October 05, 2011

Written Materials of Linda Galler, Hofstra University

Preliminary Matters

As used in this letter, the term "accountant" refers to a "certified public accountant" ("CPA"). Tax practice, however, does not require a license. Non-CPAs can and do prepare tax returns, offer consulting services, and perform other tax-related accounting services in government and the private sector. Only the auditing (or attest) function requires licensing as a CPA.

Any licensed CPA or attorney is entitled to practice before the Internal Revenue Service ("IRS") merely by filing a written declaration that she is currently qualified as a CPA or attorney and is authorized to represent the party on whose behalf she acts. Others may practice before the IRS by qualifying as "enrolled agents," which entails a demonstration of the applicant’s competence in tax matters by written examination administered by the IRS. Former IRS employees may qualify as enrolled agents without an examination.

Standards of Professional Conduct

AICPA Code of Professional Conduct ("AICPA Code"). The AICPA Code is the primary source of a CPA’s professional obligations. It applies to all members of the American Institute of Certified Public Accountants ("AICPA"). Most state CPA societies have adopted the AICPA Code as their own codes of conduct. The AICPA Code consists of two sections: Principles of Professional Conduct ("Principles") and Rules of Professional Conduct ("Rules"). Principles are aspirational in nature and emphasize the accountant’s duty to serve the public interest through integrity, objectivity (also referred to as independence), and due care. Rules state minimum levels on conduct below which a CPA may not fall without triggering disciplinary action. These standards must be met by any CPA performing professional services, including tax services.

Interpretative Guidance. The AICPA Professional Ethics Executive Committee issues two types of interpretative guidance. Interpretations of the Rules are general in nature while Ethics Rulings apply the Rules to specific facts. A CPA who departs from an Interpretation has the burden of justifying such departure while a CPA who departs from an Ethics Ruling will be asked to justify such departure.

Statements on Responsibilities in Tax Practice. Statements on Responsibilities in Tax Practice are issued by the AICPA Federal Taxation Executive Committee and are intended to provide a body of advisory opinions. The Statements do not represent enforceable standards and violation of a Statement will not trigger AICPA disciplinary action.

State Codes of Professional Conduct. Each state has a Board of Accountancy or similar governmental body which has adopted a code of professional ethics. Many state boards have adopted all or portions of a recommended model code developed by the National Association of State Boards of Accountancy. While this mode code is worded differently from the AICPA Code, the two codes are compatible in their requirements.

Requirements for Licensure

Each of the fifty states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands, has enacted accountancy laws governing the licensing of professional accountants. These laws set forth the requirements for licensure — typically education, examination, and experience — and establish a state board of accountancy to administer and enforce the law. In all 54 jurisdictions, the title "CPA" is restricted to individuals who are registered as CPAs with a state board.

Education. In most, but not all, jurisdictions, an applicant for a CPA license must complete some post-high school education. Most states require a baccalaureate degree that reflects at least 120 semester hours and a includes a prescribed number of semester hours in accounting courses. Reflecting an amendment to the bylaws of the AICPA, most states are in the process of increasing the minimum semester hours of education to 150.

Unlike their counterparts in law school, students studying accounting at the undergraduate or graduate level are not required to complete any courses in professional ethics. Indeed, I have on occasion informally polled my own J.D. students who majored in accounting as undergraduates and have yet to find a single one who took an accounting course in ethics. Ethical issues are mentioned in substantive courses, although my students’ experiences in this regard have varied.

In preparing this letter, I perused the bulletin of my university, which offers an accounting major to undergraduates, a Master of Business Administration degree in accounting, and a Master of Science degree in accounting. The university offers no courses in accountants’ professional ethics. Ethical issues are included among the topics listed in the bulletin as covered in one or two of the substantive courses. A quick search of the university library’s on line catalog indicated a collection of fourteen books on accountants’ professional ethics. Based on my admittedly unscientific research, it appears that accounting schools regard ethics very differently than do law schools.

