What are fundamental principles of the Code of Ethics for Professional Accountants?

In Brief

Acts considered “discreditable to the profession” are those that bring harm to one’s reputation or that of the profession. Acts of “moral turpitude” illustrate deviations from ethical norms that should be considered discreditable because they reflect conduct that is tied to lapses in personal judgment and the failure to act with good moral character. The AICPA Code of Professional Conduct should include a new principle on professional behavior, similar to that in the International Ethics Standards Board for Accountants (IESBA) Code, that addresses both professional and personal acts that may raise questions in the mind of the public whether accounting professionals are meeting their social responsibilities and acting in the public interest.

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Certain behaviors by professional accountants are considered “acts discreditable to the profession” in the AICPA Code of Professional Conduct because they bring harm to one’s reputation or that of the profession. Examples include negligence in the preparation of financial statements or records, failing to follow regulatory requirements in performing professional services, and failing to return a client’s books and records upon request. Other acts discreditable are triggered by personal choices, such as when a member fails to file personal tax returns in a timely manner; engages in acts of discrimination or harassment in employment practices, such as sexual harassment and age discrimination; or discloses confidential information obtained from an employment or client relationship without the client’s consent. In these instances, the personal choices made are inconsistent with the broader social responsibilities of accountants to serve the public interest.

What is missing in the current AICPA code is a new principle on “Professional Behavior”—similar to the one in the Handbook of the International Code of Ethics for Professional Accountants published by the International Ethics Standards Board for Accountants (IESBA), as well as the ethics codes of professional associations outside the United States. Including such a principle sends a message to the public that professional accountants take seriously their commitment to act in a moral way, both in one’s professional life and in personal activities.

The possibility that other personal decisions might infer acts discreditable should bring new attention to this rule of conduct. For example, is it an act discreditable for an external auditor to post critical comments on social media about a client or client personnel, or for an internal accountant to complain about the pressures of the job? Although an interpretation of the acts discreditable rule might help to deal with such matters, the addition of a new principle that directly addresses professional behavior can shine light on the growing number of cases in which personal choices reflect poorly on moral behavior and bring into question one’s commitment to the values of the profession (e.g., integrity, objectivity).

Convergence of AICPA and IESBA Codes

Including a new principle on professional behavior in the AICPA code would converge it with the IESBA Code on this important issue. The revised version of the IESBA code issued by the International Federation of Accountants (IFAC) in 2018 includes the following statement: “IFAC’s member organizations are required to apply ethical standards at least as stringent as the [IESBA] code.” As a member of IFAC, the AICPA agrees to have ethics standards that at a minimum conform to the provisions in the IESBA code. This does not mean adopting the IESBA code, although the IFAC chapters of many nations have done just that.

It is still important to develop a separate principle on professional behavior to make a statement about the need for moral conduct in professional activities and personal behaviors that strengthen professionalism, thereby increasing the public trust.

The IESBA code requires professional accountants to comply with five fundamental principles: integrity, objectivity, professional competence and due care, confidentiality, and professional behavior. Subsection 115 of the IESBA code describes professional behavior as follows:

A professional accountant shall comply with the principle of professional behavior, which requires an accountant to comply with relevant laws and regulations and avoid any conduct that the accountant knows or should know might discredit the profession. A professional accountant shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession, and as a result would be incompatible with the fundamental principles.

The principles in the AICPA code are aspirational statements. It is true that the principles are not enforceable provisions, and it could be said that the acts discreditable rule already covers most of the professional behaviors and personal choices mentioned above; however, it is still important to develop a separate principle on professional behavior—not only to converge the AICPA code with the IESBA code, but also to make a statement about the need for moral conduct in professional activities and personal behaviors that strengthen professionalism, thereby increasing the public trust.

