Ethics in Accounting and Audits

Chapter 5
Accounting Codes of
Conduct
 I. AICPA Professional Code of Conduct
 II. Code Principles
 III. Criticisms of the Code of Conduct
 Accountants have a responsibility to present the
most truthful and accurate financial pictures of an
organization.
 As auditors, they have a responsibility to evaluate
other accountants’ pictures and attest to their
truthfulness and accuracy.
 In doing so, accountants achieve the purposes of
their profession – to meet the needs of the clients or
companies for which they work, or to serve the best
interests of the stockholders/stakeholders who are
entitled to truthful representations of an
organization ’ s financial status.
 Individuals have an ethical obligation to
perform their jobs.
 Job responsibilities are usually spelled out in

a job description, employee handbook,

managerial guide book, company code of
conduct, and/or, finally, the profession ’ s
code of conduct or ethics.
 The accounting profession has developed
multiple codes of ethics that set the standards
for accountants ’ behavior, standards that
require more than simply adhering to the letter
of the law.
 We suggest that these sophisticated codes are
the equivalent of a binding organizational
moral law. Consequently, the codes determine
what is ethically required of an accountant.
Business Ethics enumerates six ways that codes
of conduct can be valuable:
 1.A code can motivate through using peer pressure, by holding up
a generally recognized set of behavioral expectations that must
be considered in decision making.
 2.A code can provide more stable permanent guides to right or
wrong than do human personalities or continual ad hoc decisions.
 3.Codes can provide guidance, especially in ambiguous situations.
 4.Codes not only can guide the behavior of employees, they can
also control the autocratic power of employers.
 5.Codes can help specify the social responsibilities of business
itself.
 6.Codes are clearly in the interest of business itself, for if
businesses do not police themselves ethically, others will do it for
them.
 In the United States, there are two major codes
for the accounting profession – the AICPA
(American Institute of Certified Public
Accountants) Code of Professional Conduct,
adopted in its current form in 1973,
significantly revised in 1988, and updated for
all official releases through October 2009, and
Institute of Management Accountants (IMA)
Standards of Ethical Conduct for Practitioners
of Management Accounting and Financial
Management, adopted in April 1997.
There are also codes for accountants in other
countries, the most famous of which is the
International Federation of Accountants (IFAC)
Code of Ethics for Professional Accountants,
updated in 2009 by the International Ethics
Standards Board for Accountants (IESBA), which
develops ethical standards and guidance for
professional accountants.
 The IESBA encourages member bodies to adopt

high standards of ethics for their members and

promotes good ethical practices globally.
 The Public Interest Oversight Board (PIOB) oversees
the work of the IESBA, which also fosters
international debate on ethical issues that
accountants face.
 Four of the principles of the IESBA code – integrity,
competence, confidentiality, and objectivity – are
identical to those in the AICPA code. (The IMA code
also addresses the principles of integrity,
competence, confidentiality, and objectivity – see
Appendix B )
 The fifth IESBA principle – professionalism – is
covered in other areas of the AICPA code.
 This chapter examines what constitutes
appropriate behavior for accountants.
 Because we do not have the time or space to

examine all accounting codes of conduct, we

will concentrate on the AICPA code.
I.AICPA Professional Code of Conduct

 The AICPA Code of Conduct is composed of two

sections;
 the first section is devoted to principles,
 the second to rules.
 The principles are general norms of behavior, and they
provide the framework for the more specific rules.
 The Council of the AICPA designates bodies to interpret
the rules and provide technical standards for them.
 These interpretations result in Ethical Rulings, which
govern specific activities but can also be applied to
other similar behavior.
The AICPA code begins by explaining its
purpose and scope.
 It was adopted “to provide guidance and

rules to all members – those in public

practice, in industry, in government, and in
education – in the performance of their
professional responsibilities. ” Its purpose,
then, is to guide, and its scope encompasses
all certified public accountants who belong to
the AICPA.
 It is binding on them and only them. Because,
however, the code promulgates the “basic
tenets of ethical and professional conduct for
accountants, ” it can serve as a handbook on
ethics for all accountants.
 The code specifies three constituencies to

whom accountants have ethical

responsibilities: the public, clients, and
colleagues.
 In the accounting profession, particularly for “ public ”
accountants, the responsibility to the public is paramount.
 This primary responsibility is different in accounting than in
various other professions, such as law and medicine, in which the
primary responsibility is to the client or patient.
 The accountant ’ s responsibility to the public is so important that
it overrides his or her obligations to companies or clients.
 In the case of an external audit, for example, even though the
firm being audited hires and pays the accountant, the accountant
’ s first responsibility is to those in the public constituency
entitled to view the company ’ s financial statements.
 This creates an anomalous situation in which the accountant
technically is not working for the person or company that pays
him or her.
 Because accountants have responsibilities to
the public, clients, and colleagues, we need
to examine all the relationships and the
incumbent obligations. Studying the
provisions of the AICPA code helps to clarify
the various relationships.
 Let’s turn now to an examination of the

principles in the AIPCA code.

