Accounting codes of conduct, violations and disciplinary actions.

Accountants provide valuable services and they are much sought after by both public and private entities for information and advice. This article explores the codes of conduct that work to keep all accountants honest and fair. It also looks at the penalties for those who aren't ...

Introduction

Taxation, bookkeeping, management consulting, auditing, and attestation and assurance. For more than a century, the accounting profession in the United States has provided these valuable services to public and private organizations. The best CPAs ensure they are performing their responsibilities with technical competence and the highest ethical standards by adhering to a strict code of conduct Actually, there are several codes, each comprised of numerous technical and ethical guidelines.

In performing their professional responsibilities, CPAs are expected to technically conform with accounting and auditing standards embodied in Generally Accepted Accounting Principles (GAAP) and Generally Accepted Auditing Standards (GAAS) and regulatory pronouncements. They are also expected to follow tax rules promulgated by private and government standard-setting and regulatory bodies, such as the Financial Accounting Standards Board (FASB), American Institute of Certified Public Accountants (AICPA), Securities and Exchange Commission (SEC) and Internal Revenue Service (IRS). And, they are counted on to conduct themselves according to the ethical rules prescribed in the bylaws or codes of any accounting groups they have joined (see Exhibit 1).

It's in the best interest of accountants to follow these various guidelines, and they know that Both individual accountants and accounting firms, for example, are concerned about the consequences of unethical behavior on their public practice. And sole practitioners who violate technical and/or ethical rules of conduct are not only publicly exposed, they are subject to disciplinary actions.

The objective of this paper is three-fold. First, to briefly describe the development and contents of the AICPA's Code of Professional Conduct (CPC). Second, to investigate the most common categories of ethical violations by practicing CPAs. And third, to identify the different types of resolutions (disciplinary judgments) reached by the AICPA in ethics cases. The overriding goal is to provide insights for accountants (both CPAs and non-CPAs) and accounting students by exploring a wide range of ethical dilemmas and disciplinary sanctions.

Code of Professional Conduct -- A Brief History

Accounting codes of professional conduct significantly influence the behavior and judgment of practicing accountants. Various accounting organizations revise and amend these codes periodically to adapt them to the changing socioeconomic, business and accounting environment Most of these codes contain technical and ethical rules designed to help accountants fulfill their professional obligations with competence and integrity. Exhibit 1 lists major organizations and the codes of ethics they require for their accountant members.

This is an important area, reflected by the growing body of ethics- and morality-related research studies in the accounting literature (7, 9, 10, 12, 15, 18, 19, 22, 24, 26). At the same time, there are only a limited number of empirical and survey studies on the enforcement of accounting rules of conduct, and these are limited in scope as well. So far, for example, there are only four studies that focus on the AICPA's disciplinary actions against CPAs (5, 6, 20, 25).

The AICPA adopted the most recent version of its Code of Professional Conduct for accountants in 1988. Before that, predecessors initiated and developed their own rules. In 1894, for instance, the American Association of Public Accountants (AAPA) prohibited its members from advertising. By 1909, the AAPA Constitution and Bylaws outlined five prohibited activities, describing the procedures for adjudicating complaints and imposing penalties. And in 1917, the American Institute of Accountants adopted its set of Rules of Professional Conduct, which numbered 13 by 1938 and 16 by 1948.

It wasn't until 1962 that the AICPA rearranged the Rules of Conduct and established its Code of Professional Ethics, which a special Committee on Standards of Professional Conduct revised in 1987. The AICPA membership approved the Committee's recommendations in 1988, when the code was renamed the Code of Professional Conduct -- the code that AICPA members know and follow today. They also replaced 12 regional trial boards with one centralized board to promote consistency and fairness (1,4,8,20).

To help practicing CPAs comply with the current code's technical and ethical concepts, the AICPA's Division of Professional Ethics regularly publishes and revises interpretations and ethical rulings. These basically explain and answer questions about particular rules. These interpretations are not, however, officially enforceable, and any departure is difficult to justify in a disciplinary hearing (3).

Exhibit 2 outlines the contents of the AICPA's CPC (1,3,21), which consists of two sections. The first, entitled Principles, contains six articles on the general principles of ideal conduct; broadly highlighting the accounting profession's responsibilities to the public, clients and fellow practitioners. These six articles, in turn, provide the framework for the second section, entitled Rules of Conduct, consisting of 11 specific, enforceable regulations.

