The AICPA Code of Professional Conduct

The American Institute of Certified Public Accountants, or AICPA, has developed rules of conduct that govern accountants practicing in the United States. These rules, known as the AICPA Code of Professional Conduct, have been in force for several decades and were revised in 2014. These rules apply to all CPAs, whether they work in private practice, industry, government, academia, or other capacities.⁷

The AICPA is a national professional organization comprised of approximately 400,000 CPAs.⁸ From a narrow perspective, the AICPA's rules only govern the conduct of members who voluntarily join this organization. However, every state has an official Board of Accountancy that, by law, regulates all CPAs licensed and practicing in it. In most instances, state legislatures and state governmental boards have adopted the AICPA's ethical framework as mandatory legal requirements. For example, California's accountancy laws require all CPAs to “comply with all applicable professional standards,” including the AICPA's ethics rules.⁹ Consequently, as a practical matter, most AICPA rules have the force of law behind them and subject violators to having their professional licenses suspended or revoked. Furthermore, in disciplining non-CPAs, judges, juries, and regulators often refer to the AICPA's rules as persuasive expressions of how financial professionals should behave. Accordingly, the AICPA's rules, as a practical matter, broadly establish the governing standard of conduct for all accountants and financial professionals practicing in the United States.¹⁰ For this reason, throughout this book, we will assume that the AICPA's rules are the relevant benchmark of behavior for all accountants and financial professionals, whether or not they formally are CPAs or members of the AICPA.¹¹

The IFAC Code of Ethics for Professional Accountants

For accountants practicing or issuing financial statement opinions for users outside the United States, the International Federation of Accountants, or IFAC, has established a set of ethical standards. The IFAC created the International Ethics Standards Board for Accountants to “develop and issue, under its own authority, high quality ethical standards and other pronouncements for professional accountants for use around the world.” For brevity, these rules shall be referred to as the IFAC Code.¹²

The IFAC is an “organization of organizations,” whose members are professional societies rather than individuals. The IFAC principally is comprised of about 160 accounting societies, ranging from the Albania Institute of Authorized Chartered Auditors to the Zimbabwe Institute of Chartered Accountants. The AICPA also is a member. IFAC's member organizations collectively represent 2.5 million accountants who work in industry, government, public practice, and academia.

IFAC group members are not permitted to establish standards that are less stringent than those that are expressed in the IFAC Code. Therefore, because the AICPA is a member of the IFAC, the AICPA Code necessarily is at least as strict as the IFAC Code.

As a pragmatic matter, the rules established by both such codes are substantially similar. As a result, the core principles embodied by both the IFAC and AICPA codes will collectively be referred to hereafter as the Code of Conduct.¹³

Other Sources of Accountant Regulation

In the United States, several federal government agencies also regulate accountant conduct. The U.S. Treasury and Internal Revenue Service (IRS) govern the conduct of tax professionals, and the SEC and the Public Company Accounting Oversight Board regulate financial reporting by publicly traded companies. In addition, many states have adopted rules regulating the practice of accounting. These rules are patterned after the Uniform Accountancy Act.

For the most part, government regulators have deferred to the AICPA in the area of ethics standard-setting because all such organizations share the same core goals.¹⁴

Ethics in Financial Accounting

People unfamiliar with financial reporting easily might wonder how an accountant would ever encounter an ethical dilemma. After all, debit and credit entries can be accomplished by automated processes, free of human involvement.

However, accounting is more than just the bookkeeping process of recording and compiling data into financial statements. Many areas of accounting require significant professional judgment.

Consider the dilemma that arises if your employer, a restaurant, is expected to lose $1 million in a lawsuit because an angry customer was injured from consuming the chef's experimental new pizza seasoning, which was a flavorful blend of savory herbs and rat poison. According to generally accepted accounting principles, you must accrue an immediate liability if this loss is probable. But what exactly does probable mean?

If your employer applies International Financial Reporting Standards, probable means that it is more likely than not that a company will sacrifice cash or other resources in the future. More likely than not signifies that the odds of a loss are above 50%.¹⁵ This mathematical statement is clear, but its application is not. How can an accountant make this probability judgment when even an experienced litigator would hesitate to forecast the outcome of a trial before it has begun? Nonetheless, accountants have an ethical obligation to use their best efforts in making this subjective determination.

