Some CPAs Escape State Disciplinary Actions

It is difficult to believe in these times of regulation that accountants that have had disciplinary action taken against them by the Securities and Exchange Commission (SEC) are still practicing accounting. After the actions against them, the Associated Press reports that nearly half of them still hold valid state professional licenses.


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There have been more than 50 accountants sanctioned over 2005 and 2006 for professional misconduct and few of them have compensated shareholders for their complicity or neglect. The Associated Press reports that although sanctioned not to practice public accounting for between one and ten years by the SEC, these accountants still prepare, audit or review financial statements for public companies.

They also remain able to perform these services for private companies. While firms such as Arthur Andersen and others have paid huge sums in accounting damages, the individual accountants have escaped their professional penance, according to the Associated Press.

The disconnect seems to be an established communication system that would allow the SEC to advise state accounting boards of federal sanctions against rogue accountants. Another aspect of the disconnect is that state accountancy boards do not have staff to handle the number or reach of financial scandals such as Cendant, Enron or WorldCom.

Texas is one of many states facing this situation. License renewals are not a verifiable method of finding out about SEC sanctions unless without the accountant completing the questions truthfully. A spokesman for the Georgia board told the Associated Press that a CPA recently renewed his license online without disclosing his disciplinary action by the SEC.

William Treacy, executive director of the Texas State Board of Public Accountancy, told the Associated Press, “We don’t have the staff on board to manage the extra workload that the profession has been confronted over the last few years, so we contracted with the attorney general’s office to provide extra prosecutorial power.”

One of the problems and potential fixes to this situation may be to fine accountants. After a landmark SEC settlement in which three partners at KPMG agreed to pay a combined fine totaling $400,000 for their complicity in the $1.2 billion fraud at Xerox, the Associated Press reports that one of the partners still holds his license in New York.

David Nolte of Fulcrum Financial Inquiry told the Associated Press, “The SEC has never sought serious money from errant CPAs. Unfortunately, the small fines in the Xerox case set a record of the amount paid, so everyone else has gotten off easy.”

With the heavy investment in internal controls and procedures by CPA firms, the human element of accounting and auditing helps even large CPA firms fail to identify accounting problems. Members of an audit team can identify insufficient knowledge, misrepresentation of information, sloppy accounting or even simple misrepresentation of information but must be able to see the warning signs of other risky behavior. The CPA Journal suggests a 360-degree assessment of members on an audit team. As a structured, systematic way to collect information, evaluators include the person’s boss, peers, direct reports, and even clients.

This may not be enough though. Consider the business class that failed a class on corporate scandals focusing on Enron, WorldCom and Tyco. The Associated Press reports that finance, accounting and even philosophy professors mentored the students in this class.

A majority of these students in the simulated trading room were found to be misusing business information for insider trading and other situations that would be considered professional misconduct in the real world outside Bentley College. The number of students practicing unethical behavior increased significantly as the class progressed. Management professor Tony Buono told the Associated Press, that the students explained, “You taught us how to do it.”

It is still a question of checks and balances in this process of due diligence and especially practicing a single generally accepted accounting principle (GAAP) in the end, according to BusinessWeek. That GAAP requirement says to tell the truth, the whole truth and nothing but the truth and requires the integrity of accountants. as well as all others involved in the accounting and auditing processes.

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