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Ethics in Accounting

2. Integrity—sensitivity to professional and moral judg- ETHICS ENFORCEMENT
ments Enforcement varies with the type of accountant (CPA or
non-CPA) and the type of practice (audit of publicly listed
3. Objectivity—requires the CPA to be unbiased and
companies or not). For non-CPAs, state governments and
impartial in assessing facts, making estimates and
professional societies may be responsible for ethics
arriving at judgments
enforcement, but the penalty imposed by professional
4. Independence—unbiased, impartial, and free of con- societies is limited to expulsion. CPAs face higher penal-
flicts of interest (independence in fact and appear- ties.
ance) when providing auditing or other attestation Section 105 of SOX makes the PCAOB responsible
serves. CPAs may not audit a company if they (or for the enforcement of the professional standards for
spouse or dependents) own stock in that company accountants auditing the financial statements of corpora-
and/or have financial or employment relationships tions issuing securities in public markets. The PCAOB
with the client (apart from financial interest in adopted rules, approved by the SEC in May 2004, that
timely receipt of audit fees). allow it to investigate:
5. Confidentiality—information known to accounting any acts or practices, or omissions to act, by regis-
professionals may not be disclosed to outsiders tered public accounting firms and persons associ-
except when professional work papers are subpoe- ated with such firms, or both, that may violate any
provision of the Act, the rules of the Board, the
naed by a court. (Accountants do not have attorney-
client privilege.) provisions of the securities laws relating to the
preparation and issuance of audit reports and the
6. Professional competence—exercising due care, includ- obligations and liabilities of accountants with
ing observing professional technical and ethical stan- respect thereto, including the rules of the Com-
mission issued under the Act, or professional stan-
dards. Accounting professionals should undertake
only tasks that they can complete with professional dards [italics added]
competence, and they must carry out their responsi- Registered firms must cooperate with PCAOB inves-
bilities with sufficient care and diligence, usually tigations, the results of which are private and not released
referred to as due care. to the public. If a potential breach of professional stan-
dards is found, though, the PCAOB may hold public
As the AICPA Code of Ethics has been adopted as the hearings and may impose sanctions—including revoking
interim standard by the PCAOB, it governs behavior of all a firm’s registration, barring a person from participating in
AICPA members, in all types of practice—auditing pub- audits of public companies, and invoking fines and impo-
lic companies, private companies, not-for-profit and gov- sition of remedial measures, such as training, quality-con-
ernmental institutions, as well as attestation and tax trol procedures, and appointment of independent
practices. Accountants who are not members of the monitors.
AICPA but who belong to other professional bodies are Following SOX the AICPA membership voted to
governed by similar codes of ethics. Those who are not permit the AICPA to sanction members without investi-
members of any professional body are still subject to pro- gation, if the SEC, Internal Revenue Service, PCAOB, or
fessional codes promulgated by state governments, for a state board sanctioned the member. In addition, the
example, the New York State code. institute will allow more public disclosure and trans-
parency on disciplinary matters.
In so far as the PCAOB amends their rules of ethics,
CPAs who do not audit the financial statements of
however, there may be an increasing gulf between the
publicly listed companies do not fall under the jurisdic-
demands made on registered firms by that board, and the
tion of the SEC and the PCAOB. Ethical standards for
requirements of the AICPA for CPA firms not involved in
these CPAs are enforced by the state societies of CPAs (if
audit of public companies. For example, on November
they are members) and by individual state enforcement
23, 2005, the board proposed a change in rule 3502 from
mechanisms of codes of ethics. For example, in New
“Responsibility not to Cause Violations” (of tax shelter
York State, the Office of the Professions of the Depart-
laws) to “Responsibility not to Knowingly or Recklessly ment of State Education investigates and prosecutes pro-
Contribute to Violations.” Unless the AICPA adopts the fessional misconduct. Penalties include censure,
same higher standard, CPAs auditing public firms will in reprimand, fines of up to $10,000 for each violation,
the future have to conform to higher ethical standards suspension of license and, in severe cases, revocation of
than those who do not. license. The state board deals with about thirty cases of

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 263