Ethics for Financial Managers

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Copyright 2008

Ethics for Financial Managers

Version History: Version 1.0 January 2008

Ethics for Financial Managers

Introduction This course is divided into four lessons: Lesson 1: Introduction to Professional Ethics This lesson defines ethics and explore ethical standards for corporate financial managers and sources of ethical guidance for financial managers. Lesson 2: The AICPA Code of Professional Conduct This lesson explores ethical standards for corporate financial managers introducing the principles and rules of the AICPA Code of Professional Conduct. Lesson 3: Resolution of Ethical Conflict This lesson is based on the standards published for resolution of ethical conflict by the AICPA and the IMA. They are similar in most respects. The AICPA Code is rules based while the IMA Statement of Ethical Professional Practice is principles based and is much shorter. Lesson 4: Use of the CPA Designation & Other ethical Considerations This session discusses issues that determine whether an accountant is or is not in public practice, acts discreditable to the profession and gives participants the opportunity to analyze an ethical situation in a case format.

Ethics for Financial Managers 3

Table of Contents Lesson 1: INTRODUCTION TO PROFESSIONAL ETHICS 4 Lesson topics:

Introduction to Ethics Ethics Guidance for Financial Managers

Lesson 2: THE AICPA CODE OF PROFESSIONAL 14 CONDUCT Lesson topics:

Introduction to the AICPA Code of Professional Conduct Competence and Due Care Case

Lesson 3: RESOLUTION OF ETHICAL CONFLICT 26 Lesson topics:

Resolution of Ethical Conflict IMA Statement of Ethical Professional Practice Legal Options Case

Lesson 4: USE OF THE CPA DESIGNATION & OTHER 37 ETHICAL CONSIDERATIONS Lesson topics:

When Is A CPA In Public Practice? Acts Discreditable To the Profession Case


Lesson 1: INTRODUCTION TO PROFESSIONAL ETHICS This lesson focuses on the following topics:

Introduction to Ethics Ethics Guidance for Financial Managers

Introduction to Ethics

Ethics stays in the prefaces of the average business book. Peter Drucker

>>What are Ethics? The word ethics means:

“A system or code of morals of a particular philosopher, religion, group or profession.”

This definition of ethics explicitly acknowledges that different groups of people may have their own standards that are not necessarily universal or shared with other groups. Some ethical concepts are universal such as the Golden Rule: “Do unto others as you would have them do unto you.” This concept can be approached from two different vantage points. One might argue that it is nobler to put others before oneself, that is, treating others as you would want to be treated is a natural expression of caring. An alternate viewpoint is that a person should follow the golden rule out of enlightened self-interest. Under this theory, a person should be motivated to act in the best interest of others for the very practical reason that it will be in their own best interest. In the play Hamlet, Polonius gives this advice to his son Laertes as he departs for college in France: “This above all: to thine own self be true, And it must follow, as the night the day, Thou canst not then be false to any man.”

William Shakespeare (1564-1616) Hamlet, Act 1, Scene 3


In the final analysis, our profession could not exist if the vast majority of management accountants were not ethical. Company owners would not entrust their money to accountants if they could not be trusted and large or even medium-sized businesses could not exist in absence of the trusted management accountant. How would you rate yourself?

1. I am always ethical. 2. I am mostly ethical. 3. I am somewhat ethical. 4. I am seldom ethical. 5. I am never ethical.

According to John C. Maxwell in There’s No Such Thing as Business Ethics: “Most people think that being mostly ethical is fine - unless they are on the losing end of someone else’s lapse in ethics.” Maxwell then goes on to say that he believes that the only ethical standard that anyone needs is The Golden Rule. Some version of The Golden Rule exists in every culture:

• Buddhism “Hurt not others with that which pains yourself.”

• Christianity “Whatever you want men to do to you, do also to them.”

• Hinduism “This is the sum of duty; do naught unto others what you would not have them do unto you.”

• Islam “No one [email protected] you is a believer until he loves for his neighbor what he loves for himself.”

• Judaism “What is hateful to you, do not do to your fellow man. This is the entire Law; all the rest is commentary.”


In The 7 Habits of Highly Effective People, Stephen R. Covey provides a long list of universal ethical principles that include:

• Fairness

• Integrity and honesty

• Human dignity

• Service

• Quality and excellence

• Human growth

• Patience

• Nurturance

• Encouragement Many kinds of organizations have codes of ethical conduct. Christians and Jews have the Ten Commandments, Boy and Girl Scouts follow the Scout Law: The Boy Scout Law A Scout is:

• Trustworthy

• Loyal

• Helpful

• Friendly

• Courteous

• Kind

• Obedient

• Cheerful

• Thrifty

• Brave

• Clean

• Reverent


The Girl Scout Law I will do my best to be:

• Honest and fair

• Friendly and helpful

• Considerate and caring

• Courageous and strong

• Responsible for what I say and do. And to :

• Respect myself and others

• Respect authority

• Use resources wisely

• Make the world a better place.

• Be a sister to every girl scout.

>>Rotarians Have the 4-Way Test From the earliest days of the organization, Rotarians were concerned with promoting high ethical standards in their professional lives. One of the world's most widely printed and quoted statements of business ethics is The 4-Way Test, which was created in 1932 by Rotarian Herbert J. Taylor (who later served as Rotary International president) when he was asked to take charge of a company that was facing bankruptcy. This 24-word code of ethics for employees to follow in their business and professional lives became the guide for sales, production, advertising, and all relations with dealers and customers, and the survival of the company is credited to this simple philosophy. Adopted by Rotary in 1943, the 4-Way Test has been translated into more than a hundred languages and published in thousands of ways. It asks the following four questions:

1. "Of the things we think, say or do: is it the truth? 2. Is it fair to all concerned? 3. Will it build goodwill and better friendships? 4. Will it be beneficial to all concerned?”


>>Physicians Have the Hippocratic Oath (Modern Version approved by the American Medical Association) You do solemnly swear each by whatever he or she holds most sacred:

• That you will be loyal to the Profession of Medicine and just and generous to its members.

• That you will lead your lives and practice your art in uprightness and honor.

• That into whatsoever house you shall enter, it shall be for the good of the sick to the utmost of your power, your holding yourselves far aloof from wrong, from corruption, from the tempting of others to vice.

• That you will exercise your art solely for the cure of your patients, and will give no drug, perform no operation, for a criminal purpose, even if solicited, far less suggest it.

• That whatsoever you shall see or hear of the lives of men or women which is not fitting to be spoken, you will keep inviolably secret.

• These things do you swear. Let each bow the head in sign of acquiescence.

• And now, if you will be true to this, your oath, may prosperity and good repute be ever yours; the opposite, if you shall prove yourselves forsworn.

Girl Scouts pledge to be courageous and Boy Scouts pledge to be brave. These are values that we would not expect to see in an ethical code for accountants. Yet, it is courage and bravery that are required to make the correct ethical choice when faced with a decision to do the right thing or take the easy way out.

Ethics Guidance for Financial Managers

Failure seems to be regarded as the one unpardonable crime, success as the all-redeeming virtue, the acquisition of wealth as the single worthy aim of life. The hair-raising revelations of skullduggery and grand-scale thievery merely incite others to surpass by yet bolder outrages and more corrupt combinations.

- Charles Francis Adams (1807-1886) >>Sources of Ethical Guidance for Financial Managers One of the key factors that distinguish “professional” occupations from ordinary occupations is a code of ethical conduct for the profession. This module will concentrate on ethical standards for management accountants, CPAs, CAs, CMAs and other financial professionals who are not in public practice (sometimes referred to as “in industry”).


