September 2003

Gatekeepers and Transition

By Robert H. Colson, PhD, CPA, The CPA Journal

The New York State Senate unanimously passed legislation that would change the categories of services rendered by CPA firms. The Senate vote will carry over to the 2004 session, and if the Assembly also passes the bill, we will have the first significant change in the New York accountancy statute since 1947.

The Senate bill divides CPA services into three categories:

This tripartite conception of CPA services can be helpful both in understanding current public expectations of CPAs and in designing appropriate responses to deal with public concerns about CPAs’ ethical standards. Public expectations and concerns are based on a perception of CPA services that may not fit the reality at most firms. Many CPA firms provide more non-CPA services than CPA services. Because non-CPA services do not involve a third party, the relationship between the CPA and the client is principally commercial in nature; client loyalty arises from familiarity, trust, and satisfaction with the services provided. Although some non-CPA services may be recurring, such as bookkeeping services or tax advice, many must be won in competition with other providers, engagement by engagement. The familiarity and trust that CPAs build over time with clients is a major reason that clients choose CPA firms for such engagements.

A question that frequently arises is whether the same standards of conduct should apply to all three categories of services, as defined by the Senate bill. Currently, in New York, professional misconduct rules and unprofessional conduct rules for CPAs consist of general provisions that cover all 44 of the professions regulated by the New York Board of Regents and special provisions for the profession of public accountancy. Many of the special provisions for public accountancy concern only attest and compilation services, but special provisions related to the confidentiality of client information; solicitation; form of practice; profit-sharing; and clients’ right to copies of documents, certain working papers, and their own records, apparently apply to all services.

These state rules mirror, to a certain extent, the codes of professional conduct of the AICPA and NYSSCPA. Both the AICPA and NYSSCPA codes deal similarly with independence as it relates to attest and compilation services, but the remainders of their codes apply to all services. In other words, apart from independence issues, neither state rules nor professional standards differentiate between ethical standards for CPAs according to their different functions.

Guardian and commercial moralities. In her book Systems of Survival, Jane Jacobs, the urban planner and social critic, distinguished between guardian morality and commercial morality. Guardian morality is predicated on placing the welfare of third parties over and above self-interest, whereas commercial morality depends on self-interested behavior in the market place. She asserts that guardian morality is appropriate in those social and economic functions effectively organized as monopolies. For example, government and military institutions, public utilities, and public universities should practice a guardian morality because of their special functions in society. Private businesses, on the other hand, would normally be expected to follow commercial morality, where honesty, objectivity, hard work, confidentiality, lack of conflicts of interest, integrity, and many other attributes of professionalism are practiced because they advance an entity’s economic interest.

Gatekeepers practice guardian morality. Social commentators and congressional witnesses have characterized accountants’ roles in recent corporate failures as a failure in guardian morality. The public expects CPAs to be gatekeepers over the integrity of financial statements of SEC registrants in a way that resembles the guardian morality expectations usually restricted to more public entities. CPA firms, however, are neither monopolies nor public institutions, but private businesses whose professional standards have been patterned on a demanding, voluntary, commercial ethic. Public concern about gatekeeping issues over the past quarter century has led regulators to remove responsibility for an increasing number of CPAs’ responsibilities, reflecting, I believe, a conflict between commercial morality and guardian morality. The net effect on CPAs’ behavior has been a growing concern to meet the letter of the rules for guardian morality, while the development of commercial morality has been neglected. Any perusal of either AICPA ethics courses or New York State Education Department–approved ethics courses will confirm this.

Should commercial morality be applied to attestations, as some in the CPA profession assert, and guardian morality be applied to non-CPA services, as some regulators avow? The ethical responsibilities expected of CPAs should be connected to the services performed.

CPAs and their regulators should be able to differentiate among the various functions that CPAs perform. The New York State Senate legislation provides a good place for this transition to begin.

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