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April 1992

The revised AICPA Code of Professional Conduct: current considerations. (American Institute of Certified Public Accountants)

by Beets, S. Douglas

    Abstract- The American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct has undergone significant revision since 1988. Among these revisions are the amendments that allow greater competition among accounting firms and those that review ethical guidelines on financial transactions with clients. The changes in the AICPA Code has forced many state-level CPA institutions to begin adjusting their state codes in line with the changes in the Code. The fact that there may still exist substantive differences between the revised AICPA Code and those of state-level institutions therefore raises the possibility that CPAs may unknowingly violate the revised Code. Given the unfamiliarity of many CPAs with the revised Code, it is proposed that the AICPA's membership education program be used to allow CPAs to familiarize themselves with the new Code amendments.

Before CPAs become familiar with this revised Code, however, the rules again have changed. The AICPA members recently approved revisions to the Code to 1) enable accounting firms to practice in any organizational form allowed by state law, including limited liability companies and general corporations, and 2) clarify exceptions to the general prohibitions on a member's disclosure of confidential client information. In addition, ethics interpretations effective January 1, 1992, generally prohibit all loans toand from clients, and severely limit loans from financial institution clients.

These important rule changes are the latest in a series of substantial amendments to the Code made over the past several years. Because of the multitude of revisions that have taken place since many began their careers, some CPAs may be experiencing difficulty in keeping abreast of the changes and maintaining an accurate perception of the content of the current Code.

Many CPAs may also be confused by differences between the revised Code and the state conduct codes to which they are also expected to adhere. In the circumstances of conflicting AICPA and state rules, CPAs may have to give priority to state rules to avoid loss of license. As an example of the moving-target nature of the situation, the NYSSCPA recently balloted to conform substantially its code of conduct to that of the AICPA. One area of difference that will remain relates to referral fees and commissions, with the AICPA Code permitting such fees and commissions in some circumstances, but with the state society code continuing to ban these practices. The New York State Board of Regents' rules, while largely based on the AICPA Code before the recent changes, has no yet been updated, and therefore contains a third set of guidance.


In 1985, the FTC began a study of the effect of the AICPA's conduct rules upon competition among public accountants. Two years later, the FTC concluded that several of the conduct rules interferred with competition in violation of Sec. 5 of the FTC Act. Specifically, the FTC wanted the AICPA Code amended to allow trade names, payments for referrals, acceptance of commissions and contingent fees, unrestricted advertising, and vouching for the achievability of forecasts.

All Finally Agree

Although the AICPA was initially reluctant to revise the Code, all of the changes requested by the FTC have now been made. In a January 1988 referendum, AICPA membership approved a revised Code that 1) permits non-misleading trade names, 2) allows any form of advertising that is not false, misleading, or deceptive, and 3) makes no reference to vouching for the achievablility of forecasets (the former Code specifically prohibited such vouching). In August 1988, the AICPA Coucil and the FTC negotiated a compromise agreement that specified circumstances under which AICPA members could pay referral fees and accept commissions and contingent fees. After agreeing to the compromise, however, the FTC was very slow to formally approve the consent order. The FTC commissioners learned that many accounting practitioners, fearing increased competition and a loss of professionalism, wanted the prohibitions on referals, commissions, and contingent fees to continue. Despite opposition to the revisions, however, FTC commissioners finally approved the consent order in August 1990 by a 3-2 margin.


The AICPA-FTC negotiations have resulted in significant changes in accounting ethics as defined by the AICPA. Of the 11 conduct rules that existed when the FTC investigation began, four have been materially altered to permit what they once denied.

Advertising. Any form of advertising is allowed provided that it is not false, misleading, or deceptive. Consequently, testimonials, endorsements, self-laudatory advertisements, direct comparisons of one firm to another, and in-person solicitation of prospective clients are now permitted. Even advertising that might be considered undignified or "in poor taste" is now allowed.

Trade Names. AICPA members may select any trade name for their firm as long as the name is not misleading. "Smith, Jones, and Doe, CPAs," for example, may now call their firm "Complete Accounting Services." This rule change may be particularly beneficial for firms that have a specialization or CPAs that practice in one geographical area, for example, "New England Audit Professionals."

Vouching. The prohibition of vouching for the achievability of forecasts has been deleted from the Code. Although the FTC specifically requested this change, it may have no appreciable effect on public accounting practice. Considering the related legal liability, one might question the judgment of a CPA who provides assurance that a client's forecast will be achieved.

Referral Fees. An AICPA member may now pay others to refer potential clients to the CPA. The referral, however, must be disclosed; that is, the potential client must be informed that the person making the referral is being compensated for it. This revision has the potential of significantly increasing a public accountant's client base as other CPAs, lawyers, and business professionals may be paid for directing new clients to the CPA.

Commissions. AICPA members are now allowed to accept disclosed commissions for recommending the products or services of others.

