ACCT 635 UMGC Professional Ethics for CPAs Paper

ISSUES IN ACCOUNTING EDUCATIONVol. 34, No. 4
November 2019
pp. 39–53
American Accounting Association
DOI: 10.2308/iace-52545
The Professional Ethics Exam and Acts Discreditable: An
Introductory Assignment
Adam Bordeman
Kimberly D. Westermann
California Polytechnic State University, San Luis Obispo
Keywords: AICPA Code of Professional Conduct; disciplinary actions; learning strategy; professional ethics
exam.
I. INTRODUCTION
T
he Certified Public Accountant (CPA) designation is one of the most recognizable professional certifications in the
U.S.; those who hold the CPA designation ‘‘represent the apex of [accounting] practice and the part of practice most
visible to the public’’ (Fogarty and Lowensohn 2017, 41). CPAs have become an indispensable part of the financial
framework in the U.S., from the small-town practitioner to the largest professional services firms (i.e., Big 4). The value of
CPA licensure rests on the professional’s technical expertise, objectivity, and ethics (AICPA 2018). These factors, jointly, serve
to legitimize accounting professionals and thus, the accounting profession as a whole (e.g., Westermann, Bedard, and Earley
2015). Once licensed, CPAs are held to certain standards promulgated by the American Institute of Certified Public
Accountants (AICPA), including the AICPA Code of Professional Conduct. The Code of Professional Conduct establishes
guidance and rules for appropriate behavior (e.g., independence, due care, confidentiality) in the performance of the CPA’s
professional responsibilities (AICPA 2017). Breaches of the Code of Professional Conduct may lead to disciplinary actions
against the individual CPA or CPA firm, including monetary penalties, criminal charges and/or suspension or revocation of
licensure (Krom 2016). Abiding by these ethical standards of behavior is essential to maintaining the integrity of the
accounting profession (e.g., Armitage and Moriarity 2016). The fact that most State Boards of Accountancy mandate ethics
training for initial licensure suggests that they agree with this viewpoint. As such, an understanding of the requirements for
licensure, including specific ethical requirements, is important for new accounting graduates.
The purpose of this assignment is to expose students to the professional ethics requirement(s) for initial CPA licensure and
to highlight disciplinary action proceedings, emphasizing the importance of ethics in the accounting profession. This
assignment has two parts. Part I requires students to research and understand a selected state’s (e.g., a student’s home state, the
The authors thank Valaria P. Vendrzyk (editor), one anonymous associate editor, and two anonymous reviewers for their encouraging comments. We also
thank Cathy Allen, Lindsay Andiola, Marybeth Armstrong, Colleen Duffy-Smith, Esq., Emily Hickman, Brett Rixom, and Anne Schnader for their
guidance and helpful feedback. Finally, we acknowledge the undergraduate accounting students at California Polytechnic State University, San Luis
Obispo for providing ‘‘suggestions for improvement’’ to the case; this article would not have evolved without them.
Editor’s note: Accepted by Valaria P. Vendrzyk.
Submitted: December 2018
Accepted: September 2019
Published Online: September 2019
39
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ABSTRACT: This practice-oriented assignment familiarizes accounting students with their states’ professional
ethics exam and illustrates the disciplinary proceedings process resulting from failed ethics. Part I of the assignment
requires students to research their states’ professional ethics exam requirements. Part II of the assignment asks
students to select current disciplinary actions, review the affiliated disciplinary proceedings, apply relevant sections
of the AICPA Code of Professional Conduct, and evaluate the appropriateness of the consequences. Survey
responses from 322 accounting students suggest that prior to this assignment most students are unaware of an
ethics requirement for initial CPA licensure. Students perceive that the assignment effectively exposes them to the
AICPA Code of Professional Conduct and violations experienced by practicing CPAs. The majority of students
surveyed believe the assignment is valuable, interesting, enjoyable, and improves their understanding of ‘‘ethics in
practice.’’