Examination. To obtain a CPA license, an applicant must pass the Uniform CPA Examination administered by the state boards of accountancy. The examination consists of four sections: (1) Business Law & Professional Responsibilities; (2) Auditing; (3) Accounting & Reporting – Taxation, Managerial, and Governmental and Not-For-Profit Organizations, and (4) Financial Accounting & Reporting. Each section is graded separately. A candidate must pass all four sections with a score of 75 or higher in order to become a CPA.

The Business Law & Professional Responsibilities section of the Uniform CPA Examination contains professional ethics questions that are based on the AICPA Code. "Professional and Legal Responsibilities" account for 15% of the questions in this section of the examination. The AICPA lists the tested topics in this area as follows:

"AICPA Code of Professional Conduct Proficiency, independence, and due care Responsibilities in other professional services Disciplinary systems imposed by the profession and state regulatory bodies Common law liability to clients and third parties Federal statutory liability Privileged communications and confidentiality Responsibilities of CPAs in business and industry and in the public sector"

A majority of states require applicants for a CPA permit or license to pass a special examination, or to complete an approved course, in professional ethics. There is no uniform practice in this regard.

Experience. Most, but not all, jurisdictions require experience in public accounting before a license or permit to practice may be issued. The time period required and the types of experience that are acceptable vary among the states, but typically ranges from one to three years in public accounting.

Continuing Professional Education. Virtually all jurisdictions impose continuing professional education requirements..

Enforcement of Ethics Rules .

Disciplinary proceedings against CPAs can take place simultaneously on a number of levels. It is not unusual for an accountant who has violated professional standards to be subjected to sanctions by more than one disciplinary body. These bodies include, inter alia, the state board of accountancy in the state in which the CPA practices, a Joint Trial Board of the AICPA and the state CPA society in which the CPA practices, and the IRS. Because disciplinary proceedings may be conducted during the pendency of related civil litigation, the results of such proceedings could be used as evidence in the civil action.

State Disciplinary Proceedings. Accountancy laws governing the licensing of CPAs have been enacted in all fifty states, the District of Columbia, Guam, Puerto, and the U.S. Virgin Islands. These laws establish boards of accountancy that are responsible for administering and enforcing the accountancy laws; accountancy boards have disciplinary authority. State disciplinary authorities are usually required to take disciplinary action against a CPA who has been convicted of a crime or who has failed to file her own tax returns. Other types of infractions (and there are many others) that could give rise to a state disciplinary proceeding are:

Practicing with gross negligence or incompetence, Losing the right to practice before a state or federal agency, Willfully filing a false report with a governmental agency, and Disclosing information about a client without that client’s consent.

While some matters are subjected to a formal hearing, many matters are settled through negotiation. Accountancy boards can revoke a license in the case of wrongdoing or impose lesser sanctions (e.g., fines, reprimand, censure, probation, and suspension). Some states permit other sanction, as well. For example, New York permits the state licensing authority to impose up to one hundred hours of community service.

AICPA/State CPA Society Joint Ethics Enforcement Program. The AICPA and state CPA societies investigate alleged violations of professional standards by their members. Most state CPA societies have joined together with the AICPA in a Joint Ethics Enforcement Plan ("JEEP") under which the AICPA conducts investigations and disciplinary hearings both on its own behalf and on behalf of the state CPA society of which the accused CPA is a member. The AICPA typically waits until any civil litigation pertaining to the acts in question has concluded before commencing its investigation. Thus, AICPA disciplinary proceedings often commence years after transgressions have occurred.

The AICPA and state CPA societies may suspend or expel a CPA from membership but cannot themselves revoke a license to practice. AICPA bylaws permit automatic suspension of a member convicted of a felony or certain tax-related crimes. Other alleged transgressions, including violations of the AICPA Code, are settled with the respondent or are heard by a Trial Board, which then decides the matter. The AICPA may suspend or expel a member for up to two years or order remedial or corrective actions. Automatic suspensions and expulsions and all Trial Board convictions are reported in The CPA Letter (the organization’s membership periodical). Settlements are sometimes reported, as well. It has been suggested that most respondents are more concerned with the publication of a sanction than with the sanction itself.