Conversely, under U.S. accounting rules, rule-makers similarly mandate that probable losses must be recorded, but they have not provided concrete numerical guidance for determining when a loss is sufficiently likely to meet this vague test. As a result, accountants have broad discretion in interpreting the word probable and an ethical obligation to valiantly try to fairly present a company's financial position.

Adding to your ethical dilemma in pondering the meaning of probable, you are likely to encounter various workplace pressures. For instance, your employer may pressure you to delay reporting a loss before it even has had the opportunity to defend itself in court. However, lenders and investors may push you to accrue the loss immediately so they can make timely judgments in protecting their financial interests in a restaurant that might be bankrupted by a large litigation loss.

As this illustration demonstrates, when faced with uncertain standards and conflicting peer pressures, even a highly conscientious accountant may struggle to reach an ethically correct decision.

Ethics in Tax Reporting

According to the IRS, tax evasion cost the federal government over $3 trillion in uncollected taxes over the past decade. Cheating on taxes is so widespread that pundit Will Rogers once commented, “The income tax has made liars out of more Americans than golf has.”

As a tax accountant, you inevitably will encounter clients who concoct questionable schemes, claim dubious deductions, or simply lie. If you resist their requests for aggressive tax reporting, these clients sometimes threaten to shift their business to someone more “open-minded.” Thus, accountants often encounter the ethical dilemma of maintaining lucrative client relationships while continuing to uphold the integrity of our tax system.

Specific ethical rules governing tax practice appear in the AICPA's Statement of Standards in Tax Practice and U.S. Treasury Circular 230.¹⁷

Ethics in Internal Controls

Internal auditors play a crucial role in ensuring that organizational results are reported fairly and regulatory mandates are meticulously satisfied. At times, an internal auditor's duty to report suspected fraud, bribery, and other illegal activities may pose a severe test of integrity. Nonetheless, internal auditors must perform their duties with the highest degree of professionalism, even if their conclusions potentially devastate the careers of colleagues they interact with on a daily basis.¹⁸

Ethics in Management Accounting

Accountants who work for business entities are the frontline soldiers in the ethical battle to present accurate financial statements. As the first paragraph of a standard auditor's report succinctly states, “These financial statements are the responsibility of the Company's management.”

Although all accountants encounter ethical conflicts, accountants working in industry often are subject to far greater pressure than others are. Accountants working in a CPA firm never want to lose a client, but the loss of one client rarely poses a major threat to their standard of living. In contrast, a management accountant's entire livelihood often depends on maintaining the approval of a direct supervisor or employer. For this reason, management accountants have to be acutely aware of their ethical obligations and rights, including the protections granted by government regulations, whistleblower statutes, and company policies.²⁰

Ethics in Governmental and Nonprofit Accounting

In 1819, Supreme Court Chief Justice John Marshall issued his famed dictum that “the power to tax involves the power to destroy.” Whether you pursue a career in taxpayer compliance or other areas of government service, you must always remain mindful of the government's vast power and your ethical duty to act with restraint.

The dangers of unchecked government power recently came to the forefront when the IRS wrongfully denied tax-exempt status to certain nonprofit organizations based on their political agendas. As a result of this interference, the IRS selectively impeded certain citizens from organizing to exercise their freedom of political expression. The IRS's efforts were especially pernicious because many of the affected groups favored a simplified tax system that challenged the power and size of the IRS.

Although many government accountants specialize in tax matters, numerous other career opportunities exist for accountants at the federal, state, and local levels of government. At the federal level, accountants serve in a wide array of capacities in organizations such as the FBI, the General Accountability Office, the Defense Contract Audit Agency, and the IRS's Criminal Investigation Division. Accounting careers in state government often involve the administration of state income and sales tax revenues, and careers in local government commonly involve property tax administration, budgeting, and general financial management.²¹

Ethics in Other Accounting Roles

Accountants perform many functions, including acting as personal financial planners, investment managers, trustees, estate executors, management consultants, and corporate directors and officers. In many of these capacities, clients entrust significant portions of their wealth to their accountant and become wholly dependent on the accountant's advice and decision making. For example, if an accountant is appointed to oversee a trust fund for young children, the children's future financial security rests on the accountant acting prudently. When accountants hold a special position of trust over vulnerable clients, they are expected to satisfy an elevated duty of care and loyalty. This obligation is called a fiduciary duty.

