8 Ways CPAs Violate the AICPA's Ethics Requirements
by Terri Eyden on
By Gary Zeune, CPA, Managing Director, The Pros & The Cons LLC
What do these former CPAs have in common?
- Enron Controller Richard Causey
- HealthSouth CFOs Aaron Beam and Weston Smith
- WorldCom Director of General Accounting Buford Yates and Director of Management Reporting Betty Vinson
- Michigan Catholic School Controller Dan Korson
- PharMor CFO Patrick Finn
They all committed unethical acts. And went to prison.
New ethics rules1 effective November 30, 2011, April 30 and August 31, 2012 put CPAs at risk for actions that are now strictly prohibited. This article explores a few such activities. But, first, why do CPAs violate the Code of Professional Conduct? Here are five common reasons:
1. Lack of objectivity: "We don't see things as they are; we see them as we want them to be."2 None of us are objective about ourselves or our work. We won't admit that our own behaviors violate the AICPA's Code of Professional Conduct.
2. Power: Really smart people do really stupid stuff. If smart people didn't do dumb stuff, Elliot Spitzer would still be the governor of New York. People with a sense of power are overconfident in their abilities and consistently reject advice, leading to suboptimal decisions.
3. Superiority bias: Multiple studies have shown that powerful people deceive themselves into decisions that are consistently worse than those made by people who feel less powerful but accept advice.3 For example, Apple CEO Steve Jobs refused the advice to undergo surgery that likely would have saved his life.4
4. Pressure: We subordinate our judgment to a more powerful person, such as a boss or a client, or to obtain or maintain the status quo, for a lifestyle, or for a position in the entity.
5. Ignorance: CPAs simply don't know the ethics requirements and prohibitions - the focus of this article.
Following are sections of the Code and the common violations that relate to them.
ET Section 91 Applicability:
Paragraph .01 says the bylaws of the AICPA require members to comply with the Code of Professional Conduct. The introduction reads, "A member who departs from interpretations or rulings shall have the burden of justifying such departure in any disciplinary hearing."
Paragraph .01 .2: Requirement: CPAs will not knowingly ask or allow anyone they have authority or control over to carry out on the CPA's behalf, paid or not, any act that would be prohibited if committed by the CPA.
Violation No. 1: You can't have someone do your dirty work.
Paragraph .01 .3: A CPA is not to conclude that independence is not violated solely because of his inability to control the other person.
Violation No. 2: CPAs cannot justify allowing unethical behavior with, "It's not my job." Or, as Lisa Snyder, the AICPA's professional ethics director, comments, "If a spouse invests in a CPA's client, even though the CPA does not `control' her spouse, she would no longer be independent."
ET Section 100-1 Conceptual Framework for AICPA Independence Standards:
Rule .20: Safeguards are defined as controls that eliminate or reduce threats to independence to an acceptable level.
Violation No. 3: If anyone can bypass the CPA and order the CPA's subordinate to do something that the CPA will not do, then the CPA has violated the requirement to provide such independence safeguards.
Rule 501 Acts Discreditable new interpretation:
ET Section 501 .10 Confidential Information Obtained From Employment or Volunteer Activities
CPAs are required to maintain confidentiality of any confidential information obtained from an employer or volunteer position. Further, CPAs are to prohibit the disclosure of confidential information to people who are not subject to the profession's ethics requirements.
When a CPA changes employment, the CPA is prohibited from using confidential information from previous employment for personal gain or advantage. This prohibition does not end if the CPA leaves the subsequent job or if the disclosure is without proper authorization.
Violation No. 4: When a CPA departs a firm and takes another position in an entity that has an audit, it's unethical, a discreditable act, to use knowledge gained in public accounting to circumvent the audit process.
Violation No. 5: The SEC sued5 Deloitte and Deloitte M&A tax partner Arnold McClellan and his wife, Annabel, also ex-Deloitte, alleging that they passed confidential information about at least seven acquisitions planned by Deloitte's clients to her sister and sister's husband.6 The SEC alleged7 they made $23 million using the confidential information.8
Mrs. McClellan agreed to pay $1 million to settle the SEC lawsuit.9 She told prosecutors that Mr. McClellan was not aware that she overheard him discussing confidential information. Arnold is now an ex-Deloitte Tax LLP partner. To get a lighter sentence, all his wife would have had to say was, "Of course he knew. How do you think I got the information?" How would Arnold prove he didn't give her the information?
But what was Arnold's discreditable act? He allowed her to overhear his confidential conversations. There's no exemption in the code of conduct for ethics violations because you trusted someone. Even family.
Violation No. 6: The Code of Professional Conduct often include the phrase "a member should." Most CPAs read "should" as a suggestion, an option or recommendation.
But "should" is different in the Code of Conduct. Lisa Snyder says that, unlike everyday usage, any ethics rule that says "a member should" is a requirement.
"While the PEEC has not adopted the ASB's drafting conventions yet, we do consider 'should' as being a requirement," she said. "When something is a suggestion, we will generally say the member `should consider.'"
Violation No. 7: Ethics violations often come from thinking that materiality is the dollar amount or percentage of a number relative to the whole (e.g., percentage of sales). Just because an amount is small does not mean it's immaterial. If the user, such as a bank loan officer, would make a different decision with the correct information, then the little number is material.
Violation No. 8: Ever heard, "It's my company, and I can do whatever I want!"? So when you allow your client or boss to charge clearly personal expenses to the company, you've allowed her to deliberately violate internal controls. Further, because the deductions were for personal expenses, how are you ethical, yet you work for someone who deliberately defrauds the IRS, even for minor amounts?
As CPAs, it's our responsibility to know and understand the Code of Professional Conduct that governs our work and our behavior. When we violate the Code, willingly or unknowingly, we compromise our duty to users of our work product. And we begin to resemble the former CPAs mentioned at the beginning of this article.
About the author:
Gary D. Zeune, CPA, is a nationally recognized speaker and writer on fraud, auditing, and ethics. He also founded The Pros & The Cons, the nation's only speakers' bureau for white-collar criminals at www.TheProsAndTheCons.com . You can reach Zeune at firstname.lastname@example.org .
© By Gary D. Zeune
1 Journal of Accountancy, Official Releases, REVISIONS TO THE CODE OF PROFESSIONAL CONDUCT, November 2011, page 101
2 Adapted from "We don't see things as they are; we see them as we are," Anais Nin, French-born American author, 1903-1977
3 The Detrimental Effects of Power on Confidence, Advice Taking, and Accuracy," Organizational Behavior and Human Decision Processes, vol. 116, no. 2
4. "Bad medicine: Very rich and the very poor," Dr. Cary Franklin, Chicago Tribune, Nov. 13, 2011, p. 25
5 U.S. vs. McClellan, 10-5412, U.S. District Court (San Francisco)
6 "Did Arnold McClellan's Wife Act Without His Knowledge?" April 11, 2011
7 "SEC breaks up in-law insider trading ring," Fortune.com, Nov. 30, 2010
8 "Did Deloitte Compromise Independence in McClellan Insider Trading Scandal?" Frocine McKenna, Forbes, Dec. 7, 2010
9 "Ex-Deloitte Partner's Wife Settles SEC Case for $1 Million," Bloomberg, Oct. 25, 2011