Bordeman and Westermann
40
state of a student’s university, or a student’s state of future employment) professional ethics exam requirement.1 Part II requires
students to select two current disciplinary actions, review the affiliated disciplinary proceedings, apply relevant sections of the
AICPA Code of Professional Conduct, and consider the appropriateness of the consequences.
II. ASSIGNMENT BACKGROUND
CPA Licensure Requirements
(1) The Education Requirement
As of 2015, all State Boards of Accountancy require 150 semester credit hours of higher education to become a licensed
CPA (i.e., ‘‘the 150-hour rule’’) (AICPA 2018).2 As a result, many university programs have adopted models to ensure that
students secure the credit hours necessary for CPA licensure (e.g., double major, master’s degree; Mauldin, Braun, Viosca, and
Chiasson [2013]). Further, a number of states require a minimum of credit hours in ethics education at the university level.3
(2) The Uniform CPA Exam
As designed, the CPA exam serves as a mechanism to protect the public interest by helping to ensure that only qualified
individuals become licensed as U.S. CPAs (National Association of State Boards of Accountancy [NASBA] 2018). The
computerized exam consists of four segments: Financial Accounting and Reporting, Regulation, Auditing and Attestation, and
Business Environment. In total, these exams comprise 16 hours of testing, and candidates must successfully complete all four
sections within 18 months. During the first quarter of 2019, the average pass rate across sections was approximately 50 percent
(Gleim 2019).
(3) The Professional Experience Requirement
In addition to completing higher education and passing a standardized exam, candidates for CPA licensure must also gain
requisite professional experience. One objective of this requirement is to ensure that CPAs have sufficient practical training to
match their academic training (Roberts 1994; Armitage 2014). All jurisdictions in the U.S. have adopted some experiential
requirement. While each has the authority to set standards for what constitutes required experience, generally one to two years
of accounting-based work under the supervision of a licensed CPA is considered sufficient for licensure (Armitage 2014).
(4) The Administrative Requirement(s)
Similar to the experience requirement, administrative requirements for initial licensure are jurisdictionally distinct.
Administrative requirements may include a valid Social Security number (SSN), residency and citizenship requirements, and/or
an age minimum. However, some states do not impose these administrative constraints. For example, neither Montana nor New
1
We use the terms ‘‘state’’ and ‘‘jurisdiction’’ to refer to both the 50 U.S. states as well as five additional territories: District of Columbia, Guam,
Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands.
A standard undergraduate bachelor’s degree consists of 120 semester credit hours. Therefore, candidates must acquire an additional 30 semester credit
hours for licensure. Candidates may obtain the additional credit hours in a number of ways—a graduate degree such as a M.S. Tax, M.S. Accounting,
Master’s of Business Administration, or 30 additional units of undergraduate coursework (Brink, Norman, and Wier 2016). Florida was the first state to
adopt the 150-hour requirement in 1983. As of 2019, 54 of the 55 jurisdictions require 150 hours of accounting education for licensure; Colorado was
the last state to adopt the requirement in 2015, and the U.S. Virgin Islands will mandate 150 hours beginning in 2020, making it the final jurisdiction to
conform.
3
Education and training in ethics have historically been weak (Hurtt and Thomas 2008). Studies of ethics education continue to highlight shortcomings
in ethics education at the university level (e.g., S. Ward, D. Ward, and Deck 1993; Jennings 2004; Misiewicz 2007; Liu, Yao, and Hu 2012).