Many sources of ethical guidance exist for accountants today. These include accounting professional associations such as the American Institute of Public Accountants (AICPA), the Institute of Management Accountants (IMA), The Institute of Internal Auditors (IIA), the Financial Executives International (FEI) and various other associations such as state and provincial accounting societies. Some ethical guidelines for accountants have the force of law such as those promulgated by the U.S. Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS) and state boards of accountancy. The oldest and most influential set of ethical rules for accountants is the AICPA Code of Professional Conduct (hereafter the Code or the AICPA Code). Many state CPA societies have adopted the AICPA Code as their own by reference, not publishing separate standards. In Michigan, for example, the Michigan Association of CPAs (MAPCA) specifies that their association will adopt all of the AICPA rules except where the state association votes not to do so. The only exception that the MACPA has made to date is that the AICPA effective date for any rule will be deferred six months so that Michigan association members may have time to evaluate it before adoption. There is a distinct procedural difference in the manner in which ethical rules are developed in Canada and the United States. In Canada, while accounting standards are developed nationally, the various provincial associations of chartered accountants develop ethical rules independently. Since Ontario represents over 1/3 of Canada’s population, the Rules of Professional Conduct of the Institute of Chartered Accountants of Ontario (ICAO) are particularly influential. The principles section of the AICPA Code reads with vision and clarity reminiscent of Thomas Jefferson’s Declaration of Independence. The rules sections sink to the depths of bureaucratic jargon bearing a closer resemblance to the IRS Code. The AICPA Code was not just been written by a committee, but by many committees working in three different centuries. While this seminar will use the AICPA Code as its primary reference point, it will also draw from other accounting codes of professional conduct. Certain ethical standards are nearly universal in codes of conduct for accountants. These are:

• Competence

• Confidentiality

• Due Care (Often included as a part of Competence)

• Integrity

• Objectivity


In addition, when codes of conduct apply to financial professionals who are providing an attestation function, independence is also added to the list. This includes public practice accountants providing audit and review services as well as internal auditors in a corporation. Professional standards for public practice accountants who provide consulting services do not require them to be independent. For accountants in public practice, the issue of independence is key to the public’s perception that the accountant has been able to view the financial situation of their clients in an objective and unbiased manner. Because accountants who are not in public practice are involved in preparing their company’s financial statements and because they depend on their employers for their livelihood, it is accepted that they are not independent. Most seminars about ethics for accountants are designed for accountants in public practice and devote a large portion of their material to independence issues. Since independence is not an everyday concern for most management accountants, this seminar will concentrate on the other ethical standards. Because the AICPA Code has been so widely adopted, these standards have become the de facto standards for the entire accounting profession in the United States, even for accountants who are not licensed as CPAs. The AICPA Code is long and extensive. It is a living document that continues to be frequently amended. Many of the situations that are described in the code do not apply to CPAs who are not engaged in public practice; however, unless a particular portion of the Code specifically excludes management accountants, every section applies to all AICPA members. The AICPA Code reads very much like a legal code and is not light reading. One way to familiarize yourself with the AICPA Code would be to go to the AICPA web side and read the actual code itself. It may be found at www.aicpa.org/about/code. Other professional associations to which accountants may belong also have ethical standards. For example, the Institute of Management Accountants (IMA), which is the certifying body for the Certified Management Accountant (CMA) and Certified Financial Manager (CFM) designations, publishes its own Code of Ethics. The IMA’s Statement of Ethical Professional Practice is much shorter and is more readable than the AICPA Code, yet it includes similar principles. The IMA Statement will appear in its entirety in a later module of this seminar.


NORTH AMERICAN ACCOUNTING ORGANIZATIONS PROVIDING ETHICAL GUIDANCE FOR ACCOUNTANTS

Organization Professional Designation

Focus

American Institute of Certified Public Accountants (AICPA)

CPA Auditing, Financial Reporting

Institute of Management Accountants (IMA)

CMA Management Accounting

Canadian Institute of Chartered Accountants (CICA)

CA Auditing, Financial Reporting

CMA – Canada (CMA-C) CMA Management Accounting

Financial Executives International (FEI) None Corporate Finance Institute of Internal Auditors (IIA) CIA Internal Audit ISACA (Formerly the Information Systems Audit and Control Association)

CISA, CISM Information systems auditing and security

Various State and Provincial Accounting Societies

CPAs, CAs Auditing, Financial Reporting

NORTH AMERICAN REGULATORY FRAMEWORK FOR ACCOUNTANTS

AICPA Code of Professional Conduct, Statements on Auditing Standards, Standards for Tax Services, Statements on Standards for Consulting Services

CICA Accounting and auditing standards in Canada Courts Decisions affecting legal liability Financial Accounting Standards Board (FASB)

Financial Accounting Standards (FAS)

Independence Standards Board (ISB)

Independence Standards Board Standards and Interpretations

Ontario Securities Commission (OSC)

Regulations relating to financial disclosure relating to the Toronto Stock Exchange

Public Company Accounting Oversight Board (PCAOB)

Auditing Standards for public companies traded in the United States.

U.S. Securities & Exchange Commission (SEC)

Regulation and Codification of Financial Reporting Policies relating to companies raising funds in the U.S.

Provincial CA Societies Codes of Ethical Conduct


CASE >>Case - Enginuity Systems, LLC Dale Matheson, 37, was now in her 10th year as Corporate Controller of Enginuity Systems, LLC a company that manufactures electronic engine controls, primarily for the automotive industry. Enginuity was a 25-year-old privately held company that had grown to more than $180 million in sales with facilities in Buffalo, NY, Warren, MI, Lorain, OH and Windsor, Ontario. Matheson’s dilemma on this particular day related to a payment that the company received from an automobile manufacturer for a new engine control that Enginuity shipped from its Windsor plant. The remittance process was almost paperless. As goods were ready to ship, Enginuity transmitted an Advance Shipping Notice (ASN) to their customers to signal that the product was ready to be picked up by truck. Upon delivery to the plant, the customer’s receiving personnel would bar code scan the shipment. The customer’s computer would then match the products received with release and purchase order information to pay based on the “evaluated receipts.” After Enginuity received payment through an ACH (automated clearing house) transaction, they would access the customer’s vendor website to access the details of each remittance. That morning, the company had received their first payment on the new 172,500 unit/year contract. Donna Richardson, the Accounts Receivable supervisor, brought the remittance to Dale’s attention because the remittance was for about 20% more than Enginuity showed in their system. Putting the paperwork on the Controller’s desk, Richardson said, “As best I can figure, they paid us in $82 US per unit for something that we quoted $82 Canadian.” >>Discussion of Case #1- Enginuity Systems, LLC The first thing to do in almost every ethics situation is to investigate the facts. Donna could be mistaken about the situation. Dale should investigate the facts. What is the price on the company’s quote to the customer and what does the purchase order from the customer say? Did the customer really make a mistake? There is a lot of money involved here. ($82 CAD /unit x 20% x 172,500 units * $1 US/$1.2 CAD = $2,357,500 US or about $2,825,000 CAD per year). According to John C. Maxwell, the author of There’s No Such Thing as “Business” Ethics, says there is only one principle that we ever need to apply: “The Golden Rule” (Do unto others what you would have them do unto you). Applying that principle, we know that the right thing to do is to alert the customer and give the excess back.


Taking this high road could be a very hard thing to do for a cash-strapped auto supplier that might be struggling for survival. The temptation is likely to be high to just ignore the customer’s mistake and enjoy the windfall. This might be justified by past wrongs that the customer may have done to the company. (And some automakers have done plenty of nasty things to their suppliers). What would be the worst-case scenario if Enginuity Systems kept the money? Besides serious damage that could happen to the customer relationship if the customer ever figured out what happened, the company could spend a year or more of the windfall and then have the customer suddenly demand that the overpayment all be returned at once. Today’s windfall could create a fatal cash flow problem sometime down the road. If there really is an error, the right thing to do is to alert the customer to the error and pay back the excess. This concludes Lesson 1.


