| Responsibility
for Ethics: Firms or Individuals?
APRIL
2005 - An NYSSCPA task force is currently discussing how
the accounting profession deals with unacceptable behavior;
specifically: What would the profession’s peer review
and ethics programs look like if we were starting from scratch?
This question is interesting because assigning responsibility
to ensure the profession’s core concepts of integrity,
independence, and competence has been approached in an apples-and-oranges
manner.
Licensing
agencies’ disciplinary programs and voluntary organizations’
ethics programs deal with individuals. A CPA losing her
license for disciplinary reasons, however, is an infrequent
occurrence. The AICPA’s and the NYSSCPA’s ethics
programs also deal with individuals, and the result of an
ethics complaint can include termination of membership.
If the individual is also involved in litigation, however,
the ethics case is deferred until the litigation is adjudicated,
which in some cases takes years.
The
AICPA peer review program, however, which is required to
operate independently of its ethics programs, deals with
firms, specifically their quality-control systems. Peer
review’s focus has historically been remedial, although
many state licensing agencies require peer review for firm
registration. Peer review is designed to modify firms’
behavior in generally nonpunitive ways, and firms are not
shut down for failing to comply with peer reviewers’
recommendations unless they persist over several review
periods, at which point a firm can be dropped from the program.
How a CPA firm deals with ethical issues usually depends
on the size of the firm, regardless of its participation
in peer review. In large firms, issues that are generally
considered “ethical” fall under “quality
control,” and most of them are addressed within the
firm’s policy and procedures manual.
A recent
change of direction came with the Sarbanes-Oxley Act, which
requires PCAOB inspections of all public accounting firms
that audit public companies. Although the PCAOB has disciplinary
authority, it hasn’t conducted enough inspections
yet for anyone to know the program’s long-term implications.
But many CPA firms fall outside of the PCAOB’s inspection
program, and although the public expects peer review or
PCAOB inspections to look at individuals, they don’t.
Moreover, peer review programs cannot share information
with ethics programs, even if the information concerns an
individual that is involved in an ethics complaint.
Most
CPAs and firms recognize that integrity, independence, and
competence cannot be turned on and off like a switch. But
would they be higher if the ethics and peer review programs
were allowed to work together more than they currently do?
If peer review were to become more disciplinary in nature,
however, and important information from peer review results
were to pass to ethics enforcement, then due process, to
protect the “innocent until proven guilty” rights
of both individuals and firms, would become more important
than ever.
Where
Do You Want to Go?
I’m
reminded of Lewis Carroll’s Alice in Wonderland,
when Alice gets lost and comes to a fork in the road. She
sees the Cheshire cat in a tree: “‘Which road
do I take?’ she asked. ‘Where do you want to
go?’ he responded. ‘I don’t know,’
said Alice. ‘Then,’ said the cat, ‘it
doesn’t matter.’” Similarly, CPAs must
recognize that knowing where you want to go does matter,
and if they themselves—as well as regulators—don’t
answer these questions, no one will be smiling. They’ll
still be lost, even though they helped lay the roads themselves.
But because the ultimate goal is serving the public, finally
confronting that apples-and-oranges question—firms
or individuals?—is worth the effort.
Louis
Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA
lgrumet@nysscpa.org
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