I understand that the American Bar Association has established a Commission on Multidisciplinary Practice to study whether the Model Rules of Professional Conduct governing lawyers should be relaxed to permit lawyers to practice in multidisciplinary professional services firms. Much has been written about lawyers practicing with accountants in such firms. There appears to be some confusion respecting the professional ethics standards governing certified public accountants, and a perception that our standards are less rigorous than the standards governing lawyers. Given my professional experience, I thought it might be useful for me to provide this Commission with an overview of our licensure and professional responsibility standards.
Let me begin with a snapshot of my qualifications to provide this overview. I have over 30 years of experience as both a CPA and a professor of accounting. I presently serve as the Wilton & Catherine Thomas Professor of Accounting at The University of Texas at Austin, a position which I have held since 1990. From 1968 to 1990, I served in other faculty positions in the Accounting Department at The University of Texas at Austin, and from 1965 to 1968, I was an Assistant Professor of Accounting at Rice University. I am active in our state respecting professional oversight of licensed certified public accountants. In 1997, I was appointed by Governor Bush to serve a six-year term on the Texas State Board of Public Accountancy, which regulates the licensing and discipline of CPAs in Texas. I also serve as an elected at-large member of the Board’s Executive Committee. From 1995 to 1996, I was President of the Texas Society of Certified Public Accountants. I also have national experience with setting and enforcing standards for the accounting profession. I am a member of the 270-member Council for the American Institute of Certified Public Accountants ("AICPA"), which meets regularly to review and revise national standards.
In my overview, I first address the education, regulation, and peer review of CPAs, and restrictions on CPA practice. Next, I discuss the accounting profession’s standards governing confidences, resolution of conflicts, and rendering independent advice. Third, I discuss how CPAs handle conflicts that arise in giving advice. My overview closes with attention to the CPA absolute rules respecting preservation of objectivity and integrity of judgment.
1. Education, Regulation, and peer Review of CPAs. All 50 states, plus the District of Columbia, Puerto Rico, the Virgin Islands, and Guam, have enacted legislation to protect the public interest by regulating the practice of public accounting. These "public accountancy" laws establish a class of licensed professionals known as Certified Public Accountants with certain privileges and restrictions, and regulate the professional conduct of the members of this class. The laws differ in detail, but in most cases individuals who seek to practice as CPAs must obtain a license from the state, and this license requires specialized education and experience. Once a license has been issued, most states require the licensed CPAs to complete continuing annual education on a variety of technical subjects. As a general matter, each state requires licensed CPAs to adhere to rigorous professional and ethical standards established by its State Board of Accountancy ("State Board"). The Rules of Professional Conduct promulgated by each State Board, which apply to all professional services rendered by CPAs, regulate conflicts of interest, standards of professional care, client confidences, and advertising. In addition to imposing strict ethical standards upon licensed CPAs, the State Board also has the power to revoke or suspend the license of a CPA who does not meet these standards.
Most CPAs voluntarily belong to state CPA societies and/or to the 330,000-member AICPA. Each of these organizations imposes additional responsibilities on their members. The AICPA maintains its own Code of Professional Conduct and enforces that Code through an ethics review board. The AICPA ethics division coordinates its enforcement with the actions of the state boards. To reinforce compliance with and adherence to professional standards, the AICPA and the state boards of most states require periodic peer review of all accounting firms that perform attest services.
2. CPAs Must Keep Client Confidences. There seems to be some misperception about our rules governing client confidences. Let me be clear: AICPA Code of Professional Conduct Rule 301, as well as the state codes with which I am familiar, direct that: "A member in public practice shall not disclose any confidential information without the specific consent of the client." Simply put, CPAs must preserve client confidences. For example, a CPA cannot, absent client consent, provide management consultant services to a client if that would entail disclosing information from another client where "the prospective client would clearly know the origin of the information." ET § 391.030. Indeed, the AICPA goes even further, and states that a CPA must not disclose information obtained from a non-client in violation of a promise of confidentiality. ET § 391.028. Like lawyers, CPAs may not make voluntary disclosures of confidential information.
