1.3 Professional Codes of Conduct
6 min read•august 15, 2024
Professional codes of conduct are essential guidelines for accountants. They set ethical standards, promote , and maintain public trust. These codes cover key principles like independence, , and .
Accounting organizations play a crucial role in developing and enforcing these codes. The AICPA, IMA, IIA, and IESBA are key players, each with their own ethical standards for members. Violating these codes can lead to serious consequences for accountants.
Accounting Professional Organizations
Major U.S. and International Organizations
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- The American Institute of Certified Public Accountants (AICPA) is the national professional organization for Certified Public Accountants (CPAs) in the United States that establishes ethical and behavioral standards for its members through the
- The Institute of Management Accountants (IMA) is a professional association for management accountants and financial professionals that outlines the ethical responsibilities of its members in the IMA Statement of Ethical Professional Practice
- The Institute of Internal Auditors (IIA) is an international professional association for internal auditors that sets forth the principles and expectations governing the behavior of individuals and organizations in the conduct of internal auditing through the IIA Code of Ethics
- The International Ethics Standards Board for Accountants (IESBA) is an independent standard-setting body that serves the public interest by setting high-quality ethics standards for professional accountants worldwide through the IESBA International Code of Ethics for Professional Accountants
Role and Purpose of Professional Organizations
- Develop and enforce ethical standards and codes of conduct for their members to maintain public trust in the accounting profession
- Provide guidance, resources, and training to help members navigate ethical dilemmas and comply with professional standards
- Investigate and discipline members who violate ethical standards or engage in
- Represent the interests of the accounting profession and advocate for policies that promote transparency, accountability, and integrity in financial reporting
Professional Codes of Conduct
Purpose and Key Principles
- Professional codes of conduct serve to maintain public trust in the accounting profession by promoting ethical behavior, integrity, objectivity, and among accountants
- Key principles addressed in professional codes of conduct include:
- Independence: Accountants must be free from conflicts of interest and maintain objectivity in their professional judgments
- Integrity: Accountants must be honest, candid, and truthful in their professional dealings and resist pressures to compromise their integrity
- Objectivity: Accountants must be impartial, unbiased, and free from influences that could impair their professional judgments
- Professional competence and : Accountants must maintain and update their knowledge and skills, and exercise diligence and thoroughness in providing professional services
- Confidentiality: Accountants must protect the confidentiality of client information, unless disclosure is required by law or the client consents
- Professional behavior: Accountants must comply with relevant laws and regulations, avoid actions that discredit the profession, and behave in a manner that is consistent with their professional responsibilities
Structure and Content of AICPA Code
- The AICPA Code of Professional Conduct is divided into three parts:
- The Principles provide the framework for the Rules and are goal-oriented, aspirational, and not directly enforceable (Responsibilities, Public Interest, Integrity, Objectivity and Independence, Due Care, Scope and Nature of Services)
- The Rules are more specific, enforceable standards that govern the performance of professional services by members (Independence, Integrity and Objectivity, General Standards, Compliance with Standards, Accounting Principles, Acts Discreditable, Confidential Client Information)
- The Interpretations provide guidelines on the scope and application of the Rules
- The AICPA Code applies to all AICPA members, whether in public practice, industry, government, or academia, and covers a wide range of ethical issues and professional responsibilities
Applying Codes of Conduct
Ethical Dilemmas and Pressures
- Accountants may face pressure from clients or employers to manipulate financial statements or engage in fraudulent reporting (overstating revenues, understating expenses, misclassifying transactions)
- Professional codes of conduct require accountants to maintain integrity and objectivity, resist such pressures, and report any suspected wrongdoing
- Conflicts of interest can arise when an accountant's personal or professional relationships impair their objectivity (providing services to a company in which they have a financial interest, auditing a close friend's business)
- Professional codes of conduct require accountants to identify and avoid or manage conflicts of interest, and to disclose them when necessary
Confidentiality and Disclosure Requirements
- Confidentiality is a fundamental principle in accounting that requires accountants to maintain the confidentiality of client information, unless disclosure is required by law or the client consents to disclosure
- Examples of confidential information include financial data, business plans, intellectual property, and personal information
- There are certain situations where accountants may be required or permitted to disclose confidential information, such as:
- Complying with a validly issued and enforceable subpoena or summons
- Complying with laws and regulations that require disclosure (suspected money laundering, terrorist financing, or other illegal activities)
- Consulting with legal counsel regarding compliance with laws and regulations
