Why Are Ethics Important In The Accounting Profession?

Why Are Ethics Important In The Accounting Profession?

Sheree Fletcher

CE CAPSTONE COURSE FOR THE ASSOCIATES DEGREE

IDS399

September 10, 2006

What does ethics have to do with accounting? Everything, since there have been some recent financial accounting scandals; a few examples being Xerox, WorldCom, Enron, which have generated much unwanted and unfavorable publicity for CPA's, including those working as controllers or chief financial officers for organizations.

When you hear the word "ethics," what is the first thing that comes to mind? Having to make the decision of doing what is right versus doing what is wrong. Some idealists say that decisions of ethics should not be conditional. However, that is not as simple as it may sound. What constitutes "right" to one person may be "wrong" to anther; what clearly distinguishes the line between right and wrong? What some may look at as being unethical does not necessarily make it illegal.

In the predicament of David Duncan, the lead audit partner at Arthur Anderson the Accounting Firm for Enron, underscores the penalty that accountants may face under professional accountability. Duncan had pleaded guilty to obstruction of justice when he was involved in the connection with document shredding.

The scandals have made some big implications on the profession as a whole. One being the decision from the Public Company Accounting Oversight Board (PCAOB), created by the Sarbanes-Oxley Act (SOA) of 2002, in April 2003 they voted to assume the responsibility for establishing auditing standards. The Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA) previously played this role.

The PCAOB has the authorization to provide rules governing the following areas; ethics, independence, and quality control for any registered accounting firms, supplanting the role of the AICPA for auditors of SEC registrants. Ethical and professional responsibility issues represent actual and increasing challenges for CPA's and the accounting profession due to the inclusion of ethics in the mandate and the consequences from ethics violations that may arise now and in the future.

To define the relationship between Business Ethics and Accounting Ethics are as follows: Business Ethics has largely to do with the constraints placed on the pursuit of profit and Accounting Ethics has to do with an ethical ideal inherent in accounting as a profession.

After the demise of Anderson and the collapse of Enron, which shook corporate America, many stockholders began to make adjustments in their decision-making processes in order to reflect their concerns over the unethical business practices. The demands for financial reporting to go beyond the current requirements in order to achieve a deeper level of transparency in corporate reporting came form the stakeholders.

The focus on a rule-based approach to ethics comes from the desire of a company wanting to have good ethical reputation that characterizes a compliance mode. The integrity mode is when the firm becomes more proactive in the promotion of ethical behavior, by engaging all of the stakeholders. In the post-SOA environment, it was not that corporations have become more sensitive to their public's expectations in regards to their transparency of values.

How are ethics currently being handled? In order to enter into the profession some boards of accountancy in at least 26 states, not including New York, require CPA's to pass an exam on ethics or a course before sitting to take the Uniform CPA Examination. At least two-thirds or more of the states require CPA examination candidates to complete 150 hours of a state-required education before sitting for the exam. There are only a few states that require a college course in ethics.

There are generally two types of required exams: either an exam that the state has designed or the AICPA's self-study ethics course, which is required by 17 of the states. The AICPA's "Professional Ethics for CPA Examination" consists of 50 multiple-choice questions involving factual or ethical situations that raise issues of integrity and independence. In order to pass the self-study course the student must obtain a 90%. Ethical questions are also on the Uniform CPA Examination. The examination was revised in Spring of 2004; the exam now contains professional responsibility as part of the new section entitled "Regulation," and constitutes a maximum of 20% in this new section.

Unfortunately, since 75% continues to serve as the passing grade for the examination, examinees will be able to pass the "Regulations" portion of the revised exam regardless of the examinees knowledge in ethics. No matter what form of testing that is mandated for the CPA licensure, some states may require applicants for certification to meet a character and fitness requirement. The state of New York has included questions about crimes and unprofessional conduct for their Application for License and First Registration candidates.

CPA's are required to complete Continuing Professional Education (CPE) credits in every state except Wisconsin in order to maintain their licenses. The usual requirement is 40 credits per year. There are currently only ten states that require continuing training on ethics and professional responsibility, which typically is two hours annually or four hours every two years. However, 30 out of the 41 specified number of hours that must be taken exclusively in ethics or in other limited topics, including ethics. Even though the revised "Joint AICPA/NASBA Statement on Standards for Continuing Professional Educational"