A question of ethics.

When I have a difficult decision to make, I look at a sign on my desk quoting Mark Twain: "Always do right. This will gratify some people and astonish the rest."

Unfortunately, life is not that simple. Today's decisions are more complicated than choosing between right and wrong. In the real world of plaintiffs, attorneys and second-guessers, we must deal with situations that involve gray areas, not the black and white of right and wrong. That's why the accounting profession needs rules to specify what is ethical and unethical and ethics committees to interpret the rules. However, both before and after the AICPA revised the Code of Professional Conduct in 1988, many members in commerce and industry found the code itself to be such a gray area: Because it primarily addressed members in public practice, members in industry weren't sure how it applied to them.

Before the code was revised, members in commerce and industry were subject only to two general rules: Rule 102--Integrity and Objectivity and Rule 501--Acts Discreditable. Before rule 102 was revised, its only guidance to members in commerce and industry amounted to seven words: "A member shall not knowingly misrepresent facts...." The rest of the rule applied only to members engaged in the practice of public accounting. The revised wording, however, referred to "the performance of any professional service," which is defined in the code as of November 30, 1989, as including "all services performed by a member while holding out as a CPA." Originally, the committee used the term engagement instead of professional service, which left the impression that the rule did not extend to industry members.

The applicability of rule 102 to members in commerce and industry also was called into question by the deletion of this sentence: "In tax practice, a member may resolve doubt in favor of his client as long as there is reasonable support for his position." That action was triggered when, as the only industry member of the committee on standards, rules, bylaws and education, I asked why an industry member couldn't resolve doubt in favor of his or her employer. Of course, the deletion did not clarify industry CPA's positions with respect to their employers.

UNEQUAL TREATMENT?

After the revised code was adopted, many CPAs believed there was a glaring inconsistency in the way public practitioners and CPAs in commerce and industry were treated. On the one hand, the auditor of improperly prepared financial statements could be charged with multiple violations of the code, including rules 201, 202 and 203, which encompass general professional standards and competence. On the other hand, the party primarily responsible for the preparation of the financial statements--in many cases an AICPA member in commerce and industry--was not subject to these rules.

In response to such concerns, the AICPA members in industry executive committee began discussions with the professional ethics executive committee with the goal, among other things, of filling the gap. In 1993, the AICPA professional ethics division published three new interpretations (see Official Releases, JofA, Nov.93, page 134).

SINS OF OMISSION

Interpretation 102-3, which covers a member's obligations in dealing with an employer's external accountant, says "a member must be candid and not knowingly misrepresent facts or knowingly fail to disclose material facts...." The later part of this sentence is critical: Simply answering all questions truthfully and factually is not sufficient; if the external auditor should know material information that is not disclosed by the company, he or she has violated the code.

The Securities and Exchange Commission also has addressed such situations. SEC accounting and auditing enforcement release no. 394 (issued in 1992) described a situation in which the agency found a company's chief financial officer had violated SEC rules by failing to disclose errors in the financial statements for the company's fiscal year ended April 1989. Although the CPA was not named CFO until July 1989, he had signed the form 10-K, he had been aware of material facts and he had failed to disclose them during the course of the examination of the financial statements. The SEC release and the AICPA ethics interpretation should give industry members clear guidance on this issue.

While I agree with both the AICPA interpretation and the SEC release, I believe another aspect of the case should be considered: the emotional and economic pressures a CPA in commerce and industry faces when he or she has a difference of opinion with, say, the chief executive officer. Consider the circumstances faced by a public practitioner who has a difference over accounting principles with a client. If discussions between the CPA and the client break down over the issue, the public member risks losing a single client. However, the industry CPA may have no alternative but to resign. For the public CPA, the loss is just one client; for the industry CPA, it's the loss of a job, which might be his or her sole source of income. Although the ethical and legal decisions may be similar, the economic impact could be quite different.

EXTERNAL COMMUNICATIONS

As mentioned above, many CPAs are unsure whether rules 201, 202 and 203 are limited to the practice of public accounting. Interpretation 203-4 clarifies the rules originally adopted in 1988 on the responsibility of employees to prepare financial statements in accordance with generally accepted accounting principles. A key sentence in the interpretation states: "Representation regarding GAAP conformity included in a letter or other communication from a client entity to its auditors or others...is subject to rule 203...." Examples also refer to reports to regulatory authorities and creditors as well as to auditors.

JUST A DIFFERENCE OF OPINION?

The third interpretation, 102-4, addresses subordination of judgment and the steps CPAs should take when they disagree with their supervisors over how financial statements are prepared or how transactions are recorded.

The first paragraph discusses what constitutes a material disagreement. Although I believe the wording in the interpretation is appropriate, I am concerned members in commerce and industry still will have a difficult time determining when the line is crossed from an acceptable difference of opinion to a subordination of judgment.

Industry members should realize it is very common to have professional difference--between senior members of the audit team, even on the partner level. They also may occur between the industry member and the external auditor and even among associates of the internal accounting staff.

Many industry CPAs report directly to a CEO. Usually, these people are not accountants and they have different objectives concerning results of reported operations. But the CPA must take special care that the reported results are presented without bias.

Paragraph 2 of interpretation 102-4 concerns documentation of a dispute by the CPA and specifies procedures for informing appropriate people in the organization, including the audit committee and the board of directors. The key issues here are how and whether to discuss the dispute with an outsider. While I believe a member in commerce and industry should seek management's approval before contacting the outside auditor when differences arise, if approval is not granted the member must weigh the risk of proceeding anyway. Clearly, the external auditor's involvement can help resolve a problem earlier--before both sides dig in their heels and a resignation is inevitable. Our profession needs to encourage maximum communication between internal and external CPAs to reduce the incidence of improper accounting and, even worse, audit failures and litigation.

The third paragraph discusses three considerations the member needs to take into account in attempting to resolve such problems without violating rule 102: (1) the member's continuing employment, (2) the responsibility of communicating to third parties, including regulatory authorities and external accountants, and (3) the member's need to consult with legal counsel.

In my opinion, an industry member should consider resignation as a last step--after exploring all other options. I suggest that CPAs in commerce and industry who face a potential dispute with management follow this logical sequence of actions:

1. Consult with the appropriate people--initially within the organization and then, if necessary, outside the organization.

2. If it's appropriate and you believe it's best to do so, "blow the whistle" and alert outsiders to the problem.

3. If all else fails, resign--if you haven't already been fired.

There are a growing number of cases in which whistle-blowers have become heroes, collecting judgments instead of languishing on the unemployment lines. While I believe such public confrontations are undesirable and should be considered only as a drastic measure, from an ethical standpoint they mean standing up for what is right and protecting shareholder and creditor rights when there is clear evidence a company is concealing material misstatements in financial reports.

The three interpretations discussed above provide clear guidance on the applicability of the AICPA Code of Professional Conduct to members in commerce and industry. I look forward to further guidance from the AICPA professional ethics division. In the meantime, nothing can take the place of good professional training of CPAs at all levels and the application of common sense and ethical thinking. In the final analysis, each of us must determine what we believe to be right--with or without rules.