Lesson 2:

THE AICPA CODE OF PROFESSIONAL CONDUCT This lesson focuses on the following topics:

Introduction to the AICPA Code of Professional Conduct Competence and Due Care Case

Introduction to the AICPA Code of Professional Conduct The AICPA Code of Professional Conduct has continually evolved since it was introduced over 100 years ago. A visit to the ethics portion of the AICPA web site gives insight into this heritage revealing dozens of deleted paragraphs and an odd numbering scheme that is the result of continual reworking. The Code is broken up into two major parts: Principles and Rules. The Principles are relatively short, comprised of 23 paragraphs that are organized into 6 articles. The Rules are voluminous, comprised of five major sections. The Principles provide the framework for the Rules. >>Principles The Principles of the Code are aspirational and are not enforceable by themselves. Here is a summary of the key points of the Principles of the Code: 1. Preamble Notes that membership in the AICPA is voluntary and that “by accepting membership, a CPA assumes an obligation of self-discipline above and beyond the requirements of the law.” AICPA members accept an unswerving commitment to ethical behavior in their responsibilities to the public, to clients and to colleagues. 2. Responsibilities “In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities.” CPAs perform an essential role in society. Consistent with that role, members have a continuing responsibility to improve the art of accounting, maintain public confidence and be self-governing as a profession. 3. 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 general, prevailing professional ethics prioritize the stakeholders affected by the accounting profession in this order:

• The Public

• The Profession

• The Client/Employer

• The Professional (self) Ethical rules however are not always consistent with the order listed in these principles. For example, for CPAs in public practice, keeping the confidentiality of client information may take precedent over acting in the public interest when the client has performed an illegal act. 4. Integrity “To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.” Integrity is the quality or state of having sound moral principles, honesty, and sincerity. Many people who think that they have high moral principles would be surprised to find that their co-workers do not hold them in high regard. Integrity involves more than just telling the truth. A person will not be trusted unless they are honest, candid and reliable. Candor involves sharing information that affects other people’s lives. Lastly, integrity involves one more element, the courage to do the right thing when faced with a difficult choice. Many people have good intentions. They plan to lead a life of integrity, but those plans go astray when faced with hard choices. There can be no integrity without the courage to do the right thing. 5. 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 is a state of mind that lends value to professional services. Although members not in public practice cannot maintain the appearance of independence, they remain responsible for maintaining objectivity in providing services to their employer. Bias is an ever-present threat to the objectivity of the decisions of financial professionals who have a responsibility to safeguard the interests of their employer. Objectivity can be tested by putting yourself in the position of the other party; the customer, vendor, peer or team member whom the decision affects. A decision that appears fair from every vantage point is probably a good decision.


6. 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.” This standard requires that members perform their work with competence and diligence, imposing an obligation to maintain and improve professional skills. In some ethical codes for accountants, due care is merged with competence. 7. 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.” Services provided by certified public accountants must be consistent with acceptable professional behavior and must not violate the public trust for personal gain. The public accounting profession is defined as including auditing and accounting, tax and consulting. Accordingly, someone who is licensed as a CPA but who does not perform one of these services would not be considered to be a CPA in public practice. Additionally, someone who is licensed as a CPA who acts as an employee of a company that is not organized as a CPA firm would not be considered to be in public practice. For example, a CPA who worked for a tax preparation firm such as H&R Block or the consulting firm Accenture, LLC would not be considered to be in public practice. >>Rules The Rules of the AICPA Code are voluminous and are broken up into these major sections:

• 100 Independence, Integrity, and Objectivity

• 200 General Standards and Accounting Principles

• 300 Responsibilities to Clients

• 400 Responsibilities to Colleagues

• 500 Other Responsibilities and Practices Some of these rules will be further discussed in this module or other modules in this series of one-hour seminars. >>Is Financial Management a “Professional” Profession? Corporate financial managers undoubtedly like to think of themselves as belonging to a “professional” profession. However, we should examine by what criteria this claim could be made. The following is excerpted from the Rules of Professional Conduct of the Nova Scotia Institute of Chartered Accountants:


“The rules of professional conduct presume the existence of a profession. Since the word “profession” has lost some of its earlier precision, through widespread application, it is worthwhile reviewing the characteristics that mark a calling as professional in the traditional sense. Much has been written on the subject and court cases have revolved around it. The weight of the authorities, however, identifies the following distinguishing elements:

1. There is mastery by the practitioners of a particular intellectual skill, acquired by lengthy training and education.

2. The foundation of the calling rests in public practice - the application of the acquired skill to the affairs of others for a fee.

3. The calling centers on the provision of personal services rather than entrepreneurial dealing in goods.

4. There is an outlook, in the practice of the calling, which is essentially objective.

5. There is acceptance by the practitioners of a responsibility to subordinate personal interests to those of the public good.

6. There exists a developed and independent society or institute, comprising the members of the calling, which sets and maintains standards of qualification, attests to the competence of the individual practitioner and safeguards and develops the skills and standards of the calling.

7. There is a specialized code of ethical conduct, laid down and enforced by that society or institute, designed principally for the protection of the public.

8. There is a belief, on the part of those engaged in the calling, in the virtue of interchange of views, and in a duty to contribute to the development of their calling, adding to its knowledge and sharing advances in knowledge and technique with their fellow members.

By these criteria chartered accountancy is a profession.” By this definition, it would be debatable whether corporate financial management is a “professional” profession since the profession has trouble passing 3 of the eight criteria listed above:

1. Corporate financial managers do not meet the second test of offering a service to the public for a fee.

2. Not all corporate financial managers meet the sixth criteria of governance by an independent society or institute.

3. Some professional standards for the behavior of corporate financial managers do not mention acting in the public interest or make it secondary to the interests of the employer.


The Nova Scotia Rules of Professional Conduct addresses this issue: “It is essential to recognize that a profession does not cease to be a profession because a proportion of its members enter salaried private employment. These members continue to belong to the profession and to be subject to the rules of professional conduct.” >>Comparing Various Codes of Conduct Contrasting the AICPA and other standards of professional conduct for financial managers, there are several key differences:

1. The AICPA code and the codes of the various Canadian Institutes of Chartered Accountants list serving the public, as their first basic principle. Prior to 2005 the preamble to the IMA ethical standards specifically listed the affected stakeholders of management accounting to be the public, the profession, the company, and the professional, in that order. However the 2005 revision to the IMA Statement of Ethical Professional Practice omits a discussion of stakeholders. The Code of Ethics of the Institute of Internal Auditors (IIA) omits any discussion of stakeholders at all and the Financial Executive’s International (FEI) lists employers first and the public second. While the FEI does not specify that the stakeholders are listed by priority, their choice of order would imply that “for the general good of society” might be less important to corporate financial managers than those in public practice.

2. Standards of confidentiality can easily conflict with the most basic principle of acting in the public interest. AICPA members are allowed, although are not necessarily encouraged, to report the illegal acts of their employers to law enforcement officials. Generally, members in public practice may not report the illegal acts of their clients. However, an accepted practice that is evolving as a result of the “Accounting Crisis of 2002” is that the outside auditors may effectively protect outside stakeholders by making a noisy withdrawal.

3. In the course of one’s work, an accountant may become aware of illegal acts performed by an employer or client that is not in the best interest of society as a whole. For example, it would not be uncommon for a financial manager to be aware that the owner of the company was cheating on their income taxes or that the company had discharged toxic wastes into a municipal storm sewer. The public may be better served if the accountant reveals this confidential information. There has been increasing thought that accountants should be allowed, or perhaps even be required, to report the illegal acts of their clients. For example, Michigan Law (PA 278) contains the following wording that specifically allows CPAs in public practice to disclose confidential information to law enforcement agencies:


“Subsection (1) does not prohibit any of the following: (c) A licensee, or a person employed by a licensee, from disclosing information otherwise privileged and confidential to appropriate law enforcement or governmental agencies when the licensee, or person employed by the licensee, has knowledge that forms a reasonable basis to believe that a client has committed a violation of federal or state law or a local governmental ordinance.” Money-laundering laws in both the U.S. and Canada require accountants to report certain kinds of suspicious transactions to the federal government. The AICPA Code of Professional Conduct allows members to follow state standards when they differ from their own rules. Interestingly, while it may be against AICPA rules for a member in public practice to reveal confidential information, the same does not hold true for corporate financial managers. In the United States, in response to an inquiry, the AICPA Ethics Division Staff ruled that it would not be a violation for an accountant in industry to report his employer for illegal acts. Conversely, it should be noted, that the rules of the AICPA Code provide no encouragement for a CPA/ Management Accountant to disclose confidential information that would be in the public interest.

4. IMA members may only report the illegal acts of their employers when the law has clearly been broken, a standard that may be interpreted as meaning that there is nearly a 100% certainty that there has been a violation of the law. This standard has drawn criticism as providing management accountants the opportunity to look the other way when an accountant believes that their employer has probably (greater than 50% chance) acted illegally.

