RESPONSIBILITIES & LEADERSHIP

Ethics

A Crucial Test for New CPAs
Ethics at the Gateway to the Profession

By Jacqueline A. Burke and Jill D'Aquila

The number and magnitude of recent business scandals have created an overwhelming need to reexamine the regulatory environment of the accounting profession. The confidence in the integrity of financial statements has deteriorated. Since the downfall of Enron, WorldCom, and others, changes have certainly been made or proposed in an attempt to restore the public’s confidence, such as the Sarbanes-Oxley Act of 2002, the most significant accounting legislation since 1933. The act created the Public Company Accounting Oversight Board, which has the authority to set and enforce auditing, attestation, quality control, and ethics standards for auditors of public companies. Furthermore, the act creates new roles for audit committees and auditors, creates tougher penalties for those who commit certain fraudulent acts, and requires issuers of public stock and their auditors to adhere to new rules and procedures for the financial reporting and audit process. For example, managers are now required to assess and make representations about the effectiveness of the company’s internal control structure. The chief executive and chief financial officers must certify the accuracy of the company’s quarterly and annual reports. Additionally, a new fraud standard has been issued, SAS 99: Consideration of Fraud in a Financial Statement Audit, which provides more specific guidance to auditors regarding the detection of fraud.

Although these kinds of changes should help restore the trust in the accounting profession, they are not enough. Attention also needs to be focused on the education and licensing process. We need to teach ethics, emphasize it on the national exam, and include it in the licensing process.

CPA Exam in Transition

The recent scandals and resulting changes in the accounting profession are taking place at a time when major changes have been proposed for the spring 2004 CPA Exam. One of the major changes is, of course, the move from paper and pencil to computer. Another is the reshuffling of topics covered on the computer-based exam (Exhibit). For example, the new exam will test general business knowledge in the Business Environment and Concepts (BEC) section. Another benefit of the computerized exam is its ability to test the judgment of candidates by allowing them to evaluate simulated cases that resemble real-life situations.

Many decisions that CPAs make have ethical implications. The notion that more emphasis should be placed on this subject in accounting education is not new. The results of a study reported in Accounting Education: Charting the Course through a Perilous Future (Albrecht and Sack, 2000) disclosed that, among other necessary changes, accounting education should deal more with values, ethics, and integrity. This study was conducted before the major business scandals of 2001 and was sponsored by the Institute of Management Accountants (IMA), the AICPA, the American Accounting Association (AAA), and the former Big Five. The authors, Steve Albrecht (a former AAA president) and Robert J. Sack (a former partner at Deloitte & Touche), were asked to write a “high-level thought piece, backed by empirical evidence where possible, that would motivate serious change in accounting education.” The leaders of these four groups sponsored the study out of concern that accounting education in colleges and universities had to be quickly reformed.

According to Albrecht and Sack, accounting students are not properly prepared for the “ambiguous business world” because of weaknesses in the educational process. The authors explain that accounting majors are too often asked to memorize and regurgitate information when they should instead be taught analytical skills. Students must be better prepared to deal with “uncertainty”; for example, they should learn to solve problems with more than one answer. The study also revealed that accounting curricula focus too much on number crunching instead of exposing students to pertinent concepts such as ethics, technology, and globalization. Had this study been conducted today, it is doubtful the findings would be different.

Apparently, the profession needs more than the Sarbanes-Oxley Act and SAS 99. We need better training, testing, and licensing. Stressing ethics more on the exam can help. It can accomplish other goals as well. If ethics becomes a more important part of the exam, it too will become a more important part of the accounting programs. Many accounting programs at colleges and universities structure their curriculum and courses toward the CPA Exam. While educators do not necessarily like to “teach toward the exam,” the exam content certainly places pressure on educators to cover similar content in their curriculum. An advantage of the 150-hour requirement is that the extra credit-hours can allow for more ethics to be covered.

Furthermore, a stronger emphasis on the importance of analyzing ethical dilemmas makes a statement to entry-level CPAs, as well as the public, about the significance of ethical decision-making. Although the CPA Exam is designed to test knowledge and skills relating to public practice, it cannot be ignored that many CPAs that enter public practice eventually leave to become financial leaders in businesses. Thus, increasing the importance of ethics in the licensing process may also have a positive impact on the conduct of corporate executives.

Expanding the coverage of ethical decision-making can be done in a variety of ways, including one or more of the following:

Additional Questions in the Regulation Section

The Regulation section of the computerized exam will test candidates on their knowledge of federal taxation, ethics, professional and legal responsibilities, and business law. Candidates will also be tested on their ability to apply that knowledge rather than simply provide rote answers. Ethics has traditionally been incorporated into the ARE section of the exam. The proposed exam reflects the same degree of emphasis on this subject as in the traditional exam. The following is a breakdown of the Regulation content covering ethics and professional and legal responsibilities:

According to Gregory Johnson, the AICPA’s director of the CPA Examination:

The Regulation section of the exam will be worth 25% of the total. Approximately 15% to 20% of this section will be devoted to “Ethics and Professional and Legal Responsibilities,” or a maximum of 5% of the CPA Exam. Furthermore, ethics is only one of several components in the Ethics and Professional and Legal Responsibilities category. When factoring in other components of the Regulation section, such as legal responsibilities and liabilities, it is apparent that the attention devoted to ethics will realistically be less than 5%.

