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It's a matter of integrity.

Integrity is defined in Article III of the California Society of CPAs' Code of Professional Conduct as the quality from which the public trust derives and the benchmark against which a member must ultimately test all decisions.

While the public trust has eroded since Enron, WorldCom, Global Crossings and other recent similar situations- we are coming back.

A recent Gallup Poll indicated the accounting profession's public image has improved the most over the past year of 25 industries surveyed. Pre-Enron, the profession had a positive rating of 39 percent; last year's rating was 0 (when as many people gave it a negative rating as a positive one). This year's rating is a positive 31 percent.


When CPAs make decisions regarding a matter of materiality or proper disclosure in financial statements, they are making a determination of whether or not the item in question falls above or below a line drawn in the sand. But who draws the line and how is it measured?

Guidelines have been established to help with those decisions, but in the end, it is the CPA whose judgment is relied upon to ensure the accounting treatment is appropriate given the circumstances.

Judgment is determined by several factors, including:

Knowledge of proper ethics. The California Board of Accountancy regulates this with a requirement to take one eight-hour course on professional conduct and ethics every six years. I do not think that is enough. You could easily spend eight hours on professional conduct over a three year period and eight hours on ethics during that same three year period.

Defining materiality. The definition of materiality is gained primarily through experience. There are numerous tables and formulas to assist us in this process, but in the end, the CPA must make a judgment call about what would be considered by the "average Joe" to be misleading in a set of financial statement.

Setting aside client expectations. When gauging the integrity of a CPA's decision, we ask: Is the CPA thinking about keeping the client, the fees he's generating or the proper treatment according to pronouncements even if the client will raise the roof when told? Someone with integrity knows the answer.


When I received my application to serve on the Professional Conduct Committee, it included a question as to why I wanted to serve. In addition to the major events noted above, I relayed my experience of having run across, with two separate clients, tax returns prepared by one local practitioner who had achieved large tax refunds for these clients by claiming, among other strange items, tens of thousands of dollars in moving expenses each of four consecutive years--but the clients never moved.

Of course, the taxpayer should have noticed the erroneous entries, but when receiving a large refund, how many clients actually look at the return?

When it comes to integrity, two things come to mind for Mary Beth Armstrong, CPA, an accounting professor at Cal Poly San Luis Obispo: "Acting in accordance with your principles and looking at the whole picture, not just a piece of it.

"Whenever a client (compilation, review or especially an audit) asks a CPA to bend the rules, or argues that the rules should be interpreted in a way that the CPA believes is not consistent with the spirit of the rule, that client is asking the CPA to forgo his or her integrity," Armstrong says.

In tax, she says, the situation is a little different because the Treasury Department's standard of care states that a tax practitioner must have a "good faith belief' that the item in question has a realistic possibility of being sustained if challenged by the IRS.

"In other words, the tax practitioner must use integrity and objectivity to assess the probability that the IRS (or tax court) would agree with the tax treatment being contemplated if they knew all the facts and circumstances," she says.

In both cases mentioned above (attest and tax) the CPA must use professional judgment.

"In the case of attest, to make sure the treatment of the item in question is not misleading," Armstrong says. "In the case of tax, [professional judgment is used] to determine the likelihood that the IRS or tax court would concur with the treatment of the item in question."


These are the abuses of ethics we must all be concerned about. Though I am confident that a very small percentage of our profession is involved in unethical behavior, until we reach the point that no CPAs can further embarrass us all, we must strive--through education and enforcement-- to meet the standards of our profession.

William L. Schreiber, MST, CPA, is based in Encino. You can reach him at
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Title Annotation:Professional Ethics; accounting
Author:Schreiber, William L.
Publication:California CPA
Geographic Code:1USA
Date:Oct 1, 2003
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