A Question of Ethics

The AICPA's CPC is binding upon all practicing and non-practicing CPAs who are members of the Institute. They must conform to most, but not all, of the rules of conduct in all types of engagements or be subject to disciplinary actions. Moreover, although each state board of accountancy has specific rules of conduct and licensing requirements, many states have adopted the CPC to govern the practice of public accounting and licensing within their state. Thus, a CPA found guilty of violating the rules could lose the license to practice, as well as being barred from AICPA membership. Both the AICPA and the state societies of CPAs also participate in the Joint Ethics Enforcement Program, which will be explored later.

As in other professions, a few accountants encounter ethical dilemmas. For many years, there have been highly publicized reports of accountants violating rules of conduct prescribed by the AICPA or state societies by being dishonest, biased and/or incompetent While some of these allegations were found to be true, these ethics cases should not be used to condemn ALL accountants (16).

Crime(s) and Punishment(s). Most real-life violation cases can be classified as either simple ethical dilemmas that are easy to resolve, or complex cases whose resolutions are hard to reach. The complexity of cases will vary depending upon a variety of pressures that may or may not be at work including: time, job, client, personal and/or peer-related (14). Exhibit 3 highlights the various violations by practicing CPAs. As shown in this table, Tidrick (25) identified a total of 327 cases where the AICPA disciplined individual members between 1980 and 1990 (as reported in its "The CPA Letter"). Of these:

* The most violations -- 41 -- were in the area of technical standards (Rules 202-203)

* 37 related to a failure to cooperate with the investigation or comply with its requirements

* 28 were for "acts discreditable" (Rule 501)

* 21 were violations of "general standards" (Rule 201), and

* seven were for "independence" violations (Rule 101).

Badawi and Rude (5,6) surveyed the AICPA's CPA Letters from January 1994 through December 1995, ultimately identifying 170 ethics cases in 32 states in the Continental United States (see Exhibit 5). These cases were classified into: violations of a single rule or multiple rules of the AICPA's bylaws; failure to cooperate with AICPA disciplinary investigation; and, criminal acts (see Exhibit 3).

Specifically, the most frequently violated rules include:

* Rule 202 -- Compliance with Standards (57 cases, 34 percent)

* Rule 203 -- Accounting Principles (32 cases, 19 percent)

* Rule 501 -- Acts Discreditable (24 cases, 14 percent)

* Rule 201 B -- Due Professional Care (18 cases, 11 percent); and

* Rule 201 A -- Professional Competence (14 cases, 8 percent).

Of the 170 ethics cases, 38 involve crime and crime-related convictions, ranging from mail fraud (5 cases) to making false claims to a federal agency (4 cases) to bank fraud (4 cases) and conspiracy (3 cases). The remaining cases involve everything from concealing assets, theft and bribery to money laundering, obstruction of justice and even murder.

Moriarity's study (20) examined 958 disciplinary sanctions imposed by the AICPA between 1980 and 1998. As shown in Exhibit 3, these disciplinary actions were primarily for criminal acts (349), substandard professional service (304) and failure to cooperate in investigation (119), with the remaining sanctions divided among four other categories: failure to comply with directive; professional practice infractions; nature of act not reported; and, failure to meet continuing professional education (CPE) requirements.

According to Moriarity's survey, the most common criminal acts involve income tax "filing false returns and failure to file returns at all" (87), theft "embezzlement and misappropriation of funds" (71), fraud (61), bribery (19), illegal securities transactions (14) and money laundering (11). There were also other conceivable crime acts, such as sale and distribution of drugs, jury tampering, perjury and murder (86).

The 304 cases labeled "Substandard Professional Service" involve the quality of professional service provided to a client or employer, specifically: violations of auditing and/or accounting standards (200), lack of independence (43), lack of competence or objectivity (17), refusal or failure to return client records (11), and 33 other miscellaneous violations in this area.

Penalties Can Be Tough

In addition to entering a Joint Ethics Enforcement Program, both the AICPA and many state CPA societies have ethics committees to hear complaints. Both can also act independently on a case, or they can agree to take the matter to an AICPA trial board panel, which, according to Robertson (23), has the power to: (1) acquit the CPA: (2) admonish the CPA; (3) suspend the CPA's membership in the state society and the AICPA for up to two years; or, (4) expel the CPA from the state society and the AICPA.