The principle of acting in the public interest and the principle of maintaining client or employer confidentiality are inherently in conflict. Standards in this area are likely to continue to evolve with the likely result that there will be an increased expectation that accountants will “blow the whistle” when an accountant knows of illegal or unethical acts. >>Ethics Enforcement Many state CPA associations adopt the AICPA Code of Professional Conduct as their own. The codes of ethical conduct for most other states have similar or identical ethical provisions. For this reason, most state CPA associations participate with the AICPA in a Joint Ethics Enforcement Program (JEEP) under which enforcement of these various codes of professional conduct may be accomplished by a single investigation and, if warranted, a single settlement or a single joint trial board hearing. As a result, someone who is accused of violating the profession’s ethical standards will not face both an investigation by their state accounting association and the AICPA. Usually, an ethics investigation will be conducted by the state ethics committee, which will also act for the AICPA. In


certain cases, such as those that have drawn national interest or where ethics violations in multiple states are involved, the AICPA may conduct the ethics investigation, acting for the state association as well.

Competence and Due Care >>Competence Rules of professional competence specify that accountants undertake only those tasks that they can reasonably expect to complete with professional competence. This does not mean that the accountant must have all of the requisite skills prior to accepting the assignment. Particularly in a small company, an accountant may be assigned a task simply because they are the person within the company that has the skills that best match the assignment. This does not mean that their existing skills will always be adequate. Accountants may gain the required knowledge by reading, taking continuing professional education seminars, conferring with others, or by hiring skills that are available outside of the company. An accountant accepting an assignment does not assume the responsibility for infallibility of knowledge or judgment. A professional is expected to have at least the degree of skill commonly possessed by others practicing the profession. Here is the legal requirement for professional competence from Cooley on Torts: ”Every man who offers his services to another and is employed assumes the duty to exercise in the employment such skill as he possesses with reasonable care and diligence. In all those employments where peculiar skill is requisite, if one offers his services, he is understood as holding himself out to the public as possessing the degree of skill commonly possessed by others in the same employment, and if his pretensions are unfounded, he commits a species of fraud upon every man who employs him in reliance on his public profession. But no man, whether skilled or unskilled, undertakes that the task he assumes shall be performed successfully, and without fault or error; he undertakes for good faith and integrity, but not for infallibility, and he is liable to his employer for negligence, bad faith, or dishonesty, but not for losses consequent upon mere errors of judgment.” While a professional is normally expected only to have the level of skills commonly possessed by others in the profession, a CPA may be held to a higher standard of competence if they hold themselves to be an expert in a particular area. In most states and provinces CPAs and Chartered Accountants now have a continuing professional education requirement. (Sometimes government licensing boards set the requirement, at other times professional associations set the requirement). Forty hours of continuing professional education per year is


fairly standard, although in many places the requirements are stated in terms of a multi-year total. Beyond that, further continuing professional education requirements vary widely. Many states report continuing professional education in a calendar year while some report as of June 30th, September 30th or another month-end. The reporting year for CMAs in the United States is June 30th. In some states, the reporting year for each CPA falls in the month of your birthday. The practice of birth month reporting seems to be counter-productive as it makes it more difficult to economically justify holding a seminar since there is no “busy season” during which high attendance is likely preceding a reporting deadline. CPAs and CAs who are not in public practice may be registered rather than licensed and may not have any CPE requirement at all. An increasing number of states require ethics education and accounting and auditing CPE requirements are common as well. Tax practitioners may have different requirements from those offering attestation services. A list follows of CPE requirements for ethics education for all 50 states: Ethics CPE Requirements by State* STATE CPE

Require-ment

STATE CPE Require-ment

STATE CPE Require-ment

Alaska None Kentucky None North Dakota None Alabama None Louisiana # 4 hrs/3 yrs Ohio # 3hrs/3yrs Arizona # 4 hrs/3 yrs Maine 4 hrs/3yrs Oklahoma 2 hrs/yr Arkansas 4hrs/3 yrs Maryland None Oregon # 4 hrs/4 yrs California 8 hrs/6 yrs Mass. 4 hrs/2yrs Penn. None Colorado 2 hrs/2 yrs Michigan 4 hrs/2 yrs Rhode Island 6 hrs/3 yrs Conn. 4 hrs/3 yrs Minnesota 8hrs/3yrs S. Carolina None Delaware # 4hrs/2 yrs Mississippi # 3 hrs/3 yrs S. Dakota None Dist. of Col. None Missouri 2 hrs/3yrs Tennessee 4 hrs/2 yrs Florida # 4hrs/2 yrs Montana 2 hrs/3 yrs Texas # 4 hrs/2 yrs Georgia None Nebraska 4 hrs/2 yrs Utah None Hawaii 4 hrs/2 yrs Nevada None Vermont # 4 hrs/2 yrs Idaho None New Hamp. 4 hrs/3 yrs Virginia # 6 hrs/3 yrs Illinois 4 hrs/3 yrs New Jersey

# 4 hrs/3yrs Wash. # 4 hrs/3 yrs

Indiana 2 hrs/3 yrs New Mexico None West Virginia None Iowa 4 hrs/3 yrs New York # 4 hrs/3 yrs Wisconsin None Kansas 2 hrs/2 yrs N. Carolina 2 hrs/yr Wyoming # 2 hrs/3 yrs * Original Source www.reqwired.com, as of 6/30/05, many states have been subsequently modified for changes in their requirements # Requirement includes specialized study of that state’s rules.


>>Adherence to Accounting Principles Associated with competence is an ethical requirement that accountants adhere to the current prevailing standards agreed upon by the profession’s various standards boards. These include the Financial Accounting Standards Board (FASB), the Government Accounting Standards Board (GASB), and the Federal Accounting Standards Advisory Board (FASAB). Together, the principles established by these boards constitute Generally Accepted Accounting Principles or GAAP. Gary Grigowski, Vice President of Team One Plastics, Inc. in Albion, Michigan has coined a phrase to describe accounting principles that are not generally accepted. His term, RAAP, refers to Rarely Accepted Accounting Principles. There is a strong presumption that adherence to GAAP will result in financial statements that are not misleading and that any financial statement that is produced by a competent accountant has been produced in conformity with GAAP. Since published financial standards cannot possibly foresee every possible situation, there may occasionally be a time when an accountant may be required to use accounting principles that are not generally accepted in order to produce financial statements that are not misleading. In the rare situation that following generally accepted principles would cause a financial statement to be materially misleading, the accountant should disclose the nature of the departure from GAAP, its approximate effects (if practical), and the reasons why compliance with the principle would result in a misleading financial statement. >>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.”

-AICPA Code, Section 50, Article V Due professional care is really a quality standard for the accounting profession. It means that the accountant will seek to be adequately prepared and reasonably diligent. While due care receives a prominent place in the Principles section of the AICPA Code, it is grouped with General and Technical Standards in the Rules section. Interestingly, in some compilations of accounting ethics, Due Care is listed as a competence issue (such as in the AICPA and IMA ethics standards) while in others it is grouped with Integrity, such as in the Rules of Professional Conduct for the Institute of Chartered Accountants of Ontario.


Case >>Case - Barbara Remington (Part 1 - Her Perspective) Barbara Remington, CPA couldn’t believe it when her alarm clock rang at 6:30 AM on a Friday morning. When her old college roommate from Western Michigan University had announced that the bachelorette party for their former suite-mate would be on a Thursday night, Barbara immediately asked for and was given Friday off. She was definitely hung over. Barbara normally limited herself to 2 drinks, but in the atmosphere of the party, she had consumed at least triple that. If everything had gone as planned, she would have been able to sleep in, but only two weeks before she realized that she was 24 hours behind in getting the 80 hours of continuing professional education she would need to renew her CPA license for the following two-year cycle. Being in the corporate world now, Barbara wasn’t required to be licensed, but it was something that she wanted to have, “just in case.” On this particular Friday, she was scheduled to take the four hours of professional ethics required in by the Michigan Board of accountancy to renew her license. There were only ten days left before the end of the reporting period and there were not many seminars scheduled in the Grand Rapids area. As she looked at the clock, she said to herself “I have to go.” At 7:50 AM after a cold shower, two cups of coffee and a half hour drive, Barbara slipped into a comfortable chair near the back of the seminar room and closed her eyes, her head still throbbing. Frankly, she didn’t know if the speaker was any good or not as she sat with her eyes closes, drifting in and out of consciousness. All that she could think was “I hope that I make it to the morning break.” When the other participants got up for the morning break at 10:00 AM, she thought “I can’t make it another two hours”. I’ve got to go home and get some real sleep. In front of her was the card that she was supposed to turn in the discussion leader to document her attendance >>Case - Barbard Remington (Part 2 - His Perspective) John Daly surveyed the room at the Western Michigan University Beltline Conference Center in Grand Rapids, Michigan. At 7:50 AM, participants were still trickling in for Daly’s presentation of Ethics for Financial Managers, a seminar that he had created a few months before in response to a new requirement of the Michigan Board of Accountancy that every CPA in the state of Michigan earn 4 hours of ethics continuing professional education credit every two years. In creating this seminar, his objective had been to create the ethics seminar against which all others would be measured which he believed could be achieved by using the case method to create lively discussions about real life ethical situations.