A few states (e.g., California) have not joined JEEP and conduct their own investigations. CPAs in these states therefore could be subject to two separate self-regulatory proceedings for the same infraction.

IRS Disciplinary Proceedings. The Director of Practice of the IRS may suspend or disbar from practice before the IRS any practitioner, including a CPA, who: (1) is shown to be incompetent or disreputable, (2) refuses to comply with Circular 230 (Treasury regulations governing practice before the IRS), or (3) with intent to defraud, willfully and knowingly misleads or threatens a client or prospective client. In addition, a practitioner may be disbarred or suspended for willful violation of any of the regulations in Circular 230 or for recklessly or through gross incompetence violating the Circular 230 rules governing (1) tax shelter opinions and (2) standards for advising with respect to tax return positions and for preparing or signing returns.

Once disbarred, a practitioner may not engage in practice before the IRS until reinstated and may not petition for reinstatement until five years after the disbarment. No other person who is eligible to practice before the IRS may associate in practice with the disbarred practitioner. The names of persons suspended or disbarred by the IRS are made a matter of public record and the IRS Director of Practice sometimes notifies state authorities of actions taken with respect to practitioners licensed by the state.

Nature of Complaints Against CPAs

It might be interesting to know what types of complaints are frequently filed against accountants, particularly with respect to tax services. Unfortunately, I have no empirical information. A review of professional literature suggests only the following:

1. A large number of disciplinary actions allege failure to turn over client records when requested. This may be explained by the fact that the overwhelming majority of disciplinary matters come from private complaints.

2. Disciplinary authorities are generally required to take action when a CPA has been convicted of a crime or has failed to file her own tax returns. A fair number of proceedings arise from these situations.

I wonder whether the accounting profession follows the apparent practice of the legal profession, which for the most part leaves disciplinary activity for tax-related violations of practice standards to federal authorities (i.e., the IRS). There are very few reported instances of state bar disciplinary actions with respect to lawyers engaged in tax practice.

Disciplinary Proceedings Against Firms

To the best of my knowledge, accounting firms may not be subjected to disciplinary proceedings by state accountancy boards because CPAs are licensed on an individual basis. Likewise, the AICPA and state CPA societies only have the power to discipline their members, who are individuals. Indeed, these organizations have no authority with respect to licensed CPAs who are not members. Disciplinary proceedings by the IRS under Circular 230 are limited to practitioners.

The AICPA monitors individuals’ and firms’ conformity with established professional standards through practice-monitoring programs (peer review and quality review). AICPA bylaws require that all members who engage in a public accounting practice may do so only with a firm that is enrolled in an approved practice-monitoring program. Although "public accounting" technically includes providing tax and financial planning services to clients, it appears that practice-monitoring programs do not focus on tax services. I do not know enough about the programs to reach any sound conclusions.

Applicability of Lawyers’ Ethics Rules to Attorneys Employed by Accounting Firms

Despite the fact that nonlawyer CPAs may lawfully perform certain types of tax-specific legal services (e.g., practice before the IRS and the Tax Court), accounting firms claim not to engage in the practice of law. Thus, despite legal training, admission to the bar, and, in many cases, work experience in law firms, as well as the nature of the professional services which they provide, lawyers employed by accounting firms claim not to engage in the practice of law. Such assertions are thought to liberate these individuals from such potentially troubling ethical rules as:

Model Rule 1.6 (Confidentiality of Information) — the lawyer presumes that she can share confidential client information with nonlawyers in her firm who are not directly involved in a particular client matter, and Model Rule 1.7 (Conflict of Interest) — if the conflict of interest principles applicable to accountants are different (i.e., less stringent) from those that apply to lawyers in legal practice, then the lawyer is not held to the higher standard.

This approach arguably is inconsistent with ABA Informal Opinion 328, which states that a lawyer who engages in a second occupation that is so law-related as to involve some practice of law is held to the standards of the bar in that second occupation. The closer to the line (or the farther over the line) that a lawyer employed by a CPA firm goes toward the practice of law, the more evident it becomes that the lawyer should be subject to the same ethical restraints as are attorneys who perform similar services in law firms.

