In a wide-ranging discussion about professional ethics, “Ethics Sage” Steven Mintz, professor emeritus with California Polytechnic State University in San Luis Obispo, Calif., highlights professional and personal behavior that would be considered injurious to the profession. Mintz also touches on how the current societal landscape can challenge CPA ethics as well as the positives and negatives of the AICPA Code of Professional Conduct.
By Bill Hayes, Pennsylvania CPA Journal Managing Editor
In this episode of CPA Conversations, we will talk to “Ethics Sage” Steven Mintz, professor emeritus for California Polytechnic State University. We'll talk about guidance in the AICPA Code of Professional Conduct and whether it's effective enough in defining proper and improper guidance for CPAs, trends around CPA ethics, the definition of the term "moral courage" as it relates to CPAs, and much more.
Can you give us a few examples of actions that would be considered acts discreditable to the CPA profession? There are examples for both professional and personal behavior, right?
[Mintz] There are some so-called professional behaviors in the Acts Discreditable Rule that also implicate personal behavior and personal activities. My thought is, perhaps those personal ones ought to be taken out, or at least an additional principle added to the code of conduct to highlight them.
Some of the examples, in general, these are acts that bring harm to one's reputation individually and or the profession. The one that always stands out in my mind is negligence in the preparation of financial statements or records. I think everybody could agree that that would be an act discreditable to the profession. Others include violating any regulatory requirements or statutes such as SEC rules and PCAOB rules.
One that's quite controversial is failing to return the client's books and records upon request. That one has some ifs, ands, and buts associated with it in the sense that when a CPA prepares work papers that essentially constitute client books and records, and the client makes a request for those, they should be returned. However, the AICPA allows them to be withheld pending unpaid fees.
Many state boards of accountancy say, no, even if there are unpaid fees, you have to return it because these are not just CPA work papers, which are the property of the CPA; these are work papers the CPA developed from client information that basically constitute client records, such as cash receipts journal, cash disbursements journal, adjusting journal entries, things like that.
That's always a troublesome one. There are many others, like disclosing confidential employee information, marketing professional services in an unprofessional manner, such as deceptive statements. Those are just a few that are included in the AICPA rule. Normally, they would also be in state CPA society rules and the SEC rules.
Do you consider the guidance that's in the AICPA Code of Professional Conduct to be effective enough in defining proper or improper professional behavior for CPAs? If not, what needs to be done to get it there?
[Mintz] I think the AICPA needs to consider that the world has become much more complex today than it was when the code was first developed back in the 1930s and ‘40s. Acts discreditable to the profession really cross the line. As I mentioned before, there are personal failings, personal behavior, that is not considered to be moral under community standards.
For example, if a CPA launders money for a client, which is a troublesome issue these days because of the adoption of marijuana laws in a lot of states where it's now quite legal to sell marijuana – develop, produce, and sell marijuana, certainly for medicinal purposes, and I believe there are 39 states that allow it for medicinal, and 18 of them also allow it for recreational. This is clearly a trend.
So, money laundering becomes an issue simply because it's still a federal crime. No matter what states say, it's a federal crime to be involved in the sale, distribution, or be a CPA of such a business. You'd be violating the law. How do we cover something like that, just to give one example. There are many others having to do with immigration fraud that a CPA might get involved in. The AICPA code itself has some of these activities included, such as sexual harassment. Sexual harassment of an employee or maybe a client's employee, that's an act discreditable under the current code, but it seems to me that also is a personal failing.
We need to have a separate principle to show that, to really highlight that there are moral issues involved in being a CPA, and they're important so as not to commit an act discreditable to the profession. I think the AICPA has to do something, whether it's a new principle, which is what they have proposed, The Principle of Professional Behavior, or I would personally go one step further and develop a new principle based on personal activities that a CPA does, not just professional behavior, just to highlight it, make it clear to the public that CPAs strive for moral behavior, and here are some of the things. Let's have an interpretation of it as we typically do.
The AICPA Code is not only lacking in that regard, but it's different than codes that have been adopted in other countries. For example, with respect to these so-called professional behaviors, there isn't a separate principle in many other countries, international ethics codes that address these issues, whereas the AICPA does not, at least it doesn't specifically or directly.
Do these other professional codes, such as maybe that of the International Federation of Accountants, do a better job of defining professional behavior? If so, what is it in particular that they're doing more effectively?
[Mintz] I think they definitely are doing a better job. They're defining improper personal behaviors, and they link them to a professional behavior principle. They're attributes of the CPA that are personal failings, which make that CPA less likely to perform professional services in an ethical manner. Some of these codes talk about moral turpitude, for example, and that's a tough one to define, but it's basically some sort of recklessness that shocks the public conscience, depravity, and I mentioned a few of them before. There are other acts like driving under the influence, using drugs.