The room, a small amphitheater with tiered seating was one of Daly’s favorite seminars rooms in the whole country. As he looked about, he noticed one woman had settled into a seat near the back of the room and seemed to be asleep. “She’ll wake up when class starts,” he thought confidently. After all, while he had occasionally seen a participant close their eyes, in hundreds of seminars he had never actually had a participant fall fast asleep. She opened her eyes briefly when the seminar began but then soon closed them again despite the lively discussion going on around her relating to the topic. She stirred again at the break halfway through the morning and when Daly came back from getting a fresh cup of coffee, he saw a participant card lying on top of his instructor’s manual claiming 4 hours of CPE credit. Looking up at the back row he saw that the sleeping participant had left, leaving only her name tent. >>Suggested Solution Continuing professional education is required of CPAs under the principles and rules relating to competence. The rules of the National Association of State Boards of Accountancy (NASBA) further specify that an hour of continuing professional education consists of 50 minutes of attendance at a seminar those rules specify that CPE credits are awarded according to the actual number of 50 minute hours that a participant is actually present at the seminar, but may be awarded in ½ hour increments after 75 minutes of attendance. According to this definition of CPE credits, any participant who arrives late or leaves early should deduct at least ½ credit hour for the time that they missed. Attendance rules for live seminars involve physical presence at the seminar site, but make no provisions that a CPE must be mentally in attendance unlike self-study or web-based seminars which may require tests or survey questions. Ethically, Barbara did not participant in the learning experience in any meaningful way and it could be argued that she should not claim any CPE for sleeping through the half of the seminar. However, since she was present at the seminar for 120 minutes, she would not be in violation of the profession’s rules by claiming 2 hours of CPE. Since Barbara left the seminar early, she remained two hours short of the two hours of ethics CPE required in her state. She could have completed the remaining two hours by taking an on-line self-study seminar or traveling to a different city. By claiming 2 hours of CPE for which she was not entitled, Barbara also violated the profession’s standards of integrity. The seminar sponsor is responsible for having procedures to document how many hours each participant actually attends and in many cases it is the seminar discussion leader who is responsible for reporting attendance. Most seminar discussion leaders will ignore minor shortages in minutes of seminar attendance. However, participants who flagrantly violate the rules should expect to have the


seminar discussion leader record the difference between their actual hours and their claimed hours on the attendance card. This concludes Lesson 2.


Lesson 3: RESOLUTION OF ETHICAL CONFLICT This lesson focuses on the following topics:

Resolution of Ethical Conflict IMA Statement of Ethical Professional Practice Legal Options Case

Resolution of Ethical Conflict The standards published for resolution of ethical conflict by the AICPA and the Institute of Management Accountants (IMA) are similar in most respects. The AICPA Code is rules based while the IMA Statement of Ethical Professional Practice is principles based and is therefore much shorter. Read the entire IMA Statement of Ethical Professional Practice which follows, paying particular attention to the last section: Resolution of Ethical Conflict.

IMA Statement of Ethical Professional Practice Members of IMA shall behave ethically. A commitment to ethical professional practice includes: overarching principles that express our values, and standards that guide our conduct. >>Principles IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility. Members shall act in accordance with these principles and shall encourage others within their organizations to adhere to them. >>Standards A member’s failure to comply with the following standards may result in disciplinary action. >>Competence Each member has a responsibility to:

• Maintain an appropriate level of professional expertise by continually developing knowledge and skills.

• Perform professional duties in accordance with relevant laws, regulations, and technical standards.


• Provide decision support information and recommendations that are accurate, clear, concise, and timely.

• Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

Confidentiality Each member has a responsibility to:

• Keep information confidential except when disclosure is authorized or legally required.

• Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates’ activities to ensure compliance.

• Refrain from using confidential information for unethical or illegal advantage.

Integrity Each member has a responsibility to:

• Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.

• Refrain from engaging in any conduct that would prejudice carrying out duties ethically.

• Abstain from engaging in or supporting any activity that might discredit the profession.

Credibility Each member has a responsibility to:

• Communicate information fairly and objectively.

• Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.

• Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.


>>Resolution of Ethical Conflict In applying the Standards of Ethical Professional Practice, you may encounter problems identifying unethical behavior or resolving an ethical conflict. When faced with ethical issues, you should follow your organization’s established policies on the resolution of such conflict. If these policies do not resolve the ethical conflict, you should consider the following courses of action:

1. Discuss the issue with your immediate supervisor except when it appears that the supervisor is involved. In that case, present the issue to the next level. If you cannot achieve a satisfactory resolution, submit the issue to the next management level. If your immediate superior is the chief executive officer or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with your superior’s knowledge, assuming he or she is not involved. Communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate, unless you believe there is a clear violation of the law.

2. Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics Counselor or other impartial advisor to obtain a better understanding of possible courses of action.

3. Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

The pre-2005 version of the IMA code of ethics listed the following priority of stakeholders:

1. public 2. profession 3. employer 4. individual member

This priority was nearly identical to that of the AICPA, differing only that the AICPA principles list the third point as client/employer. In the post-2005 version of the IMA code, any mention of a priority of stakeholders is completely missing. Since acting in the public interest is one of the chief criteria for being a “professional” profession, we wonder why the IMA left out any discussion of stakeholders in their current Statement of Professional Practice.


Most codes of conduct for accountants give this procedure for resolving ethical conflicts:

1. Take the conflict up the chain of command, starting first with your boss. If your boss is involved, you may leap-frog your boss and talk to your bosses boss going as high as the board of director’s audit committee if necessary to resolve an ethical conflict.

2. In the process of attempting to resolve a conflict, accountants are advised that they might want to talk with their lawyer.

3. If the professional is not able to resolve the ethical conflict, they may consider resigning although sometimes the option of reporting the employer to legal authorities is given as an option.

One major difference between the IMA and AICPA codes of conduct relates to employees reporting the illegal acts of their employers. AICPA members are allowed, but not necessarily encouraged, to report their employer to legal authorities when it appears that the employer has broken the law. AICPA members must do one or the other. This position is consistent with the responsibility of accounting professionals under the AICPA Code to put the interests of the public first. The IMA statement however says that an accountant should only report their employer to legal authorities when “there is a clear violation of the law.” This verbiage raises the issue of what the word “clear” means. Certainly “clear” means something greater than 50% certainty. Probably something more than 90% certainty and most people would say that “clear” means something is excess of 98% sure that something unethical has occurred. A problem with this wording is that when an accountant first encounters something that doesn’t look quite right, the facts are not usually clear. The truth can usually only be determined by further investigation. This wording appears to encourage management accountants to look the other way when they think that their employer might be violating the law. After all, why look for trouble that you expect is there only to be faced with the onerous task of looking for another job or turning your employer in to the government. Accountants subject to this code of conduct may be motivated to take the “Sergeant Schultz” approach, named after the German prisoner of war camp guard in the TV series Hogan’s Heroes who declared “I know nothing!” whenever he observed the suspicious activities of Colonel Hogan and his men. Earlier versions of the IMA Statement said that if the ethical issue is not resolved that the management account was expected to resign. This 2005 revision includes no such language and it is unclear what an IMA member is expected to do if the ethical conflict is not resolved. AICPA members faced with an ethical conflict have no option to look the other way. An AICPA members options are:


1. Get the ethical conflict resolved 2. Report their employer to legal authorities or 3. Resign or report illegal activity to legal authorities

When an employer has committed illegal or unethical acts, a financial manager may be advised by their attorney to keep what they know confidential to avoid the risk that they might be sued. Such an action will usually be in conflict with the basic professional principle of acting in the public interest. The best way to meet the dual objectives of acting in the public interest and minimizing personal liability is generally considered to be a “noisy withdrawal” in which the accountant informs affected parties that they are leaving the company and that they “do not want to be associated with the financial statements” of their former employer. Since protecting the public interest is an AICPA principle (and therefore unenforceable), an AICPA member is not required to look after the public interest upon resigning. However, if we examine the right thing to do, it would usually include some action that would warn or help protect innocent parties. An accountant who is subject to an ethical dilemma should seek advice from other professionals. Many state accounting associations provide this service to their members. Other resources are the AICPA Ethics Hotline (1-888-777-7077 or [email protected]) or the IMA Ethics Hotline (1-800-638-4427 Ext. 1662 or by e-mail at [email protected]). A financial manager does not need to be a member of the IMA to use this service.