The AICPA bylaws (not the Code of Professional Conduct) provide for "automatic" expulsion of CPAs who have committed a felony, failed to file their tax returns, or helped prepare false and fraudulent income tax returns. CPAs can appeal trial board decisions to the full AICPA trial board, whose decision is final.

AICPA penalties for misconduct range in severity. In many cases, a trial board panel admonishes or suspends a CPA, requiring him or her to complete a specified number of hours of continuing professional education. The goal, here, is to help the CPA attain an appropriate level of profession al competence and awareness. Although intended as a constructive resolution, the CPE requirements are similar to "serving time.' And individuals who fail to satisfy CPE conditions will find themselves charged with "acts discreditable to the profession" (AICPA Rule 501 or a similar state rule) and expelled as "second offenders" (23).

State boards of accountancy have their own rules of conduct and trial board panels to enforce them. State boards can admonish a license holder but, more importantly, they can suspend or revoke a CPA's license to practice. These are severe penalties because a person can no longer use the "CPA" title and cannot sign audit reports. On the other hand, an expulsion penalty by the AICPA and/or state CPA societies does not prevent

CPAs from continuing to practice accounting. All they need for that is a valid state license (23); while membership in the AICPA and state societies is beneficial, it's not required.

Surveys Say... Exhibit 4 reports types and ranking of disciplinary sanctions by the AICPA. Specifically in Tidrick's study (25), nearly two-thirds of the 327 disciplinary actions by the AICPA against individual members were handled under the bylaws' "automatic" provisions. Of these 210 cases, 147 resulted in expulsions and 63 in suspensions. Remember, expulsions from the Institute are required when individuals' certificates are revoked by their state boards of accountancy, or when CPAs are formally convicted of felonies. Suspensions are required when members' certificates are suspended by their state boards of accountancy, or when felony convictions are under appeal.

The remaining 117 cases were handled by formal hearings under authority of the Institute's Joint Trial Board (JTB). The judgments of the JTB were fairly distributed among expulsions (41), suspensions (27) and admonishments or censures (42). Seven additional cases resulted in "other" sanctions, including requirements for CPE and quality reviews. Suspensions by the trial board ranged from two months to two years, the maximum allowed per the bylaws, and averaged about 15 months.

Exhibit 4 also shows how many of the 170 ethics cases studied by Badawi and Rude (5,6) resulted in expulsions, suspensions and admonishments. As shown, expulsions were, by far, the most common sanction (83, or 49 percent), followed by suspensions (74, or 43 percent).

Naturally, termination or expulsion do not require any action by members. On the other hand, admonishment and suspension may require the member to fulfill certain responsibilities to return to good standing. For example, of the 74 members suspended, more than half (41, or 55 percent) were required to complete CPE courses and submit a sample of their work. Of those remaining CPAs, 20 percent had to complete CPE only and 20 percent were merely suspended.

In Moriarity's study (20) of 958 ethical dilemmas, about one-third, or 304, involved substandard professional service. Of these, there were: 162 suspensions from membership, 85 admonishments and 57 expulsions (see Exhibit 4). The average length of suspension was 1.5 years, and the average CPE during suspension was 50 hours.

Conclusion

Accounting provides valuable and vital services to public and private sectors -- basically to anyone who uses information. Accounting services are generally performed by qualified, honorable practitioners with a strong sense of public duty (26). However, like other professions, there are dishonorable practitioners whose behavior should not belittle the entire profession.

To regulate this important profession and ensure its integrity, individuals licensed to practice accounting by their states are subject to the laws and regulations of the State Boards of Accountancy. These boards are government agencies consisting of CPA and non-CPA officeholders. They issue licenses to use the "CPA" designation and limit the attest (audit) function to these license holders. (Most state laws do not regulate work in areas of management consulting, tax practice or bookkeeping services (23).) CPAs who become members of private organizations are also subject to the rules of conduct of these groups.

While there isn't that much literature on the subject, accounting violations are being investigated, judged and publicly exposed -- for the good of the profession and its clients.

