Doing the right thing: case studies give tips on how CPAs can remain within ethical boundaries.

Case studies give tips on how CPAs can remain within ethical boundaries.

Can practitioners be sure the business decisions they make are consistent with the profession's ethical standards? When they have questions, one place to turn is the American Institute of CPAs Code of Professional Conduct, which provides members with written guidance about their professional behavior. It stresses the responsibility to serve the public by dedicating oneself to achieving professional excellence. It recognizes that conduct code compliance depends primarily on voluntary self-discipline by AICPA members but notes compliance is ultimately ensured through disciplinary proceedings against those who violate code rules.

Considering the number of AICPA members in public practice and the many professional services they offer, there are relatively few accusations of conduct code violations. Nevertheless, because of the increasingly complex and competitive nature of public practice, some CPAs do violate the code, perhaps without even realizing it. When violations occur, the CPAs in question risk their careers and professional reputations, and the public may lose faith in the profession's ability to serve its interests. The following hypothetical cases illustrate the kinds of violations most often seen and what practitioners should do to avoid them.

COMPETENCE, CARE AND

COMPLIANCE WITH STANDARDS

Robert, CPA, has a large one-office firm in a growing city, but his practice is shrinking. A number of other firms recently opened offices in the city and Robert lost several key clients to his new competitors.

Because of the changed competitive climate, Robert decided his firm needed to offer a wider array of services and seek clients in industries in which the firm hadn't previously ventured. For example, Robert bid on a nearby community college's annual audit work even though his firm never before had audited a college. The bid was successful, and his firm conducted and completed what he thought was an appropriate audit. Shortly after its conclusion, however, Robert was informed an ethics investigation was being considered to determine if he had violated conduct code rules 201A - general standards, professional competence; 201B - general standards, due professional care; 202 - Compliance with standards; and 501 (interpretation 501-3) - Acts discreditable, failure to follow standards and/or procedures or other requirements in governmental audits.

Rule 201A: "A member shall ... [u]ndertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence."

Rule 201B: "A member shall ... [e]xercise due professional care in the performance of professional services."

Rule 202: "A member who performs auditing, review, compilation, management consulting, tax, or other professional services shall comply with standards promulgated by bodies designated by [AICPA] Council."

Rule 501 (interpretation 501-3): "Engagements for audits of governmental grants, governmental units or other recipients of governmental monies typically require that such audits be in compliance with governmental audit standards, guides, procedures, statutes, rules, and regulations, in addition to generally accepted auditing standards. If a member has accepted such an engagement..., he [or she] is obligated to follow such requirements."

How to avoid violations. Robert's problems stem primarily from the fact that he was unfamiliar with the applicable technical standards of the engagement. Although Robert had considerable auditing experience, he had never audited a government entity and had failed to become thoroughly familiar with government auditing standards and to consult carefully any applicable audit guides. He didn't fully understand, for example, that these standards and audit guides contain specific requirements for testing and reporting on compliance with laws and on internal controls. He also failed to consult a pertinent official pronouncement recently issued by the AICPA auditing standards board.

Robert could have avoided the conduct code violation charges by taking steps to ensure his firm was technically competent to conduct a community college audit. Courses, training materials and official pronouncements are available to CPAs and firms wishing to enter new practice areas or service clients in new industries. Taking advantage of these resources is critical to providing quality services and reducing the risks associated with accepting new clients.

Further, firms should have adequate firmwide supervision and review procedures to ensure work has been performed with due professional care and all applicable standards have been met.

ACCOUNTING PRINCIPLES

Sylvia, CPA, has been a sole practitioner in a small town for almost 30 years. Her practice consists primarily of tax work and compilation services, but she occasionally performs audits and reviews. Sylvia admittedly has fallen somewhat behind in her reading of accounting and related pronouncements. She and her husband have been making retirement plans, and Sylvia has been finding it difficult to concentrate on her practice.

A few of Sylvia's clients switched to other accounting firms because they felt their needs were not being met. In one case, the successor firm discovered that in the previous year Sylvia had issued a review report saying she was not aware of any material modifications that needed to be made to the client's financial statements in order for them to conform with generally accepted accounting principles. In fact, the client's accounting for income taxes was materially misstated and very obviously not in compliance with a recent Financial Accounting Standards Board pronouncement. Based on its study of Sylvia's workpapers for the previous year's review engagement, the successor firm believed Sylvia had violated conduct code rule 203 - Accounting principles, as well as rules 201B and 202.

