Code of Professional Ethics
What every professional needs to understand.
July 12, 2010
Everyday there are new stories about businesses and their professional advisors being accused or investigated for unethical behavior. These events around the country have heightened the public’s awareness of the need for increased attention to all ethical business practices by professionals.
While, investigations of alleged unethical conduct of these high-profile firms show that most have established ethical policies or guidelines in place, they failed to follow their own written policies. Ethical responsibilities start at the top of every organization and must be adhered to on a daily basis. Doing ‘the right’ thing is not just a slogan but a behavior to which every professional within the organization must adhere.
A key point to remember about business ethics is that in spite of having a detailed written Code of Professional Conduct, ethics programs and manuals do not make ethical decisions. Individuals make the ethical choices. As professionals we should provide the ‘environment’ and the ‘culture’ within our firms to reward individuals for acting ethically at all times. We should also be seen as taking a leadership role within the business community that signals unethical practices will not be tolerated.
As leaders in the financial world, CPAs have created an even higher level of assurance as it pertains to our professional conduct. The interpretation of financial data and its application to complicated regulatory statutes has added a new level of transparency to our conduct. As such our governing body, the American Institute of Certified Public Accountants (AICPA) has structured and instituted professional standards for all CPAs to follow in their professional life.
AICPA Code of Professional Conduct
The Code of Professional Conduct of the AICPA consists of two sections:
The Council of the AICPA is authorized to designate bodies to promulgate technical standards under the Rules, and the Bylaws require adherence to those Rules and standards.
Compliance with the Code of Professional Conduct, as with all standards in an open society, depends mainly on members' understanding and voluntary actions, as well as on reinforcement by peers and public opinion and ultimately on disciplinary proceedings, when necessary, against members who fail to comply with the Rules.
Many of the rules found in the Code of Professional Conduct apply to public accounting firms, including definitions and procedures for establishing, among other things, guidelines for professional practices. These guidelines would include procedures that pertain to Due Professional Care, Competence, Contingent fees, Confidential client information, Independence and Record retention.
In conjunction with the overall standards, the Council also formulated specific standards as it pertains to the operation of a professional tax practice. The AICPA Council designated The Tax Executive Committee to promulgate certain tax standards that were released as the Statement on Standards for Tax Services (SSTS’s). These standards have recently been updated to comply with the new rules and pronouncements from the Department of Treasury and the Internal Revenue Service (IRS). They contain the accepted standards for procedures that apply to all tax services provided by any AICPA member. This includes members both in public practice and industry. AICPA members are subject to potentially significant consequences if they have engaged in certain acts deemed to violate the AICPA Code of Professional Conduct. If their actions are deemed to be material, then they can be disciplined.The member could also be subject to remediation if their actions were less severe. This is a process that requires the member to take additional CPE courses take relating to the specific area of violation. Ultimately the public and the profession will be well served.
CPAs who are tax practitioners may also be subject to the rules and regulations of State Accountancy Boards, the Securities and Exchange Commission (SEC) and the Public Company Oversight Board (PCAOB). The requirement to follow certain accepted administrative and technical procedures within a firm will help reduce the risk of possible errors or misstatements. The procedures recommended in the AICPA’s Statement on Standards for Tax Services (SSTS’s) as well as the requirements found in the “Best Practices” section of Circular #230 attempt to define what is acceptable professional conduct. This would apply to both a member of the AICPA but also an individual practicing before the Internal Revenue Service. This includes communicating clearly to the client the terms of professional engagement as well as being informed of the theory behind evaluating the reasonableness of any assumption used in the preparation of the client’s tax return. Advising clients as to the tax conclusions reached as to certain treatment of items of income and expenses is essential in order to act fairly and with integrity within a professional practice.
Coupled with the AICPA Code of Conduct are the Department of Treasury’s enforcement rules as authorized in Circular #230 by the Secretary of the Treasury. These rules govern all individuals practicing before the Internal Revenue Service (IRS). This would include CPAs, enrolled agents, attorneys and actuaries. The IRS Office of Professional Responsibility (OPR) was formed to oversee these rules of conduct. As such, they may censure, suspend or disbar for any individual from practicing before the IRS if the infraction is shown to be material in nature. The OPR reviews cases referred to them from many sources as to an individual’s incompetent behavior or disreputable acts while practicing before the Internal Revenue Service or other governmental agency. The disciplinary actions are subject to publication and may also apply to disciplinary actions under the AICPA bylaws (7.3.2).
Good ethical practices also impact the performance of accounting services provided to our clients. As such the AICPA has formulated new rules for Nonattest Accounting Services under Ethics interpretation 101-3. We must be ever vigilant to understand the meaning of true ‘independence’ and what requirements must be met in order to accept new client engagements.
As CPAs, we are not allowed to perform management functions in connection for an attest client. A member may provide advice, research material or recommendations to assist the client’s management in performing its functions of making decisions. These should be documented in writing and adhered to in every step of the engagement. Also nonattest services provided to a client must contain the client’s acceptance to make all management decisions and designate a qualified individual to oversee the services provided. This individual must also be able to evaluate the adequacy and results of the services provided. A good ‘paper trail‘ is essential to document the engagement procedures in a contemporaneous manner so as to make sure there is no misunderstanding between the parties.
Our ethical behavior is essential to preserve the trust that the public has placed in our profession. The publicity on certain isolated individuals within our profession has, at times, left a doubt with the public that we must attempt to dispel. We as professionals must double our efforts to make sure that ‘we do the right thing’ ….the first time...as we may never get a second chance to correct it. We also need continued involvement and input from our members both in the public and private sectors to help strengthen our Code of Professional Conduct. The ongoing pressure we feel daily to ‘help out a client’ in these difficult financial times still remains.
But a wise mentor in my professional career once told me: “It is easier to get a new client ... than a new reputation.” My hope is that in the end doing the right thing may still be the most cost-effective decision you will make in your professional career.
Bill Murphy, CPA, ABV, PFS, CVA, CFF, is a consulting principal at Murphy, McClary, Stover & Burnett, LLC, Indianapolis, Ind. Prior to MMSB, Murphy owned Murphy & Company, P.C., where he was director of Entrepreneurial and Tax Services, and the firm’s majority shareholder. He is a former director with the Indiana Attorney General's Office. He will be speaking at the AICPA Small Business Tax Practitioners Conference, July 12-13, 2010 in Coral Gables, Florida.