Ethical Issues Raised in Rendering Litigation Services

Although lawyers employed by accounting firms perform many types of services, the most talked about professional activity of this group is litigation. It has been reported, for example, that (in the state of Texas, if not elsewhere) Arthur Andersen regularly represents its clients in Tax Court litigation and that this function is performed by attorneys.

While attorneys are permitted to practice before the Tax Court by virtue of their professional licenses, CPAs and others may be admitted to practice upon passing a written examination. CPAs and accounting firms are effectively engaged in the authorized practice of law when they litigate in the Tax Court. Therefore, if the allegations against Arthur Andersen regarding Tax Court litigation were true, Andersen probably could not be prosecuted for engaging in these activities. At most, Andersen would be departing from a tradition of CPA firms not representing clients in litigation.

Attorneys employed by accounting firms, who represent firm clients in the Tax Court face a number of ethical issues:

1. An lawyer who has not taken and passed the Tax Court exam must rely on her bar admission to represent clients before the Tax Court and therefore is acting in her capacity as a lawyer. Arguably, such a lawyer violates Model Rule 5.4, which prohibits lawyers from providing legal services under the control of a nonlawyer or splitting legal fees with a nonlawyer. This is the position adopted by the ABA in Informal Opinion 1032, which was endorsed by the Chief Counsel of the IRS, and subsequently criticized by the Justice Department as unnecessarily burdening competition and stifling innovation. Despite the criticism, Model Rule 5.4 implies that attorneys employed by accounting firms cannot ethically practice before the Tax Court on behalf of firm clients unless they qualify to practice by passing the written examination. (There is some question whether the Tax Court will permit an attorney to take the examination since she is already admitted to practice before the court on the basis of her admission to the bar.) Arguably, Model Rule 5.4 should be modified or the Tax Court rule should be amended.

2. In general, taxpayers may institute civil tax litigation in any of three forums: the Tax Court, a U.S. District Court with jurisdiction, and the Court of Federal Claims. Each of these forums has inherent advantages and disadvantages. A person who counsels a taxpayer on proposed tax litigation should (and perhaps must) advise the taxpayer of the advantages and disadvantages associated with each forum. This fact raises several interesting ethical problems. First, analyzing precedent in each of the possible forums (which may, and often do, vary among the courts) must be the practice of law. Can an attorney employed by an accounting firm, which holds itself out as not engaging in the practice of law, make the required analysis and advise a client on the optimal choice? Second, there apparently is a conflict of interest since the accounting firm is permitted to represent a client only in the Tax Court. If the client selects another forum, an outside lawyer or law firm must be retained. Does the fact that the accounting firm has a financial incentive (in the form of lost fees) to advise the client to select the Tax Court create a conflict of interest? A taxpayer seeking professional assistance should not be artificially steered because of limitations or interests of the tax adviser.

3. If the accounting firm prepared the return that is being litigated in the Tax Court, there might be a conflict of interest. The firm might prefer to have its position vindicated in order to protect itself from potential future liability to the client (or to other clients who received the same advice) rather than to settle or dispose of the litigation without addressing the correctness of the issue in question. Furthermore, the accountant is potentially a witness.

If the firm participated in tax planning with respect to items claimed on a litigated return, similar issues arise. To be sure, conflict of interest problems of this sort can arise with attorneys in private practice as well. However, because accounting firms engage in a broader array of tax return preparation and tax planning activities on their clients’ behalf, the risk of conflicts arising is probably greater. Tax Court Rule 24(f) requires that counsel of record (including any authorized taxpayer representative) who was involved in planning or promoting a transaction at issue in the litigation must withdraw from the case or take steps to obviate the conflict.

4. Prior to the enactment of I.R.C. § 7525 earlier this year, conversations between accountants and their clients were not privileged. Section 7525 extends the attorney-client privilege to CPAs and other tax advisers. The privilege does not apply, however, to communications in connection with the promotion of corporate tax shelters. "Corporate tax shelter" is a "term of art" that is defined elsewhere in the Internal Revenue Code, is expected to be the subject of soon-to-be-published regulations, and is the subject of much discussion and consternation among tax professionals. Suffice to say that accounting firms are justifiably concerned that the corporate tax shelter carve out renders the privilege meaningless in many situations.