EXHIBIT 1

ACCOUNTANTS' CODES OF EIHICS

Sources of Codes:        Applicable to:

AICPA                    Members of AICPA

State Board of           Persons licensed by
Accountancy              the state to practice

State Society of CPAs    Members of state society of CPAs

Institute of Management  Members of
Accountants (IMA)        the MA

Institute of Internal    Members of the
Auditors (IIA)           IIA

Securities and Exchange  Accountants and auditors of
Commission (SEC)         SEC-registered companies

Internal Revenue         Persons who practice
Service (IRS)            before the IRS
EXHIBIT 2

AICPA CODE OF PROFESSIONAL CONDUCT


Section I - Principles:

These are ideal standards of ethical conduct
prescribed in philosophical terms. They are
not enforceable:

* Arlicle   I: Responsibilities
* Article  II: The Public Interest
* Article III: Integrity
* Article  IV: Objectivity and Independence
* Article   V: Due Care
* Article  VI: Scope and Nature of Services

Section II - AICPA CPC Rules of Conduct:

These are minimum "satisfactory"
standards of ethical conduct that
are enforceable:

* Rule 101 - Independence
* Rule 102 - Integrity and Objectivity
* Rule 201 - General Standards
* Professional Competence
* Due Professional Care
* Planning and Supervision
* Sufficient Relevant Data
* Rule 202 - Compliance with Standards
* Rule 203 - Accounting Principles
* Rule 301 - Confidential Client Information
* Rule 302 - Contingent Fees
* Rule 501 - Acts Discreditable
* Rule 502 - Advertising and Other Forms of
  Solicitation
* Rule 503 - Commission and Referral Fees
* Rule 505 - Form of Organizational Name
EXHIBIT 3

CATEGORIES AND RANKING OF CPA VIOLATIONS

Violations                            Moriarity
                                      1980-1998

Substandard Professional Rules     304        32%
Failure To Cooperate with
AICPA Investigation                119        12%
Failure To Comply with
Directives for Corrective Actions   49         5%
Failure to Meet CPE
Documentation request               46         5%
Failure To Meet CPE
Prof. Practice Infractions          36         4%
Nature of Act Net Reported          55         6%
Crime and Crime-Related
Convictions *                      349        36%

Totals                             958       100%

Violations                           Badawi/Rude
                                      1994-1995

Substandard Professional Rules      92       54%
Failure To Cooperate with
AICPA Investigation                 23       14%
Failure To Comply with
Directives for Corrective Actions   10        6%
Failure to Meet CPE
Documentation request                5        3%
Failure To Meet CPE
Prof. Practice Infractions           1      0.5%
Nature of Act Net Reported           1      0.5%
Crime and Crime-Related
Convictions *                       38       22%

Totals                             170      100%

Violations                            Tidrick
                                     1980-1990

Substandard Professional Rules      97      30%
Failure To Cooperate with
AICPA Investigation                 37      11%
Failure To Comply with
Directives for Corrective Actions
Failure to Meet CPE
Documentation request
Failure To Meet CPE
Prof. Practice Infractions
Nature of Act Net Reported         193      59%
Crime and Crime-Related
Convictions *

Totals                             327     100%

* Includes mail fraud, making false claims to a federal agency, bank
fraud, conspiracy, concealing assets, securities fraud and tax evasion,
theft, bribery, conspiracy to commit tax fraud, driving while
intoxicated, drug-related, embezzlement, failure to file a tax return,
failure to pay taxes, making false statements on a tax return,
misappropriation of funds, money laundering, murder, obstruction of
justice, violation of the RICO Act and wire fraud.
EXHIBIT 4

TYPES AND RANKING OF AIIPA DISCIPUNARY SANCTIONS

Sanctions               Moriarity            Badawi/Rude
                        1980-1998             1994-1995

Expulsions        57           19%       83             49%
Suspensions      162           53%       74             43%
Admonishments     85           28%       13              8%
Other Sanctions   --            --       --              --
Totals           304          100%      170            100%

Sanctions             Tidrick
                     1980-1990

Expulsions       188           58%
Suspensions       90           27%
Admonishments     42           13%
Other Sanctions    7            2%
Totals           327          100%

Note: Moriarity reported sanctions for substandard cases only.
EXHIBIT 5

ETHICS CASES BY STATE OF RESIDENCE OF INDIVIDUALS SANCTIONED (53
JURISDICTIONS)

      State                        Moriarty            Badawi/Rude
                                  1980-1999             1994-1995

 1. New York                   103      11%           31    18%
 2. California                  96      10%           17    10%
 3. Texas                       88       9%           19    11%
 4. New Jersey                  63       7%            6     4%
 5. Pennsylvania                54       6%           10     6%
 6. Florida                     53       6%            4     2%
 7. Arizona                     44       5%            4     2%
 8. Illinois                    35       4%           10     6%
 9. Georgia                     31       3%            3     2%
10. Connecticut                 29       3%            5     3%
11. Ohio                        27       3%            2     1%
12. Washington                  24       2%            1     1%
13. Massachusetts               22       2%            4     2%
14. Missouri                    22       2%            6     4%
15. Colorado                    21       2%            4     2%
16. Other states (35) Guam,
    Washington, DC
    and Virgin Islands         246      25%           44    26%

Totals                         958     100%          170   100%

References

(1.) American Institute of Certified Public Accountants (AICPA). Code of Professional Conduct, N.Y.: AICPA, 1988 and 1991.