2
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‘‘Admission to practice as a CPA is legally controlled by the State Boards of Accountancy, which wield delegated executive
power in every state jurisdiction of the U.S. These entities determine how candidates qualify to sit for the CPA exam, how they meet
experience requirements and how they prove their moral character’’ (Fogarty and Lowensohn 2017, 28). Specifically, a successful
candidate for CPA licensure will meet jurisdictional requirements including (1) completing higher education in accounting (i.e., a
degree from a four-year institution), (2) passing all four parts of the Uniform CPA exam, (3) obtaining the requisite experience
requirements (i.e., one to two years of supervised accounting work), (4) meeting administrative state requirements (e.g., citizenship
or state residency), and, in many jurisdictions, (5) fulfilling an ethics requirement (a professional ethics exam and/or ethics education)
(AICPA 2018). As the nature of this assignment relates to the ethics requirement, in this subsection we discuss briefly the first four
requirements and then subsequently expand on the ethics requirement in detail.
The Professional Ethics Exam and Acts Discreditable: An Introductory Assignment
41
York requires U.S. citizenship or a SSN for licensure as of 2019. Therefore, while administrative requirements may affect
where one is licensed, they do not prevent someone from becoming licensed somewhere in the U.S.
The Professional Ethics Requirement
AICPA Code of Professional Conduct: Violations and Sanctions
At a high level, the AICPA Code of Professional Conduct describes the fundamental ethics principles expected of a CPA in
practice including integrity, independence and objectivity, professional competence and due care, confidentiality, and
professional behavior (AICPA 2017). The Code of Professional Conduct outlines what behaviors are and are not acceptable in
the profession of accountancy in the U.S. (AICPA 2017). The three most common types of Code of Professional Conduct
violations are a criminal conviction, a failure to comply with professional standards, and an act discreditable to the profession
(Jenkins, Popova, and Sheldon 2018). While clear arguments exist as to why the first two violations would result in sanctions,
determining what constitutes an ‘‘act discreditable’’ is somewhat subjective. Interpretations under the Acts Discreditable Rule
(AICPA §1.400.001, AICPA 2017) list certain behaviors as discreditable to the profession including, but not limited to,
harassment, CPA exam cheating, failure to pay taxes, and making false or misleading statements. Krom (2016) notes that
‘‘socially’’ discreditable acts (e.g., driving under the influence, murder) are also considered of consequence under this rule.
A CPA is required to self-report violations of the Code of Professional Conduct to his/her State Board of Accountancy
(AICPA §0.300.010, AICPA 2017). Violations can also be reported to the AICPA by any authoritative body such as the
Securities and Exchange Commission (SEC), the Public Company Accounting Oversight Board (PCAOB), or the Internal
Revenue Service (IRS). Reported violations are generally reviewed by the AICPA’s Professional Ethics Executive Committee
and/or the relevant State Board of Accountancy, which assess the violation and impose sanctions (Jenkins et al. 2018).5
4
The authors reviewed six academic outlets (Accounting and the Public Interest, Auditing: A Journal of Practice & Theory, Current Issues in Auditing,
Issues in Accounting Education, Journal of Accounting Education, and Journal of Business Ethics) and two prominent practitioner publications (The
CPA Journal and Journal of Accountancy) from 2000 to 2019 for articles pertaining to the professional ethics requirement for licensure (e.g., course,
exam). We note a number of articles pertaining to undergraduate ethics education in accounting (e.g., Earley and Kelly 2004; Jennings 2004; Thomas
2004; Swanson 2005; Madison and Schmidt 2006; Bates, Waldrup, and Calhoun 2008; Hurtt and Thomas 2008; Massey and Van Hise 2009) as well as
articles pertaining to ethics in the form of continuing education (e.g., Loeb 2012). However, we note only two articles (Burke and D’Aquila 2004;
Misiewicz 2007) that specifically address a separate and distinct professional ethics requirement.
5
The AICPA is permitted to levy sanctions on a CPA without further investigation based on the findings of another authoritative body (e.g., SEC,
PCAOB, or IRS) (Armitage and Moriarty 2016); this acts as a means to speed up the enforcement process. Although less common than AICPA
enforcements, the SEC can also directly name a CPA in an Accounting and Auditing Enforcement Release and choose to investigate and sanction Code
of Professional Conduct violations (Juric, O’Connell, Rankin, and Birt 2018).