- Initiating a complaint with or responding to an investigation by a professional or regulatory body
Professional Competence and Due Care
- Accountants must exercise professional competence and due care in providing services to clients, which includes:
- Maintaining and updating their knowledge and skills through continuing professional education (CPE) and staying current with changes in accounting standards, laws, and regulations
- Only accepting engagements for which they have the necessary competence and expertise, or obtaining the necessary knowledge and skills before performing the engagement
- Assigning qualified staff with adequate supervision to engagements and reviewing their work
- Exercising professional skepticism and judgment in evaluating evidence and forming conclusions
- Documenting the work performed and the basis for conclusions reached
Consequences of Violations
Disciplinary Actions by Professional Organizations
- Violations of professional codes of conduct can result in disciplinary actions by professional organizations, such as:
- Reprimands: A formal expression of disapproval that is communicated to the member and may be disclosed to the public
- Suspensions: A temporary prohibition on the member's ability to practice or use professional designations for a specified period (usually 1-3 years)
- Expulsions: A permanent termination of the member's membership and ability to use professional designations
- Disciplinary processes typically involve an investigation of the alleged violation, a hearing before a disciplinary committee, and the imposition of sanctions if the violation is substantiated
- The member is usually given an opportunity to respond to the allegations and present evidence in their defense
- The disciplinary committee considers factors such as the nature and severity of the violation, the member's intent and prior disciplinary history, and any corrective actions taken by the member
Legal and Regulatory Consequences
- Severe violations may lead to the revocation of an accountant's professional license by state boards of accountancy, which can prevent them from practicing as a CPA
- Examples of violations that may warrant license revocation include felony convictions, fraud, embezzlement, and gross negligence
- Accountants who violate professional codes of conduct may also face legal consequences, such as:
- Civil lawsuits by clients or third parties who were harmed by the accountant's actions (malpractice, breach of contract, negligence)
- Criminal charges for violations of laws and regulations (tax evasion, securities fraud, money laundering)
- Violations of professional codes of conduct can also trigger investigations and enforcement actions by regulatory agencies, such as the Securities and Exchange Commission (SEC) or the Public Company Accounting Oversight Board (PCAOB)
Reputational and Career Impacts
- Violations of professional codes of conduct can damage an accountant's reputation and career prospects, even if they do not result in formal disciplinary actions or legal consequences
- Negative publicity and media coverage of ethical violations can harm an accountant's personal and professional reputation
- Employers may be reluctant to hire or promote accountants with a history of ethical violations or disciplinary actions
- Clients may choose to terminate relationships with accountants who have violated their trust or engaged in unethical behavior
- Violations by individual accountants can also erode public trust in the accounting profession as a whole and undermine its credibility and integrity
- High-profile scandals and failures (Enron, WorldCom) have led to increased scrutiny and regulation of the accounting profession and highlighted the importance of ethical conduct and effective self-regulation
Key Terms to Review (18)
AICPA Code of Professional Conduct: The AICPA Code of Professional Conduct is a set of ethical guidelines established by the American Institute of Certified Public Accountants that outlines the principles and standards for professional behavior in the accounting profession. This code emphasizes the importance of integrity, objectivity, and professionalism, which are essential for maintaining public trust and ensuring ethical practices in various accounting activities.
American Institute of CPAs: The American Institute of CPAs (AICPA) is the national professional organization representing certified public accountants (CPAs) in the United States. The AICPA establishes and enforces professional standards and ethics for CPAs, promoting the importance of ethical behavior and integrity in accounting practices, which is critical in guiding accountants through ethical dilemmas, setting a framework for professional conduct, and ensuring responsibilities are upheld, especially in tax practices.
Confidentiality: Confidentiality refers to the ethical principle that requires professionals to protect sensitive information obtained in the course of their work. This principle is essential for maintaining trust between clients and professionals, ensuring that personal, financial, and proprietary information remains secure and private, which is critical in fostering an environment of integrity and responsibility.
Conflict of Interest: A conflict of interest occurs when an individual or organization has multiple interests that could potentially influence their decision-making, leading to a situation where personal, professional, or financial considerations may compromise their judgment. This situation is particularly important in various fields, as it can undermine trust, transparency, and ethical conduct.
Disciplinary Action: Disciplinary action refers to the measures taken by an organization to address violations of established rules, policies, or codes of conduct. It is essential in maintaining professional integrity and ensuring accountability among members. This process serves to correct behavior, deter future violations, and uphold the organization's ethical standards.