(2.) -----. The CPA Letter (monthly), various issues.

(3.) Arens, A. A. and J. K. Loebbecke. Auditing An Integrated Approach, Eighth Edition, Upper Saddle River, N.J.: Prentice Hall, 2000.

(4.) Backof, J. F. and C. Martin, Jr. "Historical Perspectives: Developments of the Code of Ethics in the Legal, Medical and Accounting Professions." Journal of Business Ethics, 10, February 1991, 99-110.

(5.) Badawi, I. and J. Rude. "AICPA CPC and Disciplinary Actions in Ethics Cases Against CPAs." Conference Proceedings of the International Conference Promoting Business Ethics, New York City, N.Y., November 24, 1995, 316-323.

(6.) -----. "A Cross-State Analysis of Disciplinary Actions by the AICPA in Ethics Cases." Conference Proceedings of the American Academy of Accounting and Finance, New Orleans, LA, December 10-12, 1997, 371-377.

(7.) Business and Professional Ethics Journal. Special Issue on Accounting Ethics, 13,1 and 2, Spring/Summer 1994.

(8.) Carey, J. L. The CPA Plans for the Future. New York, NY: AICPA, 1965.

(9.) Cohen, J. R. "Ethics and Budgeting." Management Accounting, August 1988, 29-31.

(10.) Cottell, P.G.,Sr. and T. M. Perlin. Accounting Ethics: A Practical Guide for Professionals. Wesport; CT.: Quorum Books, 1990.

(11.) Demski, J. S. and J. L Zimmerman. "On Research vs. Teaching: A Long-Term Perspective." Accounting Horizons,14, 3, September 2000, 343-352.

(12.) Grimstad, C. R. 'Teaching the Ethics of Accountancy." Journal of Accountancy, July 1964, 82-85.

(13.) Ingram, R. W. Financial Accounting, Information for Decisions, 2nd Edition, Cincinnati, Ohio: South-Western College Publishing, 1996.

(14.) Kieso, D. E. and J. J. Weygandt, Intermediate Accounting, 8th Edition, New York: John Wiley & Sons, 1995.

(15.) Loeb, S. E. "Teaching Students Accounting Ethics: Some Crucial Issues." Issues in Accounting Education, Fall 1988, 316-329.

(16.) Marshall, D. H. A Survey of Accounting: What the Numbers Mean, 2nd Edition, Homewood, Ill.: Rirchard D. Irwin, 1993.

(17.) Meigs, R F., W. B. Meigs and M. A Meigs. Financial Accounting, Eighth Edition, New York: McGraw-Hill, 1995.

(18.) Mintz, Steven M. Cases in Accounting Ethics and Professionalism, New York: McGraw-Hill, 1990.

(19.) -----. Cases in Accounting Ethics and Professionalism, 2nd Edition, New York: McGraw-Hill, 1992.

(20.) Moriarity, S. "Trends in Ethical Sanctions within the Accounting Profession." Accounting Horizons, December 2000, 427-439.

(21.) Pearson, M. A "Doing the Right Thing." Journal of Accountancy, June 1995, 82-86.

(22.) Riahi-Belkaoui, A Morality in Accounting,. Westport, Ct.: Quorum Books, 1992.

(23.) Robertson, J.C. Auditing, Sixth Edition, Homewood, Ill.: Richard D. Irwin, 1990.

(24.) Scribner, E. and M. P. Dillaway. "Strengthening the Ethics Content of Accounting Courses." Journal of Accounting Education, Spring 1989,41-55.

(25.) Tidrick, D. E. "Disciplinary Actions by the AICPA Against Individual Members, 1980-1990." Research in Accounting Regulation, 6, 1992,163-177.

(26.) Touche Ross. Ethics in the Accounting Profession, New York: Touche Ross & Co., 1985.