August 2003

Educating for the Public Trust

By Paul M. Clikeman

Can improved ethics training by college professors help prevent future accounting scandals? Pricewaterhouse-Coopers thinks so. In its new monograph, Educating for the Public Trust, the firm calls on accounting educators to integrate the values of quality, integrity, transparency, and accountability into the curriculum. The Cohen Commission on Auditors’ Responsibilities and the Treadway Commission on Fraudulent Financial Reporting also recommended that professors emphasize ethical values.

As an accounting educator, I’ve always believed that one of my roles, in addition to teaching technical material, is to introduce future accountants to the ethical standards of the profession. Most major accounting textbooks contain examples of ethical dilemmas and guidelines for resolving them, and my colleagues and I spend significant class time discussing earnings management, budgetary slack, client confidentiality, auditor independence, and other ethical issues.

Research suggests that accounting education does influence students’ professional attitudes. Southern Methodist University professor Steve Henning and I conducted a study of business students’ attitudes about financial reporting and earnings management (Issues in Accounting Education, February 2000). We administered a questionnaire measuring willingness to manipulate reported earnings to 164 college sophomores enrolled in their first accounting course. There were no significant differences between the responses of the students planning to major in accounting and those planning to major in other business disciplines, such as marketing and management.

When we administered the questionnaire to the same students two years later, we found that the accounting students opposed manipulating earnings more strongly during their senior year than they did during their sophomore year. We also found that the senior accounting majors opposed earnings management more strongly than did the seniors majoring in other business disciplines.

These findings suggest that undergraduate accounting education is successful at instilling in students a sense of responsibility for truthful financial reporting. Whether collegiate education has a “lasting” effect as asserted in Pricewaterhouse-Coopers’ monograph is a more difficult question. In my auditing course last semester, we discussed three recent SEC enforcement actions against major accounting firms. In the first case, the accounting firm paid a $2.5 million penalty after it was discovered that hundreds of the firm’s employees owned securities issued by the firm’s audit clients. In the second case, the SEC fined an accounting firm $5 million for multiple independence violations, including performing contingency-fee underwriting services for audit clients. In the third case, still under investigation, the SEC has charged that the accounting firm lacked independence because it earned millions of dollars marketing and implementing a software product jointly developed with an audit client.

None of these situations can be blamed on a few “bad apples.” The auditors caught owning stock in their firm’s audit clients included six of the 11 partners responsible for the firm’s independence policies. The business relationships in the other two cases had been approved at the firms’ highest levels.

Cases like these make me skeptical of claims that accounting education can significantly reduce unethical behavior. My students recognized immediately the violation of explicit independence rules and inherent conflicts of interest. The students were incredulous that major accounting firm partners would engage in such outrageous behavior. These cases, and others raise the question, “What happened to accounting firm partners during the years following graduation that made them blind to obvious ethical violations and conflicts of interest?”

Perhaps the answer lies in the cultures of the major accounting firms. In her recent book Final Accounting, former Arthur Andersen partner Barbara Ley Toffler alleges that Andersen’s “rotten culture” caused the firm’s downfall. First, emphasis on revenue growth, reinforced by the firm’s promotion and compensation policies, led auditors to cave in to their clients’ demands. Second, the esteemed status of engagement partners allowed Andersen’s Houston office partner David Duncan to disregard advice from Andersen’s Professional Standards Group. Finally, loyalty to the firm was the characteristic valued most highly in Andersen employees; loyalty to the public was rarely mentioned.

I don’t know if Ms. Toffler’s description of Andersen’s culture is accurate, but I know she’s addressing the right question. It seems likely that the culture and prevailing values of their firms have more influence on accountants’ behavior than do the ethical lessons they learned in college. Auditors routinely evaluate their clients’ motives and attitudes to assess the risk that a client will commit financial statement fraud. The disappointing performance of public accounting firms in recent years indicates it’s time for accountants to examine the priorities, reward systems, and cultures of their own firms.

Accounting educators may influence the attitudes and ethical beliefs with which young accountants begin their careers, but the influence of collegiate education fades over time. I would like to believe that my lessons on professionalism and public responsibility have a lasting effect on my students’ behavior, but I fear that whatever influence I have is soon overwhelmed by the pressures exerted by their employers. Accounting firms must develop cultures that elevate integrity and responsibility to the public above profit and growth if accountants are ever to regain the public trust.

Paul M. Clikeman, PhD, CPA, is an associate professor of accounting at the University of Richmond. He was formerly an auditor with Deloitte & Touche, LLP.

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