Of course, the duty to preserve client confidences differs from the attorney-client privilege because a CPA may be compelled to disclose otherwise confidential information pursuant to a subpoena or other court order. However, even this gap is narrowing. As the Commission is aware, Congress recently enacted an amendment to the Internal Revenue Code (§ 7525) that grants federally authorized tax practitioners, including accountants, in non-criminal federal tax proceedings a statutory privilege that is equivalent to the attorney-client privilege.
Some witnesses appear to have argued to your Commission that this duty of confidentiality cannot be reconciled with the attest function. Respectfully, this argument misstates our rules. A CPA cannot attest to a financial statement that he knows is false or misleading or is not prepared in accordance with generally accepted accounting principles. In these circumstances, the CPA must not disclose confidential information himself, but must inform the client he will have to resign or issue a qualified opinion unless the client discloses the information so that the statement will be accurate. At bottom, the decision to disclose any confidential information rests with the client, and not the CPA.
3. CPAs Must Render Conflict-Free Advice. Much has been made of the claim that two members of the same accounting firm could counsel opposing sides in a transaction, even though lawyers could not. I think some clarification would prove helpful.
The AICPA Code of Professional Conduct is directed to the individual member CPA, and not the accounting firm. As a result, our conflicts rule -- Rule 102 -- generally addresses conflicts that may arise in the practice of an individual CPA in the context of the member’s objectivity. Rule 102 directs that a "conflict of interest may occur if a member performs a professional service for a client or employer and the member or his or her firm has a relationship with another person, entity, product, or service that could, in the member’s professional judgment, be viewed by the client, employer, or other appropriate parties as impairing the member’s objectivity." ET § 102.03. If the member believes nonetheless that "the professional service can be performed with objectivity," he may perform the service so long as the client’s consent is obtained.
But the conflicts rule is not limited exclusively to the objectivity of the member. Under this same rule, there are instances when a conflict of interest involving a single member of a firm may be imputed to all members of the firm where the member’s conflict could cause the objectivity of the other members of the firm to be questioned by the client or other appropriate parties. In these instances, the member cannot proceed unless he discloses the conflict to the client and the potential client, and obtains the consent of each to the representation.
I now apply Rule 102 to the example with which the Commission has wrestled: that is, can two members of an accounting firm represent different clients on opposing sides of a transaction? In my opinion, the rule would permit such representations, provided that full disclosure has been made to both clients and consent has been obtained. Under our rules, these prospective engagements by clients on opposing sides would call into question the objectivity of the firm. Concerns about objectivity can only be cured upon full disclosure to both clients, and client consent. Of course, there may be instances where one of the two clients will not allow the firm to make the necessary disclosures -- a hostile takeover could present such an instance. In these circumstances, the firm could not undertake the representation because its objectivity could be called into question.
Where two or more clients give the CPA consent to represent them all in the same transaction, the possibility exists that confidential information from one client could be transferred to another client without permission. To prevent this, CPA firms have internal controls, collectively called "firewalls," to insulate individuals working on an engagement for one client from others in the firm working at the same time for a competitor. Our profession relies on these internal controls to limit access to client information, whether or not confidential, to those individuals working on the engagement. It has been my observation that internal controls in general are quite effective. The specific controls protecting client confidences should also be effective.
4. CPAs must render objective judgment. We have an absolute rule respecting objectivity and integrity of judgment. AICPA Professional Standard Rule 102 directs: "In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others." An obvious component of integrity is telling the truth. The present AICPA Code of Professional Responsibility states: "A member who knowingly makes, or permits or directs another to make, false and misleading entries in an entity’s financial statements or records shall be considered to have knowingly misrepresented facts in violation of rule 102." ET § 102.02. By the same token, the AICPA imposes various restrictions on CPA practice to ensure that professional services are provided with objectivity. For example, a CPA may not receive a contingent fee for any professional service from an attest client of the firm or for preparation of a tax return, amended tax return or claim for refund from any client. AICPA Code of Professional Conduct Rule 302. Finally, the AICPA Code of Professional Conduct provides that a member shall not "subordinate his or her judgment to others." ET § 102.01.