One may question why the exam time devoted to this topic will remain so low, especially considering the following quote from Olivia Kirtley, chair of the AICPA Board of Examiners, in the May/June 2002 CPA Exam Alert: “CPA Examination content must reflect the current environment to do its job of protecting the public interest.” In light of the recent accounting scandals and the consequential deterioration of the public’s trust in our profession, the CPA Exam would better reflect the needs of the public by expanding its coverage of ethics on the exam.

Simulations

The computer-based CPA Exam will include a new component in the form of simulations, or case studies. While the previous, paper-based exam was sufficient in testing memorization, it was limited in testing other important skills, such as candidates’ judgment. The newly designed simulations are intended to assess candidates’ ability to evaluate real-life case studies through the use of more advanced skills. Many of the CPA Exam questions related to ethics have typically been in the form of multiple-choice questions. Given the complexity of ethical dilemmas, simulations may be a more appropriate question format. This revised format could more fully assess candidates’ thought processes.

Many accounting textbooks include a decision-making framework to assist students in analyzing ethical dilemmas. Auditing textbooks typically include a discussion of such a framework in the same chapter in which the AICPA Code of Professional Conduct is discussed. On the CPA Exam, candidates could be presented with a hypothetical scenario in which an ethical dilemma exists. They could then be asked to identify the dilemma, how it relates to the AICPA’s Code of Professional Conduct, and what alternative courses of action exist, as well as the constraints upon and implications of these actions. Candidates would then select the best course of action.

Expanding the Scope to Other Sections

Another way of enhancing the coverage of ethics on the CPA Exam would be to expand the scope of coverage to each section of the exam rather than only in the Regulation section. According to Dr. Ralph Polimeni, dean of the Frank G. Zarb School of Business at Hofstra University and former director of the Chaykin CPA Review Program:

Testing ethics in the way recommended by Polimeni has very practical benefits in that it more realistically represents the way in which dilemmas are confronted. Accountants are faced with such situations in many different areas of practice and under varying circumstances. As a result, candidates should be expected to apply their knowledge of their ethical responsibilities to varying circumstances. The AICPA, however, has stated that it has no plans to increase the emphasis on ethics in the CPA Exam.

A Separate Ethics Exam

Placing a heavier emphasis on ethics for CPA candidates is not an entirely new concept for many states. According to the Digest of State Accountancy Laws & State Board Regulations, 2002, published by the AICPA and National Association of State Boards of Accountancy (NASBA), over half of the states currently require the completion of an ethics exam in order to fulfill the requirements for obtaining a CPA license or certificate. Candidates in these states are generally required to take this additional test after passing the CPA Exam. Some states, such as Colorado, Connecticut, and South Dakota, require these candidates to take the AICPA Ethics Exam. Other states, such as Kansas, require candidates to take the AICPA exam or another approved test. Texas requires the completion of a four-hour “rules of professional conduct” course and an examination related to the course. California, Florida, and North Carolina also require candidates to take an exam.

The AICPA Ethics Exam consists of 50 multiple-choice questions about different aspects of the AICPA Code of Professional Conduct. A score of at least 90% is considered a passing score for licensing or certification. A benefit on testing ethics through the new CPA Exam, as opposed to the separate AICPA Ethics Exam, is that it will achieve uniformity of ethical requirements in all states and can be designed to test analytical skills. On the other hand, the AICPA Ethics Exam consists of only multiple-choice questions. Perhaps consideration should be given to using alternative question formats on the exam in order to test more relevant skills and minimize the reliance upon memorization.

Continuing Professional Education

It should be noted that various states— including Arkansas, Louisiana, Maine, Michigan, New York, Texas, and Washington—have integrated some form of an ethics component into the continuing professional education requirements for CPAs. For example, Washington requires all licensees to complete four CPE credit hours in ethics related to a public accounting practice.

Just as emphasizing ethics at the entrance to the profession helps fulfill accountants’ public responsibility, emphasizing ethics through continuing education strengthens that commitment. Every state should consider requiring its CPAs to complete an ethics component as part of its mandatory CPE requirement.

To date, efforts to restore the public’s confidence have been focused on individuals that are already practicing. Changes should not be piecemeal, but should instead be pervasive throughout the accounting regulatory environment, starting with the education, testing, and licensing of CPA candidates.

While the AICPA is making changes to the current CPA Exam, it should also consider a substantial integration of ethics into the licensing requirements for CPAs. This can be done in a variety of ways, such as adding more questions on ethics to the CPA Exam, testing about the subject through simulations, expanding the scope of coverage by integrating the subject into all test sections, and requiring candidates that have passed the CPA Exam to take a separate ethics exam. The Sarbanes-Oxley Act and SAS 99 are not enough. Steps must be taken at the gateway to the profession: ethics must be taught, emphasized on the national exam, and included in the licensing process.