These are all personal behaviors, they're not professional behaviors, which is what I'm talking about here for a new principle to the code. It's just against good society morals, community standards of honesty and good morals. That's what's being violated basically here. There's no such rule to address these things. I just think society is going down this road where CPAs, for a variety of reasons, are becoming, let's just call it, less ethical, shall we say, because of the way society has evolved and all these additional activities that we find CPAs getting involved in more often than not.
I don't remember years ago, I'm going back to my education, where we would talk about sexual harassment, sexual discrimination, things of these kinds, getting involved in a relationship with a client, things of this nature, which are relatively new things in the code that years ago just didn't exist. If I were the AICPA, I would take a look of the international code, the International Federation of Accountants, which does have a professional behavior element to it.
The Institute of Chartered Accountants in England and Wales, which is our equivalent, so to speak, to the AICPA, also covers this separately in a professional behavior principle. Then, start to list these things, have interpretations of the code for some of the things I mentioned: money laundering, drug use, etc. What about not paying child support? Is that an act discreditable to the profession that a CPA fails to meet his or her child support requirements?
I would say it's certainly a personal failing. If a client knew that a CPA was behind on child support, they may be more reluctant to hire that CPA. Sexual abuse could be another one. I mentioned marijuana. What about postings on social media? It didn't exist years ago, but a CPA could go to social media and post improper comments about a client, or perhaps bully somebody in the office or in the client's office.
We're just not dealing with these. The AICPA Code has not caught up with some of the things that occur today. These things that I've mentioned, they're not just pie in the sky. They're violations that some state boards have already dealt with under the Acts Discreditable Rule.
In the area of trends around CPA ethics, you mentioned a few there. What are we seeing? Are CPAs facing more challenges to ethical behavior? As you mentioned, social media would be something that wasn't around a number of years ago. Are there factors arising in our current environment that could create such challenges?
[Mintz] I think so. I think one of the ones that I've seen more of lately than ever before … for example, insider trading: taking information that's sensitive, confidential, of a client, and purchasing stock of a client ahead of a major merger. These things have happened. Or tipping somebody off about these activities. If the CPA does not want to buy the stock of a company for which they have inside information directly, they could tip off a family member, a friend, and maybe get something in return.
What about hiring a former staffer of the PCAOB to join the CPA firm staff, and then expecting that person to provide inside information about which audits of the firm would be investigated as part of the peer review, so to speak, that the PCAOB does? If you hire a former PCAOB staffer who knows which audits of a CPA firm are likely to be looked at in the PCAOB inspection, that's inside information. That's certainly a personal failing.
I'm just saying there are these types of activities which may seem like violations of professional behavior, and they are, but they also implicate personal behavior, and we need to signal these out. There are other trends that are occurring in the profession that are not quite like the ones we've been talking about, but if I could just simply mention them because they give me great pause. I think there's an attempt to water down the independence standard, which concerns me quite a bit.
What I mean is, the SEC itself is considering independence violations, basically relationships that might develop between the CPA and, let's say, client personnel: controller, CFO, CEO. They're basically saying that those relationships should not definitely cause an independence violation. Instead, it's a violation of the ethics rules if it affects integrity and objectivity.
They're putting integrity and objectivity ahead of independence, at least in that one instance. It made me think about a situation I was involved in some years ago, where a CPA was looking to be hired by a client, and the client's controller was the CPA's spouse. Now, what am I going to do? Wait to see whether there's a violation of integrity and objectivity to make a decision whether independence is violated, or am I going to say, “That's a violation of the appearance of independence.” I don't have to go any further, because if the public knew I was going to review financial information prepared by my spouse, I think they'd have a lot of trouble with it.
It doesn't really serve the public interest. That's just one of the things, the trends that are facing the accounting profession right now, that need to be dealt with.
Can you define the term "moral courage" as it pertains to CPAs, and how would adding language in that area bolster the current AICPA code?
[Mintz] It's a tough one to define, but I think basically what we're looking at here is the ability to exercise fortitude and integrity, in providing professional services and serving the public interest. When we think about moral courage, the word "courage", in and of itself, is not a moral thing. You can be courageous and run into a situation where you're in the military and run into a situation with courage to try to prevent negative things happening to your side. That's not necessarily morally good or bad. It depends on the circumstances. You could be putting your fellow soldiers at risk by doing that.
Moral courage has to be in conformity with moral standards of the community. It has to be a positive thing. Integrity is a good example of moral courage. When a CPA is willing to put his or her reputation on the line, blow the whistle on financial wrongdoing, that takes moral courage because you may be fired, at least you may be retaliated against. There's an ethical issue we talk about a lot: "kill the messenger."