Rule 203: "A member shall not (1) express an opinion or state affirmatively that the financial statements or other financial data of any entity are presented in accordance with generally accepted accounting principles or (2) state that he or she is not aware of any material modifications that should be made to such statements or data in order for them to be in conformity with generally accepted accounting principles, if such statements or data contain any departure from an accounting principle promulgated by bodies designated by [AICPA] Council to establish such principles that has a material effect on the statements or data taken as a whole."

What should have been done. CPAs must gain sufficient knowledge of new official pronouncements to ensure that affected clients follow their provisions. They must be aware of changes in GAAP if they plan to refer to GAAP in their reports. Maintaining competence throughout one's career is absolutely critical.

RECORD RETENTION, ERRORS

AND FEE DISPUTES

Roger, CPA, is a junior partner in a firm with three offices located within 100 miles of each other. He always finds himself busy and overextended but remains short of meeting his revenue and new client goals. In the past month he actually lost two clients and both are causing him some unexpected problems. One refuses to pay the firm's final bill, claiming it's too high, and is furious because Roger won't return its accounting records until the fee is paid. The other is angry because Roger was responsible for an error on a tax return: Because the alternative minimum tax applied but wasn't calculated, the taxpayer owed a considerable sum to the Internal Revenue Service. Both former clients sent letters of complaint to the AICPA and the state CPA society. Roger has learned an investigation is being considered to determine if he violated conduct code rule 501 (interpretation 501-1) - Acts discreditable, retention of client records, as well as rules 201A and 201B.

Rule 501 (interpretation 501-1): "Retention of client records after a demand is made for them is an act discreditable to the profession...."

What should have happened. While some fee disputes are inevitable, one can keep them to a minimum by thoroughly discussing fee matters in advance, letting clients know as soon as possible if a fee is going to be higher than estimated and providing billings that are as detailed as possible. Fee disputes alone usually are not viewed as conduct code issues but sometimes accompany other complaints such as the ones levied against Roger.

If Roger is truly withholding the client accounting records to force fee payment, he is indeed in violation of rule 501 (interpretation 501-1). If, however, he is withholding information he produced in his workpapers pending the client's payment of fees-even if the withholding leaves the client with incomplete accounting information-roger is not in violation. Any material given to the CPA to produce his or her work product is considered client records and must be returned whether or not fees have been paid; anything a CPA produces is the CPA's work product and can be held for fee payment.

A tax return error doesn't prove Roger is incompetent or is guilty of failure to exercise due professional care. CPAs apply the level of skill and care one would expect from a professional, but they aren't expected to be infallible. Roger can best counter complaints about competence and due care by keeping himself technically up to date and adhering to firmwide controls that should be in place to ensure proper work product review.

SOLICITING CLIENTS

Kevin, CPA, has been having a difficult time getting his new practice off the ground. He had worked in the tax department of a national firm office 75 miles away, but he was tired of commuting and wanted to spend more time with his family. Going into practice by himself in his hometown had seemed like his best option.

Although Kevin had some success building his client base through contacts he had made over the years and word-of-mouth referrals, he was surprised how slowly his practice was growing. An old college friend who majored in marketing recommended advertising, and Kevin decided to give it a try. The friend suggested stressing Kevin's low fees. As a sole practitioner with very little overhead, Kevin found he was able to charge very low fees while still providing quality services.

Kevin's first ad, which he sent to small business owners in the area and published in the local newspapers, said, "Quality services. Always the lowest fee." Shortly after the ad was released, another local CPA practitioner complained to the AICPA and state CPA society: "Kevin's ad violates rule 502-Advertising and other forms of solicitation: The ad is deceptive. He also is guilty of harassing conduct because he sent the ad to many of my clients."

Rule 502: "A member in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive. Solicitation by the use of coercion, over-reaching, or harassing conduct is prohibited."

How to avoid violations. Contacting other CPAs' clients through virtually any available means normally is not prohibited. Kevin's ad, however, might be viewed as deceptive because of the inclusion of the objective statement "always the lowest fee." A more subjective phrase such as "always low fees" would have been a better choice for the ad.

LESSONS LEARNED

AICPA Statement on Quality Control Standards No. 1, System of Quality Control a CPA Firm, mandates that firms have quality control systems in place. Robert, Sylvia, Roger and Kevin could have saved themselves a lot of aggravation and risk to their careers and professional reputations if they had adequate quality control systems that ensured

* Technical competence to complete engagements in new industries.