Accountants serving in these capacities should be mindful of the AICPA's Statement on Standards for Consulting Services, Statement on Standards for Valuation Services, and Statement on Standards in Personal Financial Planning Services.

“Everyone Does It”

Cyclist Lance Armstrong seemingly had it all. He had won a record seven consecutive Tour de France victories, overcoming remarkable odds as well as a bout with cancer. He was also one of the most celebrated and financially successful athletes in the world. Then, as evidence against him mounted, he was forced to reveal that he was a doper—someone who had used illegal performance enhancers to cheat his way to the top.

Perhaps more shocking than Armstrong's admission was his defense: Everyone does it. Rather than set a moral tone for others to follow, the unrepentant Armstrong shrugged off criticism, claiming that he was compelled to cheat to create “a level playing field.” Armstrong's own financial playing field has been decimated by lawsuits claiming that he defrauded sponsors into hiring him as their advertising spokesperson. In 2015, Armstrong was ordered to pay $10 million as damages to a sports promotion firm, and the road ahead is filled with treacherous litigation potholes and financial punctures.

Contrary to Armstrong's perspective, no one is forced to cheat, and everyone does not do it. Just look at how people behave the next time that a traffic light malfunctions at a busy intersection. Most drivers behave courteously and proceed through the intersection in an orderly, alternating sequence. Chaos could easily occur, but it rarely does because most people share a common desire to act cooperatively and selflessly.

“The Other Guy's Worse”

This justification is simply a variation of the everyone does it rationalization. Many people attempt to deflect blame from their own conduct by pointing out that someone else's conduct is worse. In a world of mass murderers and billion-dollar fraudsters, there will always be someone whose conduct is worse than your own. Even if others misbehave egregiously, their conduct does not absolve you from responsibility for your own actions.

“If It's Not Illegal, It Can't Be Wrong”

Our legal system establishes minimum standards of behavior, not ideal standards. Petty crimes and well-concealed crimes often slip through the proverbial net of justice, but that does not make these acts ethical.

Imagine that a work colleague or classmate is severely allergic to peanuts. Would you bring peanuts near this person, just because doing so is not illegal? Just because our legal system does not circumscribe certain behavior or is ill-equipped to prosecute it, allow your moral GPS to guide you to act considerately.

“No Harm, No Foul”

If misconduct did not cause any harm in hindsight, wrongdoers often contend that it is pointless to examine the propriety of their conduct.

This type of logic confuses the after-the-fact, or ex post, outcome with the risk-creating act that occurred. Even if, by fortuity, an unethical act does not result in harm, the immorality of the initial act does not change its character.

Consider the plight of a thief who shoots a gun at a security guard at close range during a bank robbery, but misses due to bad aim. Should the robber be rewarded for his incompetence? Or should his intent to kill be severely punished, whether or not he fortuitously was an inept marksman?

In our legal system, this robber does benefit because attempted, but unsuccessful, homicide generally is punished less severely than successful homicide. However, from an ethical standpoint, the robber's lack of marksmanship skill does not change the immorality of his actions, and it should not alter how society judges his conduct.

“They Made Me Do It”

When we make a mistake, it is human nature to blame someone else rather than accept the consequences of our actions. Despite the pressures that arise in a workplace setting, it is unethical to shirk responsibility for your actions by blaming others.

As one example, in tax fraud prosecutions, desperate taxpayers often try to portray themselves as innocent victims who were harmed by the carelessness of an incompetent assistant, bookkeeper, or tax return preparer. Shifting blame rarely succeeds in tax prosecutions. More important, it rarely succeeds in life.