Our profession takes seriously the obligation that each member exercise objective judgment. Accordingly, the AICPA Code deals with the instance where an individual takes issue with the professional judgment of his superiors. Where the individual is not satisfied that this judgment has authoritative support, he is directed to take his concerns to firm management. If, "after discussing his or her concerns with the appropriate person(s) in the organization, the member concludes that appropriate action was not taken, he or she should consider his or her continuing relationship with the employer." ET § 102.05.
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Our profession has established standards for education, licensure, and experience, and rules of conduct. While I am not expert on the standards and ethics rules governing lawyers, I perceive that these standards and rules are substantially similar to our standards and rules. Like the legal profession, we take seriously our duties to maintain public confidence and trust, and we enforce our code of conduct.
From my vantage point, there is no merit to a contention that affiliations between lawyers and CPAs will reduce the standards and ethics governing lawyers. I would suggest to you, in fact, that the contrary argument could be made by members of our profession. But neither claim serves the public interest. It appears to me that there is compelling public demand for multidisciplinary service firms. Permitting such firms should not cause professional standards for lawyers, accountants, or any affiliated professionals, to be diminished. Instead, each regulated professional will continue to be regulated by the federal or state licensing authority, and will face appropriate disciplinary action when professional standards are not followed.
Such multidisciplinary firms will likely include "unregulated" professionals. This situation will most likely be similar to large accounting firms today, which include economists, appraisers, valuation experts, and management consultants. These unregulated service providers are not regulated by state accountancy boards simply because they offer services with CPAs. To the best of my knowledge, they are not regulated by any state licensing authority. However, certain of the Rules of Conduct for a CPA firm extend to all members and employees of the firm. For instance, to perform audit services for public companies, all employees, CPAs and non CPAs alike, must adhere to the strict independence rules of the AICPA, state boards and the SEC. Long-standing legal principles of agency impute the actions of the unregulated professionals to the firms in which they practice, and the firms may be found responsible, and held liable, for any misconduct by partners or employees. It seems appropriate to me that the same standards should apply to govern unregulated individuals in any multidisciplinary firm that includes CPAs or lawyers.
I hope that my insights can assist your Commission in its evaluation of the issues.
1/ For example, in Texas, a CPA license is granted only to persons who hold baccalaureate degrees, who have completed the required number of hours of accounting and business courses, who have passed the uniform CPA examination and an examination on the rules of professional conduct, and completed at least one year of "work experience under the supervision of a [CPA]." Tex. Rev. Civ. Stat. art. 41a-1 § 12(a)(2), (a)(3), (a)(5), (a)(4), (h) (1997).
2/ Again, to use Texas as an example, we require licensed CPAs to complete at least 120 hours of continuing professional education every three years. Tex. Admin. Code tit. 22, §§ 523.32, 523.63.
3/ For example, see Tex. Admin. Code tit. 22, §§ 501.1(e), 501.11, 501.12, 501.21, 501.31, 501.43.
4/ Many clients value highly the "industry expertise" acquired by a firm in providing services to multiple clients in the same industry. It is not unusual for a firm providing services to one client to be asked to provide attest or other consulting services to competitors of the client. For example, an accounting firm may have extensive knowledge about the cable industry. A long-standing firm client may retain the firm for its assistance in connection with a broadcast license. Another client may seek to retain different members of the same firm to provide advice in connection with a competing application for the license. In these circumstances, the member and the CPA firm must determine whether the potential engagement could compromise the member’s objectivity. Because of the substantial possibility of compromise, the firm can only undertake the engagements upon disclosures to, and consent of, both clients.