Current Landscape in Ethics for Professional Accountants

Recent trends in accounting ethics standards have focused attention on the growing threats to independence, integrity, and objectivity. Views about important ethics concepts have been evolving; these include conflicts of interest, confidentiality, professional skepticism, and professional judgment. These trends illustrate the increased focus on certain behaviors of professional accountants that may cross the line between acceptable/ethical and unacceptable/unethical. Several examples follow.

An interpretation of the AICPA rules that became effective on August 31, 2017, deals with “Pressure to Breach the Rules” [2.170.010] and targets potential violations of integrity and objectivity by members of the AICPA that may reflect poor judgment. The interpretation addresses a variety of pressures in the context of threats and safeguards, such as pressures that arise from conflicts of interest and to report misleading results (http://bit.ly/2V2nMjd).

The AICPA code, traditionally rules-based, has become more principles-based, mirroring the approach in the IESBA code through the application of a conceptual framework. The conceptual framework applies a “threats-and-safeguards” approach to various rules in the AICPA code; this approach requires CPAs and CPA firms to implement safeguards to prevent violations of rules such as independence, integrity, objectivity, and due care, as well as to avoid ethical conflicts by building safeguards into their systems. The threats-and-safeguards approach first made its way into the AICPA code in 2006, in part to conform with similar requirements in the IESBA code (AICPA Ethics Codification Project, Nov. 27, 2012, http://bit.ly/37zFpcN). A new principle of professional behavior fits well with the conceptual framework approach.

In 2017, the IESBA issued a standard that sets out a framework to guide auditors and other professional accountants on what actions to take in the public interest when they become aware of a potential illegal act, known as noncompliance with laws and regulations (NOCLAR), committed by a client or employer. A proposal by the AICPA’s Professional Ethics Executive Committee (PEEC) in February 2017 seeks to modify the AICPA code to require certain actions when members learn of noncompliance with laws or regulations in connection with their engagement or employment. The proposed interpretation, “Responding to Non-Compliance with Laws and Regulations (NOCLAR),” is based on the PEEC’s review of the standard adopted by the IESBA (http://bit.ly/2SQQRv8). In October 2019, the PEEC decided not to adopt the proposed NOCLAR standard, choosing instead to allow the National Association of State Boards of Accountancy (NASBA) to weigh in on NOCLAR disclosures without client consent.

The NOCLAR proposal should move forward, as it is consistent with the AICPA’s stated objective to have ethics standards that at a minimum conform to the provisions in the IESBA code. There is merit to having a closer alignment between the codes, as each specifies the importance of acting in the public interest and avoiding certain activities that bring into question ethical behavior. The “Public Interest Principle” in the AICPA code (0.300.030) states, “Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism.” Section 100.1 A1 of the IESBA code includes a similar statement, emphasizing the need to place the interests of the public over those of an individual client or employing organization.

Another reason for closer alignment is specific references to the IESBA code in the AICPA code with respect to the application of the AICPA rules of conduct to professional services (0.200.020). For example, the AICPA code references the conduct of foreign accountants or auditors who are members of a group engagement team, specifically those that prepare consolidated financial statements. Compliance with the IESBA code shelters them from violations of AICPA rules of conduct.

Cathy Allen, who staffed an AICPA/PEEC committee, and Lisa Snyder, who has served on the PEEC, note that “the AICPA’s PEEC monitors IESBA’s standards-setting activities for possible additions or revisions to the AICPA code, although jurisdictional legal and regulatory constraints can limit the PEEC’s ability to fully converge with certain IESBA provisions” (Cathy Allen and Lisa Snyder, “AICPA Proposal Raises the Ethical Bar,” The CPA Journal, March 2017, http://bit.ly/2NikD8P). An example of such a constraint would be the IESBA’s NOCLAR provision permitting disclosures to an outside authority under certain conditions that would be incompatible with most U.S. state laws and regulations on client and employer confidentiality.

Overcoming pressures to deviate from professional standards requires moral courage.

