cases last months, even years, running up costs for all parties and casting a shadow over the individual or firm, a presumption of innocence and even a favorable resolution notwithstanding. This system must change.

Not every ethics case that comes before the NYSSCPA Ethics Committee has been before the N.Y. State Board; some are registered here first. The N.Y. State Board recently asked the NYSSCPA Ethics Committee to share information on ethics complaints. Without a complaint, the board cannot initiate an investigation. Historically, little sharing of information has occurred between our two organizations, so this is progress. The NYSSCPA is considering changing its bylaws to facilitate this information sharing. The NYSSCPA hopes to see such information exchanges, which can only help the public and our profession, work both ways.
In some states, the state board and CPA society cooperate closely. For example, some states use investigators for ethics cases provided by the CPA society; New York has done this for many years.

The N.Y. State Board and NYSSCPA could establish a program in which the board and society would redefine what types of cases each reviews, use CPA investigators from one pool, and require only one investigation; perhaps the society could even assist the board by investigating and recommending findings on cases. In addition, the society could promote education on all ethical standards affecting New York CPAs.

Many ethics violations result from ignorance rather than deliberate action, which points to a great need for ethics education. New York recently began requiring all registered CPAs to take four hours of ethics CPE every three years, and we recognize this as a step forward.

The NYSSCPA’s ultimate enforcement action, expulsion or suspension from the NYSSCPA, is for serious violations. A felony conviction or tax fraud requires automatic termination. Termination of NYSSCPA membership is a significant event, because this generally triggers an investigation by the N.Y. State Board, which can lead to a loss of licensure.

The depth of knowledge and experience among NYSSCPA members in ethics and investigations needs to be used. For example, NYSSCPA members with international experience could advise on other countries’ ethical standards that could be adapted here. Members could also help implement new ethics rules and disciplinary mechanisms for the majority of CPAs who don’t audit public companies and are outside the ambit of the Sarbanes-Oxley Act.

In some respects, the NYSSCPA’s current ethical standards are higher than the N.Y. State Board’s. At issue is whether we need to raise the bar even higher, and whether the NYSSCPA should change how we promote, communicate, and enforce standards. Whatever proposals we develop will need to be very clearly articulated, then exposed for comment to our members and other affected parties. If you have thoughts, comments, or ideas, I would very much like to hear them.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA
lgrumet@nysscpa.org