Legal Options >>The Sarbanes - Oxley Act The “Accounting Crisis of 2002" caused uproar among the American public. Particularly galling was a statement made by Jeffrey Skillings, a Harvard MBA and CFO (and CEO) of Enron that he was “not an accountant” and was thus ignorant of the improprieties in his company’s financial records. Public outrage has caused legislation requiring increased accountability of accounting professionals. The most prominent new legislation affecting management accountants is the Sarbanes-Oxley Act. This law requires that the CEO and CFO of each SEC registered company prepare a statement to accompany the audit report to certify the "appropriateness of the financial statements and disclosures contained in the periodic report, and that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issuer." Under this law the CEO and CFO have a personal liability to investors if they knowingly and intentionally certify false financial statements.


There are many other provisions of Sarbanes-Oxley that effect publicly traded companies. Under the law, companies must disclose whether or not they have a code of professional conduct. It is certain that every company that is subject to this law will develop such a code rather than tell investors that they have none. This legislation also prevents public companies from making loans to their executives. The SEC may prevent anyone who has violated this law from ever acting as an officer of a publicly traded company and may require bonuses or gains from the sale of stock to be forfeited if financial statements must be restated. Interestingly, this act specifically extends the provisions of the Whistleblower Protection Act to employees of accounting firms. While AICPA standards currently require individual CPAs to keep their client’s wrongdoings confidential, this legislation may open the door to it becoming accepted practice for individual auditors to reveal their client’s illegal acts to law enforcement authorities or even to the public in general. Any CPA who is an officer of a publicly traded company should take a separate seminar that is specifically geared to their legal responsibilities under this and other legislation. It is inevitable that many of these new standards for publicly traded companies will eventually apply to private companies as well. >>The False Claims Act “There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government.”

Benjamin Franklin The False Claims Act dates back to the U.S. Civil War when unscrupulous manufacturers tried and often succeeded in defrauding the federal government in supplying the Union army. Under the original 1863 act, whistleblowers who exposed contractors who overcharged the government could sue their employers and recover 10% of the amount recovered. A fault in this legislation was that federal prosecutors had the option of removing private plaintiffs, leaving the whistleblower without compensation. Since the most likely whistle-blowers were employees of the contractors themselves, fear of losing their jobs, and ostracism by co-workers or potentially their entire community made prosecution under the act rare. Such laws are often called Qui Tam provisions from the Latin phrase“Que tam pro domino rege quam pro se ipso” or in English “Who sues on behalf of the King, as well as for himself." Lawyers today refer to the whistle-blower as a “qui tam relator” or simply the “relator”.


The False Claims Act was amended in 1943, but it gained real teeth in 1986, during the Reagan administration amid widespread abuse by government contractors. The 1986 amendments to the act include a provision for treble damages and enlarging the relator’s share of funds recovered to 15-25% (where the government participates in the litigation) or 25-30% (where the government declines to participate) in addition to attorney fees. Recently about 400 Qui Tam suits have been prosecuted each year, netting the United States Treasury roughly $300 million per year. The False Claims Act also provides protection for any employee who is a whistle-blower under the act. Today, the False Claims Act is the single most successful tool in the government’s fight against fraud by businesses. While the law and the 1986 amendments originally targeted defense contractors, Medicare fraud perpetrated by the health care industry makes up the largest portion of False Claims Act litigation today.

>>Reporting Other Illegal Acts CPAs and Chartered Accountants may also have a legal obligation under other legislation to report illegal acts of their clients or employers. In Canada, CAs are obligated to report suspicious cash transactions, often referred to as money laundering activities. Regulations exist in the United States as well for cash transactions over $10,000. Accountants who believe that their clients/employers are engaged in illegal activities should consult with their attorneys.

>>The Whistleblowers “What I really failed to grasp was the seriousness of the emperor-has-no-clothes phenomenon. I thought leaders were made in moments of crisis, and I naively thought that I would be handing [Enron chairman] Ken Lay his leadership moment. I honestly thought people would step up. But I said he was naked, and when he turned to the ministers around him, they said they were sure he was fully clothed.”

Sherron Watkins, Enron Vice President Hero Accountant and Time Magazine’s 2002 Person of the Year Two heroes emerged amid the Accounting Crisis of 2002; Cynthia Cooper, Vice President of Internal Audit at WorldCom and Sherron Watkins, Vice President at Enron who along with Coleen Rowley at the FBI were named as Time Magazine’s Persons of the Year. According to Time: “These women were for the 12 months just ending what New York City fire fighters were in 2001: heroes at the scene, anointed by circumstance. They were people who did right just by doing their jobs rightly – which means ferociously, with eyes open and with the bravery the rest of us always hope we have and may never know if we do. Their lives may not have been at stake, but Watkins,


Rowley and Cooper put pretty much everything else on the line. Their jobs, their health, their privacy, their sanity – they risked all of them to bring us badly needed word of trouble inside crucial institutions. Democratic capitalism requires that people trust in the integrity of public and private institutions alike. As whistle-blowers, these three became fail-safe systems that did not fail. For believing – really believing – that the truth is one thing that must not be moved off the books, and for stepping in to make sure that it wasn’t, they have been chosen by Time as Persons of the Year for 2002." The integrity of business depends on the integrity of its accountants. Accountants will be tested many times in their professional lives. Some will overlook “little” breeches of what is honest and right, overlooking progressively larger offenses to truth and integrity until eventually even a large lie seems justifiable to protect our past indiscretions and those of the managers around us. Dishonest behavior by a management team sends a message loud and clear to other people in the company. That message is “Steal from me, it is O.K. to get away with anything you can take.” An orderly society depends on its members being able to depend on each other. It depends on truth, honesty, integrity and candor. The same is true of the micro-society that exists within each company. Someone needs to be the conscience of business and it is a role that accountants should step up to fill. >>Becoming a Whistleblower In the United States there are no less than 14 Federal laws providing protection to whistleblowers. Many states have whistleblower protection laws as well, but many do not. While there is considerable whistleblower legislation, the protection that it provides is not necessarily comprehensive or in many cases adequate. For example, there is often little whistleblower protection if your employer is a state or local government. Protection for reporting federal tax fraud is particularly weak. For example, in May 2006, the U.S. Supreme Court ruled by a 5-4 margin that the government’s interest in effectively managing operations outweighs the interests that protect employee speech, even in cases where government employees may be reporting inefficiencies or wrongdoing. The Boston Globe noted in an article earlier the same month: “On several occasions, Bush contented he could nullify laws creating “whistle-blower” job protections for federal employees that would stop any attempt to fire them as punishment for telling a member of Congress about possible government wrongdoing.” In addition to laws protecting whistleblower often being weak, the amount of time available for a whistleblower to assert a claim against their employer is often surprisingly short.


Since whistleblower protection laws are a complicated area of the law, anyone considering becoming a whistleblower should immediately consult with a law firm specializing in whistleblower protection cases.