Moral Courage

Overcoming pressures to deviate from professional standards requires moral courage. In the lead-up to the revision of the IESBA code, a proposal that was discussed would have added a sixth principle on moral courage to the fundamental principles in the IESBA code. In particular, the Institute of Chartered Accountants (ICAS) issued a discussion paper, “The Five Fundamental Ethics Principles: Time for Evaluation?” (http://bit.ly/2P1ANFB). The ICAS Ethics Committee recommended that a new, separate principle of “moral courage” be added to the ICAS Code of Ethics and, it can be assumed, to the revised IESBA code upon which it is largely based. Moral courage is defined as “the ability to exhibit fortitude and a constant determination to exert professional skepticism. This includes challenging others who are behaving inappropriately, and to resist the exploitation of professional opportunity for private benefit rather than the public interest” (Alex Burden, “What is Moral Courage?” ICAS website, Nov. 4, 2016, http://bit.ly/327O0C4).

The Association of Chartered Certified Accountants (ACCA), which has a broader mission than ICAS to promote the global accountancy profession, did not support the sixth principle, stating that a moral courage principle “would threaten the clarity of the current set of principles” and create “a shift in emphasis towards publicly displaying certain qualities, rather than focusing on the usual situation, in which the principles are required to be applied in private” (“The Five Fundamental Ethics Principles: Time for Evaluation?” March 2016, http://bit.ly/2vG5REm). The ACCA did, however, agree in concept that moral courage is an enabling value that helps to meet other provisions in the IESBA code, giving as an example the importance of moral courage in dealing with threats to compliance with the fundamental principles in the IESBA code and implementing safeguards to deal with those threats.

Reference to moral courage in the new principle of professional behavior would give context to the need for courage by professional accountants. Generally, we think of integrity as capturing the notion of courage (i.e., “the courage of one’s convictions”); however, courage in a general sense is morally neutral. A courageous person may have the strength of his beliefs, but are those beliefs moral? A CPA might have the courage to question improper financial reporting, but back off once threatened with job termination. It is moral courage—a personal trait—that enables a professional to go up the chain of command to report wrongdoing and, if nothing is done about it, consider blowing the whistle to the SEC or another regulatory organization.

Personal choices can negatively affect professional relationships—just the kind of situations intended to be covered under the new professional behavior principle.

Acts Discreditable to the Profession

The acts discreditable rule applies to members in public practice (1.400.001) and members in business (2.400.001) directly in the AICPA code, and to educators and individuals who work in notfor-profit businesses because they may engage in the kinds of professional activities covered by the code (i.e., audits, reviews, compilations, tax services). The rule is applied broadly under the AICPA code. Section 1.400.005, Application of the Conceptual Framework for Members in Public Practice and Ethical Conflicts, states: “In the absence of an interpretation of the acts discreditable rule that addresses a particular relationship or circumstance, a member should apply the ‘Conceptual Framework for Members in Public Practice’ (1.000.010) [or Business – 2.000.010].” The inclusion of acts discreditable in the conceptual framework may indicate an increased concern about these matters by the PEEC.

Moreover, the AICPA code includes an “Ethical Conflicts Rule” (1.000.020) that is also linked to the rules of conduct, including the acts discreditable rule. This includes conflicts in applying professional or legal standards as may occur because of pressure imposed by higher-ups in an organization or by the client. It is moral courage that enables the accounting professional to withstand pressures to deviate from the rules of conduct.

Acts discreditable can occur as a result of professional actions and personal choices that are inconsistent with the values of the profession. Personal choices can negatively affect professional relationships—just the kind of situations intended to be covered under the new professional behavior principle.

There are certain acts that are so egregious that citing violations of other rules, such as independence and integrity, are insufficient to shine a light on behavior that discredits the profession. The lapses of ethical judgment in some of these cases are so severe that they bring into question whether the individuals/firm involved acted in the public interest. Just as we might say that violating independence is not in the public interest, acts discreditable are not as well, and a separate principle would go a long way for the profession to take a stand on what seem to be an increasing number of acts discreditable that are highly offensive. A good example is the “KPMG-PCAOB inspection” case described next.