Because the attorney-client privilege applies only when a lawyer render legal services, the privilege is not available with respect to lawyer employed by accounting firms, who claim not to engage in the practice of law. Presumably the new, albeit limited, tax adviser privilege applies to client communications with these lawyers. Are clients better off with the full protection of the traditional privilege? What is the likelihood that clients will be confused or misled?

Comparison of Key Ethics Rules


Lawyers. Model Rule 1.6 prohibits disclosure of information relating to representation of a client, with limited exceptions. Many states have adopted their own variations of Rule 1.6 However formulated, the duty of confidentiality generally applies to matters communicated in confidence by the client and to all information relating to the representation, whatever its source. In addition to the ethical duty, the evidentiary attorney-client privilege protects confidential communications made to the lawyer by a client for the purpose of obtaining legal advice and confidential communications made by the lawyer to her client in the course of rendering legal advice (whether or not that advice is based on a privileged communication from the client).

CPAs. Rule 301 of the AICPA Code provides that a CPA "shall not disclose any confidential client information without the specific consent of the client." Rule 301 does not apply, however (and inter alia), to relieve a CPA of certain legal obligations and professional duties. I am hesitant to draw an unwarranted conclusion here, but it looks as if duties of disclosure with respect to certified financial statements would override any duty to keep material confidential.

As described earlier, tax clients of CPAs now enjoy a limited version of the attorney-client privilege. However, the parameters of that privilege have yet to be explored. The new privilege is meant to apply in circumstances where the attorney-client privilege would apply if the tax adviser were an attorney. Some troubling issues include:

1. The attorney-client privilege applies only when a lawyer gives legal advice or provides legal services; it does not apply, for example, when a lawyer renders business advice. Since accounting firms give a lot of business advice, how or where is a line drawn between privileged legal advice and nonprivileged business advice?

2. The attorney-client privilege does not apply to communications made in connection with preparation of income tax returns. Does the preparation of a tax return in addition to the rendering of tax planning services destroy the privilege?

3. The attorney-client privilege is waived if the client shares the material with others or does not intend that it remain confidential. Does the sharing of information within an accounting firm preclude any privilege? What effect, if any, does a client’s understanding that certain tax information may be shared with the firm’s auditing department have on the privilege? If files are available or are made available for SEC inspection, is the privilege waived?

And so on.

Conflicts of Interest

Lawyers. The duty of complete and undivided loyalty is designed to assure that lawyers exercise independent professional judgment, free of compromising influences and loyalties. Professional allegiance is compromised when a lawyer is influenced by personal interests, the interests of other clients, or the preferences of third parties. Model Rule 1.7 sets forth the general rule on attorney conflicts of interest and subsequent provisions provide guidance as to prohibited transactions and conflicts with former clients. Model Rule 1.10 disqualifies from representation in a client matter all lawyers practicing in a firm in which one attorney has a conflict. This imputed disqualification rule is based on the premise that for purposes of rules governing the duty of loyalty, a firm of lawyers is essentially one lawyer or that each lawyer is vicariously bound by the obligation of loyalty owed by each lawyer with whom she is associated.

CPAs. The CPA’s overarching duty to the public is expressed in terms of independence, integrity, and objectivity. Conflict of interest issues therefore are thought of in terms of the accountant’s ability to remain free of competing financial interests or pressure (whether real or perceived) from others. One commentator describes a conflict of interest as "a situation that could undermine the judgment of a professional accountant." Concurrent representation of two or more clients with different interests therefore is permissible unless the CPA believes that the representation could be viewed by one of the clients or another appropriate party as impairing the CPA’s objectivity. If the CPA believes that she can perform the professional service with objectivity, she is permitted to represent both parties so long as the relationships are disclosed and consent is obtained from the clients. I understand that accounting firms often use screens to segregate representatives of conflicting interests. It appears that accountants will accept simultaneous representation (perhaps with client consent) in situations where lawyers cannot.