Ethics in Everyday Life

1. Rank each of the following ethical issues from 1 to 10. A ranking of 1 means that your conduct is extremely unethical, and a ranking of 10 means that conduct is extremely ethical.
   1. When you wake up, you jump in the shower right away, knowing that your use of the available hot water might prevent your roommate from getting to work on time.
   2. You arrive at class a bit late because you overslept. When the instructor stares at you disapprovingly, you mutter that “traffic was horrible,” even though it wasn't.
   3. At lunch, you notice a college administrator telling the cashier that she is a “student” to get a discount on food purchased from the student-run facility. You do not inform the cashier to avoid conflict with the administrator.
   4. Between classes, you ask your professor for “special tips” on how to do better on the upcoming midterm, knowing that your course grade is curved relative to the performance of your classmates.
   5. At your part-time afternoon job, you use a company pen to jot some notes, and then place the pen in your pocket.
   6. At your part-time afternoon job, you use the company computer to transact an online purchase of sunglasses while you were waiting for your boss to return with documents that you need to complete your work assignment.
   7. On your way home, you stop in a shoe store to figure out which size shoe fits you best. You thank the salesperson for his help, and then order these shoes online to save money.
   8. While driving home from the shoe store, you notice that there is a car accident in the far right lane, so several cars are trying to slide over into your faster-moving lane. You decide to not let any cars merge into your lane.
   9. After arriving at your apartment, you feel somewhat tired. As a result, you back out on your friends, claiming that you “have too much homework” to go out that evening, although you had previously agreed. Because your friends lack convenient access to transportation, your change of heart disrupts their plans.
   10. That evening, you are struggling to understand a difficult concept, so you call an acquaintance from your accounting class. You know that he will patiently share his time because you can tell that he has a romantic interest in you. You want and need his academic assistance, but you sure hope that he doesn't ask you out on a date.
   11. Immediately after your call, you go to an online dating website to post your photo, which was shot at a wedding three years ago.
   12. You agree to meet your work supervisor Saturday evening at a club with live music. You plan to bring your “fake ID” in case you want to order an alcoholic drink.
   13. You really enjoy that club because the “cover” band plays recent hit songs and has an awesome lead singer. You are fairly sure that the band plays copyrighted songs without paying a royalty to the song composers, but you don't care.
   14. You enjoy this band so much that you recorded a few of its songs with your cell phone.
   15. You are disappointed that the college counselor did not answer an email that you had sent earlier that morning. Before going to bed, you impatiently re-send that email.
2. With regard to each of the events identified in question 1, can you defend the opposing viewpoint? That is, if you considered one of the behaviors to be highly ethical, can you advocate for the view that the behavior was unethical? Conversely, can you advocate that an act labeled as unethical was ethical?

   The Regulatory Environment

3. A licensed CPA in Arkansas does not want to be bound by one of the rules expressed in the AICPA Code of Professional Conduct. Can she avoid being subject to the policies and rules of this Code?
4. Does the AICPA Code apply to AICPA members who leave a private CPA firm to begin work in industry?
5. Is the AICPA's Code of Conduct applicable to accountants who are licensed outside the United States?
6. Do SEC financial reporting rules apply to companies that are not publicly traded?
7. “If accountants meticulously follow generally accepted accounting principles and generally accepted auditing standards, their souls will always ascend to the heavens.” Do you agree that following GAAP and GAAS is always the correct moral choice?
8. Most ethics codes require accountants to act in “the public interest.” Assume that a large, publicly traded automobile manufacturer prepares financial statements that require restatement due to a material error made by the company's accounting staff. What subcategories of “the public,” such as investors, were owed a duty of care by the company's accounting staff?

   General Ethics Issues

9. Is it ethical to use a company credit card to make an online Internet purchase if you will reimburse your employer?
10. When a successful plumber came to your home to perform a repair, he told you that his fee was $90 if you pay with a credit card or $85 if you pay with cash.
    1. Does this situation raise any ethical issues?
    2. Would it raise any ethical issues if the cash price had instead been $65?
11. A well-regarded accounting firm has a policy of giving a $1,000 commitment fee to brilliant freshman accounting majors if they agree to not interview with named competitor firms while they are still enrolled in school. Is this firm's policy ethical?

    Common Ethical Rationalizations

12. Our criminal laws usually impose lesser penalties for attempting a crime than for successfully completing a crime.
    1. Should a person convicted of the crime of Attempted Automobile Theft serve a shorter sentence in jail than someone convicted of Automobile Theft?
    2. If you answered yes to the preceding question, would your answer be the same if someone was convicted of Attempted Rape versus Rape?