On June 17, 2019, the SEC issued Accounting and Enforcement Release 4051, which details the actions by KPMG to obtain confidential information about pending PCAOB audit inspections from PCAOB staffers, one of whom, Brian Sweet, was hired by the firm in part because he had worked on the PCAOB team inspecting KPMG audits. According to court documents, Sweet had copied confidential information showing which audits would be reviewed and then shared this information with his new colleagues at KPMG. This enabled the firm to “better tailor their responses to questions from PCAOB inspectors to mitigate concerns” (http://bit.ly/2SBrxdM).

State Boards of Accountancy

One’s decisions as an accounting professional might reflect a lack of professionalism and improper personal choices, as illustrated by what has been called “social crimes.” Cynthia Krom studied disciplinary actions taken by state boards of accountancy, including social crimes such as driving under the influence, nonpayment of child support, and drug possession (“Disciplinary Actions by State Boards of Accountancy 2008–2014: Causes and Outcomes,” Accounting in the Public Interest, December 2016, http://bit.ly/2V1yIxp). These violations, which comprised 10.3% of the disciplinary action taken by state boards of accountancy in four large states (California, Illinois, New York, Texas) during 2008–2014, highlight the use of poor judgment in personal decisions that reflect poorly on one’s reputation and the profession. Other federal or state convictions, including financial felonies and misdemeanors, make up 27% of the disciplinary actions. Examples include improper personal behavior, such as money laundering, drug dealing, immigration fraud, and assault. The combined total of 37.3% is the highest of all categories, including attest and tax misconduct (31.3%), state licensing requirement issues (19.1%), and discipline or sanction by other agencies (12.3%).

Social crimes are personal behaviors that harm others. They violate societal norms of decency. Disciplinary actions for behaviors outside the scope of practice that relate to one’s personal behavior indicate the failure to maintain a good moral character, as do crimes or offenses involving “moral turpitude.” Moral turpitude is conduct that is considered contrary to community standards of justice, honesty, or good morals. It deviates from the behaviors envisioned under the public interest principle.

Although most state board of accountancy rules do not mention moral turpitude as a specific example of an act discreditable, the Texas State Board of Public Accountancy does. The board defines an act discreditable as any act that reflects adversely on a licensed CPA’s fitness to engage in the practice of public accountancy. It includes “criminal prosecution for a crime of moral turpitude, or a crime involving alcohol abuse or controlled substances, or a crime involving physical harm or the threat of physical harm” [22 Tex. Admin Code section 501.905(5), http://bit.ly/2V8OJl0].

The Rules of the Board of Regents in New York include as an example of unprofessional conduct “conduct in the practice of a profession which evidences moral unfitness to practice the profession” (Rules of the Board of Regents of the Office of the Professions in New York State, Part 29, section 29.1, http://bit.ly/2wsMv5Y).

Moral turpitude is conduct that is considered contrary to community standards of justice, honesty, or good morals.

Some states deal with “unprofessional conduct” in their administrative rules. For example, the New Jersey State Board of Accountancy lists “any conduct reflecting adversely upon the licensee’s fitness to engage in the practice of public accountancy” as one example of when a license may be revoked, suspended, or refused to be renewed by the board [New Jersey State Board of Accountancy Statutes, (45:2B-59), http://bit.ly/327fpnU].

The rules in these states and others that address a licensee’s unprofessional conduct open the door to disciplinary actions for personal conduct that might negatively reflect on the licensee’s moral fitness to practice public accountancy. Acts of moral turpitude and social crimes are inextricably linked to acts discreditable to the profession. A new principle on professional behavior could anchor these acts and serve as a reminder that moral behavior is an inherent quality of all professional accountants. If state boards of accountancy were to adopt such a principle, licensed CPAs would be obliged to follow it regardless of what the AICPA chooses to do.