Circular 230. Circular 230 permits practitioners to represent conflicting interests if all directly interested parties consent after receiving full disclosure.

Advertising and Solicitation

Lawyers. Subject to restrictions prohibiting false or misleading communications, lawyers are permitted to advertise their services. False or misleading communications include: (1) material misrepresentations of fact or law (including material omissions), (2) statements likely to create unjustified expectations about results that the lawyer can achieve, and (3) statements comparing a lawyer’s services with other lawyers’ services unless the comparisons can be factually substantiated. Lawyers are not permitted to solicit prospective clients in person or through live telephone contact.

CPAs. AICPA rules prohibit advertising in a manner that is false, misleading, or deceptive. False or deceptive advertising: (1) creates false or unjustified expectations of favorable results, (2) implies the ability to influence a court, tribunal, regulatory agency, or similar body or official, (3) contains a representation that specified professional services will be performed for a fee that is likely to substantially increase and the client is not advised of that likelihood, or (4) contains other representations that would likely cause a reasonable person to misunderstand or be deceived. These same rule applies to solicitation.

Circular 230. Circular 230 prohibits practitioners from engaging in false or misleading advertising. With limited exceptions, practitioners are not permitted to engage in direct or indirect uninvited solicitation, including in-person and telephone communications. This ban on solicitation conflicts with Edenfield v. Fane as to accountants (and arguably as to attorneys soliciting business clients) and is likely to be amended.


Lawyers. Model Rule 5.4 sets forth several prohibitions that are meant to protect the lawyer’s professional independence of judgment. A lawyer may not provide legal services under the control of a nonlawyer or split legal fees with a nonlawyer. Model Rule 5.4 is discussed supra in connection with Ethical Issues Raised in Rendering Litigation Services.

CPAs. Independence is a cornerstone of the CPA’s professional standards. Independence refers to both actual and perceived independence.

Areas Warranting Consideration and/or Action

The Commission might wish to consider some of the following issues:

Confidentiality. If knowledge about a client’s financial situation is acquired by an attorney working in the tax department of an accounting firm during the course of rendering tax services and that information could be relevant to the client’s financial statements, which the firm is auditing, one would suspect that the attorney would be required to turn over the information for evaluation and possible disclosure. How can an auditors’ duty to disclose coexist with any realistic expectation of confidentiality? It is obvious that these two duties are incompatible and irreconcilable.

Should clients be permitted or expected to waive a lawyer’s duty of confidentiality or the attorney-client privilege at the time they retain tax advisers? Clearly, clients who appreciate the implications of waiver should not be prohibited from doing so. But, would less sophisticated clients be well served by what may become standard waivers. To the extent that multidisciplinary practices grow in number, clients who value confidentiality might find it increasingly difficult to find an unaffiliated tax attorney. Would it be appropriate to adopt different standards for sophisticated clients and unsophisticated clients? (Probably not.)

In light of these problems, should lawyers be precluded from accepting employment in accounting firms that simultaneously audit a client and provide legal services?

Conflicts of Interest. Would clients be well (or better) served by relaxing the lawyers’ conflict of interest rules? (I think not.)

Should lawyers endorse the use of screens in conflict situations?

Independence. Should Rule 5.4 be reconsidered?

Advertising and Solicitation. Should the prohibition on in-person solicitation be changed in the business context in light of the Edenfield decision?

Federalization of Professional Discipline. Should attorneys and accountants practicing in the tax area be subject to discipline only at the federal level? In light of the apparent disregard by state bar disciplinary authorities of professional ethics violations in the tax area, and what I suspect is similar treatment by state boards of accountancy, perhaps this is already effectively the case.

I hope that the Commission’s recommendations will be based on the best interests of clients and that members of the Commission will find my thoughts and comments helpful I certainly have enjoyed preparing them for you.

The views expressed herein have not been approved by the House of Delegates or the Board of Governors of the American Bar Association and, accordingly, should not be construed as representing policy of the American Bar Association.