5/ To assure reliability and comparability of information in financial reports, CPAs should comply with the AICPA’s statements on standards for accounting and review services in preparing financial statements and reports. Indeed, the Texas State Board of Public Accountancy cares so strongly about this issue that it prohibits CPAs from issuing financial statements that fail to satisfy AICPA standards — even when that failure to conform to AICPA statements is clearly disclosed on the statement.
6/ To assure reliability and comparability of information in financial reports, CPAs should comply with the AICPA's statements on standards for accounting and review services in preparing financial statements and reports. Indeed, the Texas State Board of Public Accountancy cares so strongly about this issue that it prohibits CPAs from issuing financial statements that fail to satisfy AICPA standards - even when that failure to conform to AICPA statements is clearly disclosed on the statement.
7/ For example, a CPA may not file a tax-refund form on behalf of a client, telling the client, "There’s only a small chance the IRS will grant this refund. I won’t charge you a fee to prepare and submit the refund form, but in the event that the IRS does approve a refund, I will expect to receive a certain percent of it in lieu of a fee."
A CPA who receives, or agrees to receive, other compensation for recommending services or products, must disclose the nature, source, and amount of such other compensation to the purchaser if the purchaser is a client. If the purchaser is not a client, the CPA need not disclose the amount of compensation but must still disclose the nature and source of compensation. AICPA Code of Professional Conduct Rule 503.
8/ I want to make clear that this requirement to exercise independent judgment does not mean that each CPA must require all clients to treat similar transactions alike so long as none of the treatments used violate GAAP or result in a material distortion of the financial statements.
If the CPA provides a non-attest service to different clients, the difference in the circumstances of the clients may call for the CPA to recommend different solutions even though the situations of both clients may have superficial similarity. For example, in one firm a CPA may recommend client-server MIS architecture; in another similar firm, the CPA may recommend some other architecture. The CPA is free to advocate for each client the solution best for that client, so long as there is authoritative and factual support for the respective solutions. A CPA must ensure, however, that the client understands the decision that it must make based on the CPA’s advice. A CPA who doubts that the client has the ability to make a certain decision has an obligation to help the client acquire this ability. This prevents the CPA from appearing to make decisions for the client. In tax practice, a CPA may resolve doubt in favor of the client so long as there is a realistic possibility that the client’s position may be sustained or, alternatively, the client’s position is not frivolous and is disclosed on the return. AICPA Statements on Responsibilities in Tax Practice, TX § 112.02. If a CPA discovers that a return contains an error, the CPA must call it to the client’s attention. The CPA may not report the error to the IRS without the client’s permission, but should consider whether to continue to serve that client if the client does not give permission to report the error. AICPA Statements on Responsibilities in Tax Practice, TX §§ 172.03-.04.
9/ Our rules go even farther where a CPA performs audit and other attest services. For these engagements, the CPA must be independent in fact and in appearance. AICPA Code of Professional Conduct, Article IV. From the standpoint of our profession, "independence" means that the CPA has no material conflicts of interest that would influence the opinion rendered to the client, and held out to the public. Independence is crucial to the credibility and effectiveness of the CPA as an auditor. Situations that would compromise independence include:
-- any actual or potential direct or material indirect financial interest, or commitment to acquire such an interest, in the client;
-- serving as a trustee of a trust or executor of an estate if that trust or estate had (or was committed to acquire) a direct or material indirect financial interest in the client;
-- holding any joint closely-held business investment with the client or any officer, director, partner, or principal stockholder thereof which was material in relation to the net worth of the CPA;
–having any loan to or from the client or any officer, director, partner, or principal stockholder thereof (other than certain "grandfathered" loans related to restructuring and mergers of financial institutions, and loans made under normal business terms, such as auto financing, credit card balances, and collateralized loans);
-- having a close relative (spouse, sibling, in-law, parent, grandparent, child, grandchild, etc.) associated with the client either as a member of management or by having a material financial investment in the client or by being otherwise in a position to influence the client. AICPA Code of Professional Conduct, ET §§ 101.02, 101.11.