International Ethics

Most of the codes of ethics for professional accountants outside the United States are based on the IESBA code, which member countries commit to following. An exception noted in Section 100.3 A1 of the IESBA code is when jurisdictions have provisions in their codes that differ from or go beyond those set out in the IESBA code; accountants in these jurisdictions should comply with the more stringent provisions unless prohibited by law or regulation.

The characterization of acts discreditable in global codes differ in some respects from the AICPA code. For example, the Code of Ethics of Chartered Professional Accountants in Canada uses the term “derogatory acts.” The Institute of Chartered Accountants in England and Wales (ICAEW), CPA Australia, and Chartered Accountants in Australia and New Zealand characterize acts discreditable as “conduct that a reasonable and informed third party would be likely to conclude adversely affects the good reputation of the profession.”

The inclusion of derogatory acts is similar to moral turpitude discussed above. The third-party standard, which is also included in the IESBA code, opens the door to individuals or groups in society that might conclude certain personal behaviors and professional decisions are inconsistent with the social responsibilities of accounting professionals. Similar language might be used in the AICPA code to recognize the broader responsibility to honor the public trust in the performance of professional responsibilities.

Over the years, audit professionals have become increasingly involved in personal relationships with clients that challenge their ability to remain independent and objective given the possible conflict of interests.

Examples of Improper Personal Behaviors

Over the years, audit professionals have become increasingly involved in personal relationships with clients and client personnel that challenge their ability to remain independent and objective given the possible conflict of interests. Personal relationships may open the door to claims of bias. Given the increased presence of close personal relationships between clients and CPA firm personnel, it has become increasingly important to ensure that those who provide professional accounting services are of the highest moral character. Along these lines, the following examples illustrate acts discreditable that would violate the proposed professional behavior principle.

Gender and age discrimination cases illustrate biases that are not consistent with professional behavior. In one case, plaintiffs from KPMG alleged that they were discriminated against through comments expressing surprise that single women remained with the firm for a long time because that was not the norm and that they could not travel to work on some of the most lucrative accounts because they had young children at home (Michael Cohn, “KPMG Gender Discrimination Lawsuit Expands,” Accounting Today, May 13, 2016, http://bit.ly/2HBS0Bq).

In another discrimination case, two older applicants for a position at PricewaterhouseCoopers provided evidence in the form of an e-mail in which reference was made to applicants over 40 as being too old, mature, nontraditional, and not savvy enough with new technologies (Steve Rabin et al., Plaintiffs, v. PricewaterhouseCoopers LLP, Defendant, Case No. 16-cv-02276-JST, U.S. District Court, Northern District of California, http://bit.ly/2HxzPNd).

Another lawsuit was settled after a partner at Ernst & Young alleged sexual harassment after being groped by another partner and receiving sexually inappropriate text messages and emails even after rejecting his advances (Christie Smythe and Jordyn Holman, “Ernst & Young Accused of Failing to Act on Groping Complaint,” Bloomberg News, Apr. 18, 2018, https://bloom.bg/2wna4gh).

In another case, charges of improper personal relationships were made against three Ernst & Young audit partners, one of whom on the engagement team maintained an improperly close friendship with the client’s CFO, thus violating rules that ensure objectivity and impartiality during audits. George Bednar, the partner involved in the relationship, spent close to $100,000 in travel and entertainment expenses to socialize with the CFO and his family (SEC, In the Matter of Ernst & Young LLP and Gregory S, Bednar, CPA, Accounting and Auditing Enforcement Release 3802, Sept. 19, 2016, http://bit.ly/2tZ8dxl).

Maintaining such close personal relationships with client personnel creates a familiarity threat to independence. Bednar had been assigned to the client as the “recovery partner” to establish a relationship with the CFO to persuade him not to replace Ernst & Young with another audit firm. As such, Bednar spent extensive leisure time, including infrequent overnight, out-of-town trips, with the CFO and his family, and had the CFO stay overnight in Bednar’s apartment while on a business trip, both social activities that did not have a business purpose. Not all close relationships with client personnel are acts discreditable, but in the Bednar case the acts were so egregious that they may have risen to that level, indicating unfitness to practice public accountancy. In fact, the SEC labeled it as “negligent conduct” in its enforcement release.