As examples, CPAs may accept payments from 1) software developers for recommending specific accounting software packages, 2) computer manufacturers for recommending their hardware, and 3) tax attorneys for recommending their services. AICPA members may also earn commissions by selling real estate, insurance, and securities. Commission payments, however, may only be accepted from individuals or organizations for whom the CPA performs no attest services.

The AICPA-FTC agreement defined attest services as audits, reviews, compilations for third parties, and examinations of prospective financial information. Additionally, as with referrals, the commission arrangement must be disclosed. If a CPA is paid to recommend a certain product, the clients or persons to whom the recommendations are made must be informed that the CPA is compensated for the product promotion.

However, after much debate on an issue coming from the floor, the AICPA Council at its October 1991 meeting decided to assist state CPA societies seeking legislation to prohibit the acceptance of payment of all commissions by any CPA engaged in the practice of public accounting. The result is a situation where the AICPA Code permits commissions under certain circumstances, but the AICPA will use its resources to help states legislate a complete ban on commissions.

Contingent Fees. AICPA members may now accept engagements for which the fee varies with the results or outcomes of certain events. This type of contingent arrangement may be particularly advantageous for CPAs with consulting practices. A practitioner's consulting fee, for example, could be a function of actual or projected savings, that is, the larger the savings, the larger the fee. The constraints on these contingent fee arrangements, however, include 1) this type of arrangement may not be made with a client for whom the CPA performs attest services and 2) contingent fees may not be accepted for tax preparation engagements.



The changes resulting from the AICPA-FTC negotiations are certainly not the first revisions in the Code and will certainly not be the last. Since its inception, the Code has been amended many times to keep pace with the changing business and accounting environment. Many CPAs practicing today remember a similar period of Code changes in the late 1970s that also resulted, in part, from the influence of the federal government. During that period, the Code was revised to delete prohibitions against advertising, encroaching upon other CPAs' clients, and offering employment to other CPAs' employees.

Consequently, during the careers of many CPAs, the Code has been changed several times. Figure 1 summarizes the former prohibitions that were dropped from the Code from 1978 to 1991.

Because of the potential effects of the many rule changes, the author conducted a study of practitioner familiarity with the Code. To facilitate the study, permission and cooperation were obtained from the managing partners of one representative office of two national accounting firms and one large regional firm. Every accounting professional in each office completed a questionnaire.

The questionnaire presented several cases, each of which described a hypothetical CPA performing an ethically questionable act. After each case, the respondent was asked whether the hypothetical practitioner acted in accordance with the Code.

Several cases related to conduct rules that were not substantially revised from 1978 to 1991, such as Rule 101, Independence, and Rule 301, Confidential Client Information. Practitioner familiarity with this set of rules was relatively high. On average, the practitioners correctly evaluated 88% of these cases.

Comparatively, however, the practitioners were not as familiar with rules that have been revised since 1977. On average, the public accountants correctly evaluated only 52% of these cases, indicating that many CPAs were not aware that the current Code allows several actions that were previously prohibited.

Overall, the practitioners who participated in the study were able to accurately discriminate between Code violations and non-violations more than 75% of the time. They were significantly less familiar, however, with the rules that had been revised in recent years than those rules which had not changed.

The implication of these findings, therefore, is that CPAs' familiarity with the Code may suffer with changes in the rules. Perhaps because of their college ethics training, accountants may be relatively knowledgeable about the Code at the beginning of their careers. As the ethics environment and related Code provisions change, however, some may not learn of the revisions or the effects on their practice.


Although practitioners may be less familiar with revised rules than those which have not changed, CPA's familiarity with the Code may not be as important as their knowledge of state conduct codes. All state accountancy boards have adopted conduct or ethics codes to which CPAs licensed in those states are expected to adhere. Until recently, most state codes and the AICPA Code were very similar. The AICPA-FTC agreement, however, has resulted in important differences among codes as the AICPA rules were amended to permit several actions that continue to be prohibited by many state codes.

Regardless of what the AICPA Code allows, failure to follow state accountancy codes could result in license suspension or revocation and, in states with accountancy statutes, additional sanctions or fines. Since many state codes are currently more restrictive than that of the AICPA, the freedoms allowed by the recent Code revisions may not be realized soon. The desired effect of the AICPA-FTC agreement will not materialize until state accountancy boards amend their ethics rules and repeal the prohibitions in question.

Unfortunately, reconciliation of these different sets of rules may be difficult. While many CPAs are looking forward to the new freedoms presented by the amended Code, many others are concerned that the changes will result in a more competitive, less professional business environment. State accountancy boards, therefore, are being influenced by opposing factions of CPAs; some favor the revisions, others do not. In several states, practitioners who are opposed to the Code changes are soliciting their state legislatures to forbid certain acts. Laws have been enacted in California, Florida, Nevada, Oregon, and Utah that bar commissions and contingent fees, and other states may soon follow suit. A few state codes, however, already allow these acts. The accountancy rules of Maryland, Oklahoma, South Dakota, and Wisconsin currently permit the acceptance of commissions and contingent fees. The situation in New York was discussed previously.