Case >>Case- Marianne Bose Working in the corporate world was far different than being an auditor for a “Big Four” accounting firm. Marianne Bose, 27, liked the challenges of her new job as controller of a medium-size, single office law firm, Miller, Kaiser & Garr, located in a mid-western city. She had gotten the job some six weeks earlier through an advertisement that she responded to in the Sunday newspaper. The firm specialized in doing work for city and county government agencies that included contracts, zoning issues, labor negotiations and defense work when citizens or employees sued a governmental entity. It was a good stable law practice that allowed the partners to enjoy an affluent life-style. The firm’s revenue for the previous year had been $14 million dollars. Like many law firms, the workload for new associates was high. Each year the company hired a half dozen to a dozen new lawyers from well-known regional law schools and expected them to bill at least 50 hours a week. Turnover in the first five years was high, but once someone reached the five year mark, they hardly ever left until retirement. Since the new lawyers were expected to work 50 hours a week, Bose decided that it would be a good idea for her to do that as well, at least initially. Since she had often worked 60 hours or more as an auditor during busy season, 50 hours was not going to be such a big deal. Besides, there was a lot to learn in her early days on the job and having time outside of normal business hours allowed her to concentrate on specific tasks without interruption. One Saturday morning, Bose decided that it was time to learn all about the firm’s computerized time reporting system. The software was similar to the time reporting package that her accounting firm had used to track billable hours and was also very similar to the job costing software that she had seen at a manufacturing client. In the law firm software, a job was called a case. This terminology was used even if the firm just did a lot of small, miscellaneous work for a client that was all billed under the same semi-permanent case number. Setting up new clients or adding new cases was done by the administrative assistant to managing partner, John Garr. Once a case was set-up, an attorney could use their password to log into the system and enter hours for the client cases on which they had done work. Junior attorneys usually worked on only one case at a time while more senior attorneys often worked on four or more cases a


day. While it was recognized that it was good practice to enter hours as they were worked, it was common for many more senior attorneys to fill in their hours for the previous week all at one time before time reporting was due in the computer at noon on Monday. Each Monday afternoon, a report showing all billable hours was provided to John Garr. Bose found that there was an extensive collection of reports that could be generated from the case accounting system. These included billable hours by client, unbilled hours and out-of-pocket costs (which the system called inventory), billings by attorney and even billable hours by the day of the week. This last report was curious. Even though it was barely 10 AM on a Saturday morning, it showed that there were 25 billable hours already recorded for that day. Six of the firm’s partners had each billed various clients approximately four hours each and one of the most junior attorneys had billed a client for a single hour. Finding her coffee cup dry, Bose walked down to the room where the clerical staff normally ate their lunch. She refilled her Tiffany & Co. “Art Deco” coffee mug from the same pot of Columbian Supreme that she had made earlier in the morning. Realizing that there was one other cup gone out of the pot, she found Joel Kerschner, a first year associate, working diligently in his office. While making small talk, Kerschner told her that he had spent an hour researching a zoning issue for a municipality earlier that morning and was now working on another issue for the same client. In walking around the office, Bose found that she and Kerschner were the only people there. Thinking about the previous Saturday, she realized that there were only three people in the office then. Looking at the billing records, she saw that Garr and several of the partners routinely recorded four billable hours every Saturday. >>Discussion of Case - Marianne Bose It appears that members of the firm are routinely billing their clients for hours that they are not working. At this point, many accountants would say to themselves, “I know that this kind of thing goes on, but I don’t want to know that it goes on” and pretend that the situation does not exist. One of the reasons that the firm may have had a high turnover among young attorneys is that they may have figured out what was going on, felt uncomfortable with the situation and left. When an ethical conflict arises, an accountant is supposed to take the issue to their immediate supervisor to try to resolve the conflict. If they cannot resolve the issue with their immediate supervisor or if their immediate supervisor is involved, they are expected to leapfrog their supervisor and go up the chain of command within the company. If they can’t get the issue resolved within the chain of command, they are advised to consult with their lawyer and resign. Since her boss, the firm’s managing partner, John Garr, is involved, going up the chain of


command is not likely to be effective. Bose obviously knows a lot of lawyers, but perhaps at this point, none that she can trust. For a discussion of how to have a difficult conversation with your boss or anyone else, read the books Crucial Conversations (2002) and Crucial Confrontations (2005) that are listed in the Resources section of this seminar manual. There is a growing thought in this country that an accountant should not resign and go away quietly, but to report the company’s wrongdoing. After all, a CPA’s first allegiance is to protect the public interest. Since the firm does work for municipalities, in this case the harm to the public is quite literal. This concludes Lesson 3.


Lesson 4: USE OF THE CPA DESIGNATION & OTHER ETHICAL CONSIDERATIONS This lesson focuses on the following topics:

When Is A CPA In Public Practice? Acts Discreditable To the Profession Case

When Is A CPA In Public Practice? The boundary between a CPA is in public practice and in the corporate world is not always clear and unambiguous. For example, I once had an accountant come up to me after a seminar in Troy, Michigan asking for advice on an ethical dilemma. She said that she would know what to do if she were in public practice, but since she was in the corporate world, she didn’t know how to handle the situation. This accountant was part-time Controller of four different companies who paid her on as an independent contractor. She believed that one of these companies had given their bank fraudulent financial statements. By advice, “I think that you are in public practice and it that situation, you’ve already told me that you know what to do.” In general, practicing public accounting consists of holding out as a CPA when offering those professional services defined by the AICPA’s professional standards. These services include accounting and attestation (auditing, compilation, review), tax, personal financial planning, litigation support, and management consulting. Holding out as a CPA may occur when a person informs others of their CPA status, uses the CPA designation on business cards and letterhead, displays a certificate or license evidencing the CPA designation or having a listing in a telephone or other business directory as a CPA. Merely using the CPA designation after one’s name does not mean that the person is a CPA in public practice. Several examples of the use of the CPA designation on business cards follow:


Executive Recruiters, Inc.

500 Big Beaver Road Troy, Michigan 48084

Joe Denison, CPA [email protected]

(248) 555-1953

In this example, Joe Denison is clearly not in the practice of pubic accounting since executive recruiting is not a business activity covered by AICPA standards.

Amy Denison, CPA Management Advisory Services

1200 Woodward Avenue Birmingham, MI 48009

PH: (248) 555-1941 FAX: (248) 555-1942

E-Mail: [email protected]

Joe’s wife Amy is engaged in public accounting because she is holding herself out as a CPA and engaged in a covered business service. The legend “Management Advisory Services” under Amy’s name infers that she does not perform attestation services and thus should not be expected to be independent of her consulting clients.

>>Use of the CPA Designation by Someone Not In Public Practice A CPA who is no longer in public practice may continue to use the CPA designation as long as it is not used in a manner that is misleading. In some states this means that the CPA designation must be modified in some manner. For example, a CPA who is not licensed must use the designation “CPA - not licensed” in Washington State and “CPA - inactive” in certain other locations such as Ohio, Louisiana and Minnesota. An inevitable result of these rules is that in these states most CPAs will choose to not use these designations by either maintaining their licensed status or by dropping the “CPA” altogether.

When the CPA designation is used on a letterhead the relationship with the company must not be ambiguous. Management accountants can make their relationship with their employer unambiguous by always associating a job title with their name. This is a good general practice for all business purposes since some courts have held that persons signing corporate loan documents with a signature that is not accompanied by a notation of their official capacity as a


corporate officer may be held personally liable for the company’s failure to pay the loan.

Examples follow of the proper and improper uses of the CPA designation in letters:

Adam Smith, CPA 203 Irwin Avenue Albion, Michigan 49224

May 15, 2005 Robert Lender Great Lakes Bank 555 Huron Blvd. Ann Arbor, MI 48103 Dear Bob, Enclosed are the financial statements for Calhoun Machine Tool for the month ending April 30, 2005. Sales for the month were slightly above budget at $2,257,000. Net Income was $52,000, significantly above the budget of $38,500. Sincerely, Adam Smith, CPA

Example A: This letter is misleading because it appears that Smith is sending the letter as a CPA who is a sole practitioner.

Calhoun Machine Tool, Inc 500 Industrial Park Drive Albion, Michigan 49224 May 15, 2005 Robert Lender Great Lakes Bank 555 Huron Blvd. Ann Arbor, MI 48103 Dear Bob, Enclosed are the financial statements for Calhoun Machine Tool for the month ending April 30, 2005. Sales for the month were slightly above budget at $2,257,000. Net Income was $52,000, significantly above the budget of $38,500. Sincerely, Adam Smith, CPA

Example B: While better than Example A, Smith’s relationship to Calhoun Machine Tool is ambiguous in this example. Is he writing to the bank as an independent CPA or as a member of Calhoun’s management?