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The focus of this assignment is on the ethics requirement for licensure. While ethical behavior is just as valuable for the
reputation of the CPA designation as technical competency, a void exists between the explicit value of ethical behaviors and the
implicit assumption that CPAs understand and conform to those behaviors. To fill this gap in expectations, 34 of the 55
jurisdictions in the U.S. require a separate ethics component (i.e., a professional course/exam) distinct from any educational
ethics requirement achieved through university coursework. Twenty-one jurisdictions do not have such a requirement. Of the
34 jurisdictions that do have such a requirement, 30 require a professional ethics exam (hereafter, PETH exam) and four require
a professional ethics course (i.e., a continuing education course equivalent) for initial licensure. Of the 30 jurisdictions
requiring a PETH exam, 25 mandate the AICPA’s ‘‘Professional Ethics: The AICPA’s Comprehensive Course’’ (i.e., a PETH
exam) (Allen 2018), three states (California, Texas, and Wisconsin) require a state-specific PETH exam, and two states
(Nevada and Oregon) permit either the AICPA’s PETH exam or an alternative state-specific PETH exam. See Table 1 for a list
of the ethics requirement for each jurisdiction.
These PETH requirements support two key outcomes. First, they provide a much-needed application of ethical decisionmaking for CPA candidates. Second, explicit requirements provide assurance to the public regarding the important qualities
that a professional must possess to gain licensure (e.g., the market is influenced by the perception that CPAs have high
integrity; Dopuch, King, and Schwartz [2003]). Students’ understanding of these outcomes is essential to their foundation as
practicing CPAs, and accounting instructors should not presume that students are gaining this understanding through their
current higher education curriculum.
Attention to the ethics requirement for CPA licensure in academic literature is scant, despite the fact that, for CPA
candidates in 34 states, a professional ethics exam and/or ethics course is required for licensure.4 Anecdotally, the emphasis in
the university setting is similar in that the educational requirements and the CPA exam format are widely understood by
accounting students as necessary conditions for CPA licensure, but many accounting students—even at the senior and graduate
levels—are apparently unaware of the professional ethics requirement(s) for licensure.
Bordeman and Westermann
42
TABLE 1
Ethics Requirement for Initial CPA Licensure by Requirement Type
AICPA Professional Ethics Comprehensive Course
State-Specific Exam
Either AICPA Professional Ethics Comprehensive
Course or Qualifying Alternative
Ethics-Specific CPE Course
None
Alaska, Arizona, Colorado, Connecticut, Delaware, Idaho, Illinois, Iowa, Kansas,
Maryland, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota,
Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Utah,
Virginia, Washington, Wyoming
California, Texas, Wisconsin
Nevada, Oregon
The authors reviewed the CPA application process for each of the 55 jurisdictions in the U.S. The information in this table is up to date as of April 30,
2019.
Sanctions may include mandatory continuing professional education, public service, monetary penalties, limitations on
professional practice, license suspension, and/or license revocation (Krom 2016). These sanctions are costly to the violator in
the form of lost time, lost wages, inability to practice, reduction in job opportunities, and/or damage to personal reputation.
Further, to the extent that the action in question also violates state or federal law, the CPA will also be subject to civil or
criminal proceedings.
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New Jersey, North Carolina, Ohio, Vermont
Alabama, Arkansas, District of Columbia, Florida, Georgia, Guam, Hawaii, Indiana,
Kentucky, Louisiana, Maine, Massachusetts, Michigan, Mississippi, New
Hampshire, New York, Northern Mariana Islands, Pennsylvania, Puerto Rico,
U.S. Virgin Islands, West Virginia
The Professional Ethics Exam and Acts Discreditable: An Introductory Assignment
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I.
Title: Professional Ethics for CPAs
II.
Introduction:
Competencies All graduate accounting course deliverables use the AICPA
Pre-Certification Core Competency Framework to assess competencies
deemed essential for success in the accounting profession.