Moral courage, you go to the CEO or the board of directors to point out something wrong occurring in the company, the financial statements are being manipulated, and you suffer the consequences because the CEO of the board of directors doesn't want to hear about it. They know about it, they don't want to hear about it, they're not going to change it. I like to think of moral courage as the courage of your convictions, and of course the convictions are consistent with community standards of right and wrong.
I think professional skepticism is a good example of moral courage, because you're willing to say to the client, "Hey, look, yes, I'm questioning you on this transaction, but I have to do that. I have to be skeptical. It's part of my professional responsibility." In other words, it's saying, trust but verify.
Those are some of the things that I like to think of when I think of moral courage. It has been defined in different ways, but it has to deal with doing the right thing rather than the wrong thing so that the word “courage” is not standing alone.
We've talked about in the conversation here all sorts of different professional-related crimes, social crimes. We can zero in on a few here, maybe. What are social crimes as it relates to the CPA profession, and is there a difference in how the AICPA Code approaches them versus, say, individual state societies? Does one have more power or authority than the other in such a situation?
[Mintz] The social crimes, for the most part, are things we've been talking about, these acts discreditable, which are more of a personal nature than a professional nature, or really both. They really violate both. So, most state societies, CPA societies, follow the AICPA with their rules of conduct. Clearly there are some differences, but there are differences with the state boards of accountancy. Whenever there's a difference between the AICPA code requirement and the requirements of a state board of accountancy, the CPA has to adhere to the rules of the state board of accountancy, which in most cases is stricter than the AICPA Code, which is one of the reasons why you adhere to the state boards.
A good thing with these unpaid fees is that, if there are unpaid fees, as I mentioned earlier, the CPA cannot withhold records developed that basically constitute client books and records under many state laws, state board requirements. If you're in a state where, as I said before, the AICPA may not require you to return unpaid fees as long as the work is in progress. If the state board does, you have to follow state board rules. You always have to follow the stricter rules.
That would also be true even with international standards. The IFA Code, International Federation of Accountants, says that as well. Even the AICPA Code of Conduct says that you need to follow the stricter rules when they're different than what's in the AICPA Code.
The AICPA Code is guidelines. They are not the final word, because the AICPA does not issue a license to practice as a CPA; it's the State Board of Accountancy. I think it's logical that the state board rules are followed when they differ from the AICPA rules. As I mentioned before, almost always they're the stricter rules.
In just an overall overarching sense here, why is adherence to a strict well-defined set of ethics particularly important in the CPA profession? How's the profession, in a larger sense, negatively affected when individual CPAs act in a discreditable fashion?
[Mintz] That's an important question to ask, because it really addresses the overall mantra, if you will, of the CPA profession, which is to serve the public interest above all else. The CPA has to ask himself or herself, “Are my intended actions consistent with what the public would expect?” There's a public service ideal for CPA firms.I think part of what the problem is today in accounting with respect to ethics is the firms have more revenue coming from non-audit, non-attest services than what comes from audit and attest services. This is an evolution over many years.
What I'm trying to get at here is there are different cultures. The culture of a licensed CPA who's doing audit or attest work is different, much higher level of ethics than maybe not even a CPA ... CPAs, you don't need to hire a CPA to do advisory and consulting services. In fact, in many cases that doesn't exist. Those folks come from a different culture.
It's more of a sales culture – selling, selling. And you have a clash of two cultures in firms, which I believe has watered down the ethics in the accounting profession. You have to deal with that as a firm. One of the things that I talk a lot about is, should audit and non-audit services really be broken off within a firm and have separate operational issues? Maybe that would help adhere to this public interest ideal better.
You'd have your audit firms here, your audit services, attest services, and then you would have everything else, basically, in another area. They operate independently. Basically, you wouldn't have a situation you have now, for example, where revenue from the non-audit services basically gets combined with the audit services, and you might even use revenue from the non-audit services to bolster the appearance of high revenue coming from audit.
One arm would not know necessarily what the other arm is doing. Most cases, this is not done now, it's not thought about, although, I should say, in the United Kingdom, they're looking at just this issue right now and they've actually asked the CPA firms in the UK to come up with a proposal, I believe it's due in 2024, to operationally break off audit and non-audit services. You'd have different people running those services. It wouldn't be going back and forth as much as it is now. That would protect, I think, the public service ideal. But CPAs, especially in auditing, they're the gatekeepers of the financial records. They have to have a high set of standards, because most clients don't really understand what GAAP is. They rely on their CPA's honesty and ethics. They trust the CPAs to look out for their best interest in an area where they don't really understand what's going on.
So, again, this is all part of the service ideal of the CPA. I heard an expression, one CPA said, “CPAs are the keepers of the holy grail." I think that's true, and I think over the years it's been watered down in part because of the cultural issues that I mentioned before. And just maybe general breakdown of ethics in society might contribute as well.