Due Care: Due care refers to the level of judgment, attention, and diligence that professionals are expected to exercise in their work to ensure quality and compliance with relevant standards. It involves being thorough and responsible in performing duties, particularly when making decisions that can significantly impact stakeholders. This concept is crucial in various professional fields as it helps to maintain public trust and uphold ethical standards.
Ethical compliance: Ethical compliance refers to the adherence to established ethical standards and principles within a professional environment, particularly in accounting practices. It ensures that individuals and organizations operate within the moral guidelines set forth by laws, regulations, and professional codes of conduct, ultimately fostering trust and accountability in financial reporting. Maintaining ethical compliance is crucial for mitigating risks associated with unethical behavior and navigating complex ethical dilemmas that may arise in the field.
Fraud Detection: Fraud detection refers to the processes and methods used to identify, prevent, and investigate instances of fraud, especially in financial settings. This is crucial for maintaining the integrity of financial statements and protecting stakeholders from deceitful practices. Effective fraud detection relies on various techniques, including data analysis, audits, and adherence to professional standards that guide ethical behavior in accounting.
IFAC International Code of Ethics: The IFAC International Code of Ethics is a comprehensive framework that sets out ethical standards for professional accountants globally, promoting integrity, objectivity, professional competence, and confidentiality. This code serves as a guiding document for accountants to ensure they uphold high ethical standards in their professional practice, aligning with the expectations of stakeholders and the public. It is essential in fostering trust and accountability in the accounting profession.
Independence Standards: Independence standards refer to the guidelines and principles that ensure an accountant or auditor remains unbiased and objective while performing their duties. These standards are crucial for maintaining the integrity of the financial reporting process and for fostering public trust in financial statements. They help delineate situations that may compromise an accountant's independence, such as conflicts of interest or relationships that could influence judgment.
Integrity: Integrity in accounting refers to the adherence to moral and ethical principles, ensuring honesty and fairness in all professional actions. It involves maintaining consistency of actions, values, methods, measures, and principles, which builds trust with stakeholders and promotes a culture of ethical decision-making.
Integrity Standards: Integrity standards refer to the ethical guidelines and principles that professionals must adhere to in order to maintain honesty, fairness, and transparency in their work. These standards are essential for fostering trust between professionals and the public, ensuring accountability, and promoting ethical behavior in various fields, particularly in accounting. They serve as a foundation for decision-making and help to uphold the reputation of the profession by guiding individuals in their actions and interactions with clients, colleagues, and stakeholders.
International Federation of Accountants: The International Federation of Accountants (IFAC) is a global organization that represents the accounting profession worldwide. It aims to serve the public interest by promoting high-quality international standards in accounting and auditing, enhancing the integrity of the profession, and supporting the development of professional accountancy organizations. By establishing ethical guidelines and frameworks, IFAC plays a crucial role in fostering professionalism and ensuring that accountants adhere to rigorous codes of conduct.
Objectivity: Objectivity refers to the principle of maintaining impartiality and neutrality in decision-making and reporting, especially in the context of the accounting profession. It emphasizes the need for accountants to present information fairly and without bias, ensuring that their judgments are based on factual data and not influenced by personal feelings or interests.
Professional competence: Professional competence refers to the ability of an individual to perform their job effectively and ethically, combining knowledge, skills, and experience to meet the demands of their profession. This concept emphasizes the importance of maintaining high standards of performance and integrity, as well as staying updated on industry practices, regulations, and ethical guidelines that govern professional conduct.
Professional Misconduct: Professional misconduct refers to unethical or improper behavior by a professional, particularly in their duties and responsibilities. It often includes violations of established ethical standards, laws, or regulations that govern professional practices. In accounting, this term is closely linked to professional codes of conduct that set expectations for integrity, objectivity, and competence in financial reporting and auditing.
Regulatory Oversight: Regulatory oversight refers to the processes and mechanisms established by governing bodies to monitor, evaluate, and enforce compliance with laws and regulations within various industries. This oversight aims to protect public interest, ensure ethical behavior, and maintain the integrity of financial reporting and practices. It plays a crucial role in holding professionals accountable to established standards, particularly in fields like accounting where adherence to ethical guidelines is paramount.
Whistleblowing: Whistleblowing is the act of reporting unethical, illegal, or improper conduct within an organization, often by an employee who exposes wrongdoing to external authorities or the public. This practice is crucial in maintaining accountability and integrity in organizations, especially in the accounting field where ethical behavior is paramount.