These differences among the state codes may be confusing for firms that practice in several states. As more states may align their conduct rules with those of the AICPA, regional and national firms will have to monitor the current status of rules in the states in which they practice and take special care to obey each state's unique code. Some firms may decide to refrain from the actions in question altogether to avoid confusion, sanctions, and litigation.

Some practitioners may contend that the current differences in state codes are not only confusing, but unfair. CPAs who practice only in Maryland, for example, may now accept commissisons and contingent fees, but practitioners in all neighboring states may not. Consequently, public accountants whose state rules are more restrictive may feel that their code unfairly prevents them from benefiting from revenue sources which are enjoyed by CPAs in other states.



There is no easy solution for the current confusion caused by differing ethics codes. One method of enhancing practitioner familiarity with conduct rules is through continuing professional educaton (CPE) courses. Such courses can inform CPAs of the current provisions of state and AICPA conduct codes and include discussions of the effects of specific code allowances and prohibitions on accounting practice.

The accountants in the author's study were asked whether they had received, since college graduation, any instruction or attended any seminars in which ethics was a topic. In response, 38% of the practitioners indicated that their ethics education had continued after college. Consequently, despite longstanding requirements by many state accountancy boards that CPAs attend CPE programs, the majority of public accountants in the study had not received any ethics instruction after college graduation.

To determine whether CPE ethics courses have an appreciable effect on familiarity with conduct rules, the responses of those who had attended such courses were compared with those who had not. Those practitioners who had participated in some sort of post-college ethics education were significantly more familiar with the Code than those who had no additional training. Post-college ethics education, therefore, may be effective in enhancing CPAs' familiarity with conduct rules and improving their ability to evaluate ethics situations.

An additional finding related to ethics training concerns differences among the firms that participated in the study. Sixty-five percent of the employees of one firm had received post-college ethics education, and 28% of another firm's employees had received such training. None of the employees of the third firm had received any ethics training after college graduation. As firms can influence CPAs' continuing education, especially through in-house training, this finding suggests that firms may differ in the value that they attribute to continuing ethics education.



To summarize, many practitioners may be unfamiliar with provisions of the current ethics codes and confused about the relationship of AICPA and state conduct rules. This unfortunate situation could result in widespread unintentional violations and subsequent disciplinary proceedings, sanctions, and litigation.

Fortunately, the study also reveals a partial solution to the confusion and the reduction in CPA code familiarity that may occur with revision. Public accountants who had received post-college ethics education were more familiar with the Code than those who had not attended such a course. Consequently, ethics training, perhaps the most obvious suggestion for a lack of familarity, may be effective.

Although not specifically oriented toward ethics instruction, a membership education program that was recently adopted by the AICPA may, with modifications, facilitate Code familiarity. In addition to the Code revisions that resulted from the 1988 AICPA membership referendum, a CPE program was approved whereby members in public practice are now required to complete 120 hours of continuing education in each three- year period. In fulfilling this requirement, however, practitioners may choose which courses they prefer. A tax practitioner, for example, may only be interested in attending CPE sessions that relate to tax planning and preparation. Such a narrow focus might keep practitioners well- informed of some aspects of accounting practice, but their knowledge of the current status of other important topics might suffer.

A Possible Solution

The profession may benefit, therefore, from an adjustment to the CPE requirement. While allowing practitioners to retain much of their current freedom in selecting CPE courses, the AICPA could mandate that some of the required hours be devoted to certain topics, such as accounting ethics. As the findings of this study indicate, required ethics education may be critically important when the Code is revised. In addition to enhancing Code familiarity, such course work could be useful in enabling accountants to resolve ethical dilemmas.

Similar adjustments could be made in CPE requirements at the state level. To maintain their licenses, CPAs in most states currently must accumulate a specified number of CPE hours over a certain period. A requirement that some of those hours relate to the state accountancy codes could provide some assurance of practitioners' familiarity with state rules.

While familiarity may suffer with rule modifications, the resulting implication is not that ethics codes should remain static and never be revised. The AICPA Code and state accountancy codes must evolve as the business environment evolves. When revisions occur, however, the AICPA, state accountancy boards, and individual accounting firms should facilitate understanding of the changes and their effects. One approach to fostering code comprehension is the provision and, perhaps, requirement of training and CPE course work related to ethics. As the study findings indicate, such course work may result in an improvement in practitioners' familiarity with state accountancy rules and the AICPA Code of Professional Conduct.

S. Douglas Beets, PhD, CPA is an Assistant Professor of Accounting at Wake Forest University. Dr. Beets has served on the accounting staffs of Armco Steel Corporation, Eastman Kodak Company, Russell & Purkey, CPAs, and Arthur Andersen & Co. Additionally, his articles have been published in a number of academic and professional journals.

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