II.Code Principles

“The Principles of the Code … express the

profession’s recognition of its responsibilities
to the public, to clients, and to colleagues.
They guide members in the performance of
their professional responsibilities and
express the basic tenets of ethical and
professional conduct. The Principles call for
an unswerving commitment to honorable
behavior, even at the sacrifice of personal
advantage.
 ” There are six principles, as follows:
 • Principle I – In carrying out their responsibilities as professionals, members
should exercise sensitive professional and moral judgments in all their activities.
 • Principle II – Members should accept the obligation to act in a way that will
serve the public interest, honor the public trust, and demonstrate commitment
to professionalism.
 • Principle III – To maintain and broaden public confidence, members should
perform all professional responsibilities with the highest sense of integrity.
 • Principle IV – A member should maintain objectivity and be free of conflicts of
interest in discharging professional responsibilities. A member in public practice
should be independent in fact and appearance when providing auditing and
other attestation services.
 • Principle V – A member should observe the profession’s technical and ethical
standards, strive continually to improve competence and the quality of services,
and discharge professional responsibility to the best of the member’s ability.
 • Principle VI – A member in public practice should observe the Principles of the
Code of Professional Conduct in determining the scope and nature of services to
be provided.
 The AICPA code explains each of its
principles in detail. They are similar to those
in most professional codes – service to
others, competency, integrity, objectivity and
independence, professionalism (including
continuing education), and accountability to
the profession.
 Let ’s review each of the code principles more

fully.
Principle I – Responsibilities

 In carrying out their responsibilities as

professionals, members should exercise
sensitive professional and moral judgments
in all their activities.
 The first principle also indicates the

responsibility to cooperate with fellow

professionals to maintain the integrity of the
accounting profession.
Principle II – Serve the public interest
 Members should accept the obligation to act
in a way that will serve the public interest,
honor the public trust, and demonstrate
commitment to professionalism.
 In the interpretation of this principle, the

code asserts that “ acceptance of its

responsibility to the public ” is a “
distinguishing mark of a profession. ”
Principle III – Integrity
 To maintain and broaden public confidence,
members should perform all professional
responsibilities with the highest sense of
integrity.
 In the interpretation of Principle II, the code

calls for members to resolve conflicting

pressures with integrity. Principle III specifies
the requirements of that integrity.
 The code defines integrity as follows: “ Integrity

is an element of character fundamental to

professional recognition.
Principle IV – Objectivity and
independence
 A member should maintain objectivity and be free of
conflicts of interest in discharging professional
responsibilities. A member in public practice should
be independent in fact and appearance when
providing auditing and other attestation services.
 “ Objectivity, ” according to the code, “ is a state of

mind, a quality that lends value to a member ’ s

services. ” Hence, objectivity is a virtue; it is a habit
to be developed.
 The principle requires that the objective person be

impartial, intellectually honest, and free of conflicts

of interest.
Principle V – Due care
 A member should observe the profession ’ s technical
and ethical standards, strive continually to improve
competence and the quality of services, and discharge
professional responsibility to the best of the member ’
s ability.
 The interpretation of the principle identifies the “ quest
for excellence ” as the “ essence of due care. ” That
excellence requires both competence and diligence.
The accountant must perform to the best of her ability
with a “ concern for the best interest of those for
whom the services are performed and consistent with
the profession ’ s responsibility to the public.
Principle VI – Scope and nature of
services
 A member in public practice should observe
the Principles of the Code of Professional
Conduct in determining the scope and nature
of services to be provided.
III.Criticisms of the Code of Conduct

 The code principles, taken as a whole,

establish the framework for an accountant’s
ethical approach to the accounting
profession. Critics say, however, that the
principles have at least two insufficiencies:
 (1) They are too broad and amorphous; and
 (2) They lack sanction.
The first principle, for example, says, “In carrying out
their responsibilities as professionals, members [of the
AICPA] should exercise sensitive professional and moral
judgments in all their activities.”
 That statement is too broad, critics contend, because no

one acts as a CPA in all activities, and too amorphous

because it does not specifically define “sensitive”
professional judgments. A rejoinder, however, is that
language is always general and in need of interpretation
and that rules and interpretations of code principles
address the lack - of - specificity problem. Furthermore,
principles are meant to be inspirational; rules are meant
to be concrete.
 The second drawback to codes, overall, is that they are
seldom enforced. And a code without enforcement may
be worse than no code at all. To mitigate this deficiency
in accounting codes, the Sarbanes – Oxley Act, in
addition to establishing the Public Company Accounting
Oversight Board, gave the SEC greater power to enforce
standards. (We will examine these issues more fully in a
later chapter.) Nevertheless, despite these drawbacks,
codes of conduct are tremendously important in
establishing professional standards.
 Specific rules can clear up any vagueness in a code

principle. Chapter 6 discusses the AICPA rules that clarify

the principles in its code of professional conduct.
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