Calhoun Machine Tool, Inc 500 Industrial Park Drive Albion, Michigan 49224 May 15, 2005 Robert Lender Great Lakes Bank 555 Huron Blvd. Ann Arbor, MI 48103 Dear Bob, Enclosed are the financial statements for Calhoun Machine Tool for the month ending April 30, 2002. Sales for the month were slightly above budget at $2,257,000. Net Income was $52,000, significantly above the budget of $38,500. Sincerely, Adam Smith, CPA Controller

Example C: This is the preferred format for a letter from someone who uses the CPA designation when they are not in public practice. It is unambiguous that Smith is writing in his capacity as Controller of Calhoun Machine Tool. NOTE: Smith might also have signed his name Adam Smith, Controller, listing his professional designations underneath his name and title. In Canada it is customary for professionals to list their academic degrees as well as their professional designations. In this case he might be listed as Adam Smith, Controller BS, MBA, CA

Acts Discreditable To the Profession AICPA members may be disciplined or expelled from membership for committing acts discreditable to the profession. Here are some of the offenses that are specifically spelled out in the AICPA Code: >>Retention of Client Records It is considered to be unethical for a member to withhold a client’s records after a demand has been made for their return, even if the client has not paid their bill. Ethics Ruling #191 also prohibits a member who is not an owner of an accounting firm from taking originals or copies of client records without the firm’s permission when they are terminated. While the use of the word “client” might lead to a conclusion, in these two situations, that it only applies to accountants in public practice, retention of employer records by an accountant would, in most cases, be theft and therefore unethical as well.


An accountant may ethically keep information that they are given in their capacity as an employee or shareholder that other employees or shareholders are normally allowed to keep when they leave the company. However, an accountant may not keep records or information that they received in their capacity as an accountant without the permission of their employer. An exception to this rule is when the accountant is leaving their position due to an ethical conflict. In such cases, to protect the reputation of the profession, an accountant may make copies of such records related to the ethical conflict. These records should be turned over to the accountant’s lawyer or to the ethics committee of the state accounting association. >>Negligence in the Preparation of Financial Statements or Records It is a violation of ethical standards to make, direct others to make, or otherwise permit materially false or misleading entries to be made regarding financial statements with which the accountant is associated. If an accountant fails to correct information on a financial statement that they know is wrong, then that is an act discreditable to the profession. >>Failure to Pay Child Support Failure to Pay Child Supportmay constitute an act discreditable to the profession. On November 10, 1999 the Oregon Board of Accountancy issued an order suspending the license of a CPA until such time as the Support Enforcement of the Oregon Department of Justice notified the Board that the CPA had agreed to a satisfactory repayment schedule. While other states have not necessarily codified their position in this particular situation, it should be expected that all states would act in a similar manner. >>My Heroes Have Always Been Accountants “To know what is right and not to do it is the worst cowardice”

- Confucius >>Do The Codes Of Ethical Conduct Go Far Enough? “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.”

- AICPA Code, Section 53, Article II I believe that it is not in the best interest of the public or the profession to blindly require confidentiality when a client or the accountant’s employer has committed an illegal act. I believe that it is not in the best interests of society for accountants to stand mute while they observe their employers or clients taking money from investors under fraudulent circumstances, employing illegal aliens, trafficking in drugs, laundering money from criminal activities, or funding terrorist activities.


If we believe that the responsibility of the chartered or certified public accountant is first to the public (society), then an appropriate response to illegal acts may be to:

1. Consult with an attorney. 2. Notify appropriate government agencies such as the Securities and

Exchange Commission, the Internal Revenue Service, the Federal Bureau of Investigation or the Immigration and Naturalization Service - whoever has jurisdiction over the type of offense the company has committed.

Such action may be taken anonymously.

>>A Higher Calling For our profession to rise in stature, I believe that we must change our focus from merely following the rules, to proactively standing up for what is good, right and true. In 1984, the front page of the Wall Street Journal featured Why You Never Saw Charles Bronson Cast as Hero Accountant by former Journal of Accountancy Editor Lee Berton. Consider what happened to the main character in Brian Garfield’s 1973 novel Death Wish. The book portrays a Manhattan certified public accountant who becomes a one-man vigilante squad to rid New York of crime. In the movie based on Garfield’s novel, the Bronson character is an architect, not an accountant. According to a source close to Dino DeLaurentiis, the movie’s producer; “Mr. D. thinks accountants are dull and dippy. An architect belongs to a more virile profession. Anyway, would you believe Bronson playing an accountant?” Some viewers would note that they didn’t believe Bronson as an architect either. Perhaps the accounting profession has always struggled to find its own identity. Movies over the years have usually portrayed accountants as dull and boring: Example: Gene Wilder (1968) or Matthew Broderick (2005) in the producers, and Rick Moranis in Ghostbusters. Even Cher in Moonstruck was dull and boring until she got a makeover and stopped showing up for work. There is a void that needs filling in many companies. Someone needs to represent the organization’s conscience. Every organization needs someone who is asking:

• “Is it the truth?

• Is it fair?

• Is it beneficial to all concerned?” What a better world it would be if it were not just scouts that made promises and we all pledged that “Management is Trustworthy.”


Our profession has high principles and when we really start living up to them, when we start too bravely stand up for the public interest and what is right, then the world will begin writing stories about hero accountants.

CASE

>>Case - The Bank Covenant After only six weeks, Jane W., 25, was already beginning to wonder whether taking the Assistant Controller’s job at Edwards Corporation was a mistake. Little things that her new boss, Gary Lizinsky, the Corporate Controller (and CFO) had told her about her working environment had turned out to be exaggerated. For example, he had told her that she would be a key part of the management team, but was never asked to attend meetings that included non-financial managers who were at her level. Lizinsky had shown her audited financial statements for the previous two years, but as she got into the financial statements for the year that they were now trying to close, she saw that there had been a significant reversal in the company’s prospects in the past year that had not been revealed to her before she took the job. Because the accounting department had been very short-handed until Jane and several new clerks were hired, financial statement preparation was very behind schedule. Jane knew, based on her examinations of several major balance sheet accounts, that there would be significant unfavorable year-end adjustments that would be made to the preliminary financial statements that Lizinsky would show the bank. Lizinsky and Mr. Edwards had a major bank meeting in a few days where they would present more recent financial statements that would be the basis for the renewal of the company’s bank financing that would expire in just over a month. Jane had kept Lizinsky informed about all of the adjustments that she was finding, but he brushed her off lightly as if he wasn’t concerned. The day before the bank meeting, she presented him with packets for the bank meeting that included, among other things, an analysis that the company routinely gave the bank that showed that the company was in violation of two of its three major bank covenants. She pointed this out to him, and he studied the sheet carefully for several minutes then said to her, “Don’t worry, I’ll take care of it”. The next morning, she noted Lizinsky in his office, busily running reports off the computer. As he inserted each report into the bank folders, he seemed to take out an existing report and replace it. Jane went into the computer and called up the reports that she had printed the previous day. There were several major changes to the balances that increased assets and net income. Investigating further, she found that several of the major year-end adjustments had been reversed out. What should Jane do?


>>Discussion of Case Mr. Lizinsky appears to be committing fraud, although it is possible that Jane has a misconception about how the covenant is supposed to be calculated. Jane should clearly document her actions from this point forward including documenting relevant events that have already happened. It might be a good idea to consult an attorney or the ethics committee of her state CPA society at this time for advice. Her next action might be to notify Mr. Edwards, in writing, of her concerns with a copy to the company’s auditors. If Mr. Edwards is an honest man, Jane will be protected. If he is not (and Lizinsky may be doing this with his knowledge) she will probably get fired. Letting Edwards know that she has discussed the matter with her attorney will help protect her from physical harm if either Edwards or Lizinsky is very desperate.In the event that she is fired, notifying the Bank in the form of a “noisy withdrawal” would be one way of protecting their interests without leaving herself exposed by making an actual accusation that the financial statements of Edwards Corporation were fraudulent. This concludes Lesson 4.

Documents

Ethics for Financial Managers