Under AICPA rules, CPAs are prohibited from disclosing or using confidential client information for their benefit or the benefit of others without the specific consent of the client (1.700.001). SEC rules 10b5-1 and 10b5-2 address insider trading as buying or selling a security while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped, ” and securities trading by those who misappropriate and take advantage of confidential information about one’s employer or client. Tipping includes providing confidential information of an employer or client to one’s family, business associates, and friends. An insider trading case occurred at KPMG when a partner leaked confidential information about two audit clients to a friend and received $50,000 in cash and a Rolex watch in return. Because the act violated independence, the audit reports on both clients had to be withdrawn by the firm (Peter Lattman, “Ex-KPMG Partner is Charged in Insider Case,” New York Times, Apr. 11, 2013, https://nyti.ms/2V2tjGv).

Insider trading is regarded somewhat differently than having improper personal relationships with client personnel or sexual harassment; the latter two actions are triggered by personal choices that can affect professional responsibilities, whereas insider trading starts by first gaining knowledge through one’s professional responsibilities and then deciding to buy stock of a client or another company or tipping off someone about it—a personal decision. Consequently, it is difficult to separate personal choices from professional behaviors.

Placing personal interests ahead of the public interest violates moral conduct—such as with insider trading. Integrity takes a back seat to expediency, and the investing public is harmed because it is prevented from making investment decisions on a level playing field. A professional behavior principle should capture such instances that are contrary to ethical norms of society.

Insider trading, discrimination, and sexual harassment are all illegal acts and constitute acts discreditable to the profession. They should be dealt with at the firm level and by regulators. Some acts may not clearly indicate acts discreditable to the profession and may be difficult to prove, such as the influence of certain personal relationships between an auditor and client personnel. This is why a given act that may appear to fall within the acts discreditable rule may also fall under other categories, such as integrity and objectivity. In these cases, state boards of accountancy may choose to charge both violations in an area not as certain as, for example, alleged violations of GAAP or GAAS, where application is clear.

Public and private accountants should conduct both professional and personal activities in a way that honors the public trust.

The Professional Behavior Principle

To enhance the fundamental principle of professional behavior in the AICPA code, a definition should be included for moral turpitude. In addition, the acts discreditable rule should be more expressive. The AICPA code now says, “A member shall not commit an act discreditable to the profession” and leaves it to the interpretations to describe such acts. This is a necessary—but insufficient—description, given the new professional behavior principle. Drawing from the global codes, the acts discreditable rule should say, “Any act that would likely lead a reasonable and informed third party, weighing all the specific facts and circumstances available to the professional accountant at that time, to conclude that certain acts adversely affect the reputation of the profession.” Examples could follow similar to the above discussion.

The professional behavior principle should be described as follows: Professional behavior requires a commitment to moral conduct. Professionalism requires a commitment to making ethical choices in one’s personal life and in professional activities through the exercise of moral courage. Acts of moral turpitude should be avoided because they bring harm to one’s reputation and raise doubts about one’s fitness to practice public accounting.

Public Trust

Accounting is a moral practice because CPAs attest to information about the financial condition of an employer or client that is relied on by the public. Public and private accountants should conduct both professional and personal activities in a way that honors the public trust. The existence of a professional behavior principle in the IESBA code and codes of other international professional associations reflects the global acceptance of such ethical norms. A new principle of professional behavior in the AICPA code would go a long way toward formalizing that commitment and creating a framework to evaluate acts discreditable that harm one’s reputation, bring discredit to the profession, and are contrary to the ethical values that the public expects of professional accountants.

Steven M. Mintz, PhD, CPA is professor emeritus of accounting at the Orfalea College of Business, California Polytechnic State University, San Luis Obispo, Calif. He is a member of The CPA Journal Editorial Advisory Board.

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