* Up-to-date technical accounting knowledge.

* Professional standards are followed for all services rendered.

* Use of due professional care, along with proper supervision and review of work products.

* Professional behavior, even when faced with seemingly unethical client behavior.

* Use of acceptable client solicitation methods.

DEDICATION TO PROFESSIONAL

EXCELLENCE

These cases are not real. Ethics cases are handled confidentially by the AICPA and the state CPA societies. Results are published only when there is a guilty finding by the Joint Trial Board or when the AICPA professional ethics executive committee settles a case.

However, the cases are realistic and pertain to conduct code rules that deserve particular attention because of the relative frequency of complaints relating to them. Substandard work is a leading cause of complaints, as are disagreements about record retention, fees, errors and solicitation. Even if one is not guilty of violating a specific rule of the Code of Professional Conduct, simply having to answer to a complaint can be time consuming and emotionally draining. Further, issuance of a complaint often is evidence that the public we serve is dissatisfied with our service.

Today's business environment clearly is different from that of 20 years ago. When the AICPA and most state CPA societies changed their conduct codes in the late 1970s to permit direct uninvited solicitations of clients, CPAs found themselves in a far more competitive business climate than ever before.

Public practitioners today must be particularly concerned with the efficiency and the effectiveness of their work. One can't cut corners and hope to prosper; one can't act unprofessionally and expect to survive. Maintaining skills throughout a career, exercising due professional care, following the promulgated standards for whatever kind of work is being done and acting professionally in all endeavors are a practitioner's keys to success.

The bottom line is dedication to professional excellence. The Code of Professional Conduct calls for members to "observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability." That's not a lofty ideal; it's what is needed to ensure public trust in the profession.

EXECUTIVE SUMMARY

* BECAUSE OF THE INCREASINGLY complex and competitive nature of public practice, some CPAs may violate rules of the American Institute of CPAs Code of Professional Conduct without even realizing it. * ALTHOUGH ETHICS VIOLATIONS are relatively infrequent, common problem areas that might be encountered include competence in a specific practice area, compliance with standards, knowledge of accounting principles, record retention, errors, fee disputes and client solicitation. * PRACTITIONERS CAN SAVE themselves aggravation and risk to their careers and professional reputations if they have adequate quality control systems that ensure

1. Technical competence to complete engagements in new industries.

2. Up-to-date technical accounting knowledge.

3. Professional standards are followed for all services rendered.

4. Use of due professional care, along with proper supervision and review of work products.

5. Professional behavior, even when they are faced with seemingly unethical client behavior.

6. Use of acceptable client solicitation methods.

AICPA CODE OF PROFESSIONAL

CONDUCT RULES

101 - Independence 102 - Integrity and objectivity 201 - General standards

A. Professional competence B. Due professional care C. Planning and supervision D. Sufficient relevant data

202 - Compliance with standards 203 - Accounting principles 301 - Confidential client information 302 - Contingent fees 501 - Acts discreditable 502 - Advertising and other forms of solicitation 503 - Commissions and referral fees 505 - Form of organization and name

For more information on ethics questions, contact the AICPA professional ethics division at [phone], department 4.

JOINT ETHICS ENFORCEMENT PROGRAM

The AICPA and each of the state CPA societies have their own codes of professional conduct that their members are obligated to observe as a condition of membership. The provisions of the codes of many state societies are identical with or similar to those of the AICPA code. For this reason, and because it is not uncommon for a CPA to be a member of both the AICPA and one or more state societies, the Institute and virtually all of the state societies have joined together to create the joint ethics enforcement program (JEEP).

The JEEP's purpose is to permit joint enforcement of the respective codes of professional conduct with respect to a member of either the AICPA or a state society or both by means of a single investigation and, if warranted, a single settlement agreement of Joint Trial Board hearing.

For more information, contact the AICPA professional ethics division at [phone], department 4, or the professional ethics committee of your state society. (See also, "The Professional Ethics Committee: Protecting the Public Interest," JofA, Oct.93, page 128.)

MICHAEL A. PEARSON, CPA, DBA, is professor of accounting at Kent State University, Kent, Ohio. A Journal editorial adviser, he is a member of the American Institute of CPAs task force on ethical behavior guidelines for accounting educators and the Ohio Society of CPAs professional ethics committee.