I have chosen section 500 - Other Responsibilities and Practices - of the AICPA Code of Professional Conduct which includes a broad range of rules including Acts Discreditable, Advertising and Other Forms of Solicitation, Commissions and Referral Fees, Form of Organization and Name, Ethics Rulings and Other Responsibilities and Practices (AICPA). Given the varied assortment of rules in this section and the extreme importance of the following rule, this paper will only examine rule 501 - Acts Discreditable.
The general purpose of rule 501 is to protect the accounting profession's integrity by preventing disreputable practices among accountants. A member shall not commit an act discreditable to the profession. The accountant has a moral obligation in the performance of their role in addition to the application of technical knowledge.
What do you see as the significance of rule 501 in this section for accountants?
Rule 501 - Acts Discreditable is critical in maintaining the highest level of professionalism in the role of accounting in addition to protecting stakeholders and public interest by addressing responsibilities & practices extending from the accountant's
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personal taxes to misleading the public. This rule requires the accountant to comply with timely filing of personal tax returns. It protects against the violation of anti discrimination laws and harassment in employment practices. The rule defines appropriate response to requests by clients and former clients for records. Rule 501 even guards disclosure of CPA exam questions & answers. And, recognizes failure to follow standards, procedures and requirements in governmental & regulatory audits/attest as well as recognizing negligence in the preparation of financial statements or records (AICPA).
Higher levels of professionalism will empower accountants in maintaining and broadening public confidence, accountants should perform all professional responsibilities with the highest sense of integrity (Duska, Duska, 2003). And, protecting stakeholders and public interest will bring us closer to a free market by providing knowledge of pertinent data creating informed choices (Duska, et al., 2003). Rule 501 will assist in regulating accounting's essential practice and vital profession in our economy.
Where do you see situations in an accounting practice that would make the contents of rule 501 in this section particularly relevant? Offer examples of such situations.
Rule 501 is crucial to protecting investors and public interest, especially now when the public trust in the accounting profession has been strained with the recent economic crisis of 2008. The accounting profession is often being accused of following
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technically correct procedures, but with the intent to purposely mislead investors and analysts about the actual financial condition of corporations.
The Lehman Brothers collapse in September 2008 not only illustrates an example of accounting practices that were misleading, but, "the firm's collapse started a wave of dominoes falling that was only arrested by dramatic government intervention, including the bailout of American International Group and the bank rescue known as the Troubled Assets Relief Program" (Goldfarb, 2010).
Lehman Brothers transferred assets to other financial firms in exchange for short term financing to temporarily pay down debt. The short term loans were just long enough to reflect on the company's published balance sheet. After the company's financial reports were published, the company borrowed cash and repurchased its original assets (Wikipedia, 2010).
Rule 501-4 states that making materially false and misleading entries in financial statements shall be considered to have committed an act discreditable to the profession (AICPA). "Lehman made extensive use of an accounting gimmick it called Repo 501 to shift $50 billion worth of assets off its balance sheet at the end of the first and second quarters of 2008 to make it seem to investors as though the bank had less debt than it actually had. The transactions should have been recorded as financings, but Lehman instead claimed them as sales by twisting accounting standards to its liking. Because the assets were 105% or more of the cash received, accounting rules permitted the transactions to be treated as sales rather than financings, so that the assets could be removed from the balance sheet" (Cohn, 2010).
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Consequently, Ernst and Young [Lehman Brother's auditor] is being sued by New York's Attorney General "to recover the fees collected by Ernst and Young while it was supposed to be using accountable, honest measures to protect the public" (Barr, 2010). This highlights another situation regarding auditing in accounting practice that is particularly relevant to rule 501 - Acts Discreditable. Rule 501-5 recognizes failure to follow requirements of governmental bodies, commissions, or other regulatory agencies that have established requirements such as audit standards, and other rules to follow in performing attest or similar services (AICPA).
A relatively new regulatory agency, The Public Company Accounting Oversight Board (PCAOB), was established by congress under the Sarbanes-Oxley Act to protect investor and public interest. The PCAOB have adopted auditing standards approved by the Securities and Exchange Commission. Auditing standard #12, Identifying and Assessing Risks of Material Misstatement states "the auditor should perform risk assessment procedures that are sufficient to provide a reasonable basis for identifying and assessing the risks of material misstatement, whether due to error or fraud " (PCAOB). In the example, Ernst & Young possibly failed to fulfill their purpose regarding audit/attest of Lehman Brother's financial health which may have been a contributing factor in our most recent economic recession.
The Lehman Brothers debacle is just one of many accounting sleights of hand in which integrity and character have been sacrificed by members of the accounting profession to benefit self interest whether it be internal accountants manipulating information to exaggerate their company's performance or external accountants
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certifying their client's illicit practices. Either way, misleading the public with misleading accounting entries/statements and/or failure to follow standards & procedures in audit & attest are violations of accounting principles which are core to preventing the deception of stakeholders, preventing the loss of public trust, and preventing the detrimental affect to the free market.
In summary, the general purpose of the AICPA codes of ethics, section 500, is to maintain the highest level of professionalism. And, rule 501 is the cornerstone to upholding the integrity of accountants. The fundamental purpose of accountants is to provide a true and accurate financial picture which is necessary for those who engage in financial decision making. Therefore, the ethics of accounting is dependent on the skill of the individual as well as their morality. The sheer importance of the accounting profession requires that its reputation be guarded. Thus, rule 501 is a central principle that accountant's must follow to protect stakeholders and maintain public confidence.
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