Competencies assessed by this project:
Research
o Research relevant professional frameworks, standards, and
governing bodies.
Governance Perspective
o Recognize an organization’s social and environmental
responsibilities.
o Explain how legal and regulatory environments affect an
organization and its operations, internal controls and enterprise risk
management.
Ethical conduct and Professional behavior
o Demonstrate knowledge of ethical principles and professional
behavior for the protection of society related to the AICPA Code of
Professional Conduct, which includes Continuing Professional
Education (CPE), and other professional codes of ethics
Decision-making
o Propose effective business decisions based on analysis and
professional judgment.
Communication
o Communicate clearly in writing and speaking, meeting expectations
for content, purpose, organization, audience, and format, especially
APA Style.
Scenario:
You are interviewing with Browning, Levin, & Wolod, a large accounting firm that
recruits college graduates. The firm participates in college job fairs across the
country to hire the best accounting graduates each year. Fortunately, they will be
at your university’s job fair next month. Given the ubiquity of online cheating
among some college students, Browning, Levin, & Wolod only hire recent
graduates who have an excellent understanding of AICPA’s Code of Professional
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062121 Last updated by Sharon L. Levin
Adapted from: AAA Issues in Accounting Education: The professional ethics exam and acts discernable:
an introductory assignment, by Adam Bordeman & Kimberly D. Westermann.
Ethics. Browning, Levin, & Wolod will invite select candidates to submit a writing
sample demonstrating knowledge of the AICPA Code of Professional Conduct.
To prepare for the interview, you follow the steps below, dress for the occasion,
and walk into the auditorium where the interviewing will occur next month to
emotionally prepare yourself for a full day of interviews. Next, you decide to start
preparing your writing sample
III.
Steps to Completion
Step 1: Select one (1) U.S. state that no other student has selected. Post
your selection in the discussion forum: Ask Questions About Project 1, in
Week 3. The title of your discussion must be the state you selected.
Step 2: Thoroughly read this project file and The Professional Ethics Exam
and Acts Discernable case study before beginning to work on this project.
This is a practice-oriented assignment designed to familiarize you, as an
accounting student, with the professional ethics for CPAs (PETH) exam
requirements for the state of [State you selected] and to enhance your ability
to identify and discuss repercussions of failed ethical actions by CPAs, by
way of disciplinary actions.
Before moving forward, read the article below to give you some insight on the
‘‘state’’ of disciplinary actions. The article is available in the UMGC library.
Krom, C. L. (2016). Disciplinary Actions by State Boards of Accountancy
2008-2014: Causes and Outcomes. Accounting & the Public Interest,
16(1), 1–27. https://doi-org.ezproxy.umgc.edu/10.2308/apin-51609.
Step 3: Conduct research to find answers to the questions posted below in
Step 4. It will be necessary to research or consult various resources to
complete this assignment, such as:
? [State Board of Accountancy or AICPA] Disciplinary Actions Repository
? PCAOB’s Settled Disciplinary Orders Repository
? [State Board of Accountancy or AICPA] License Look-Up or
use CPAVerify.org
? Ethics and or auditing textbooks in O’Reilly
? AICPA Code of Professional Conduct
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Adapted from: AAA Issues in Accounting Education: The professional ethics exam and acts discernable:
an introductory assignment, by Adam Bordeman & Kimberly D. Westermann.
Step 4: Part I – Professional Ethics Exams for CPAs
Complete Part I Requirements. Your answers to the following ten(10)
questions should be in paragraph format, not a numbered list. Part I should
be approximately 1-2 pages in APA format.
As demonstrated by the AICPA’s Acts Discreditable Rule, CPAs engage in
unethical behavior. In your opinion, what is the ultimate purpose of the
PETH exam?
What organization is responsible for the administration of the PETH exam
in your state?
How is the PETH exam administered (e.g., describe the format, number of
questions) and how often is it available/administered?
When can the candidate take the PETH exam?
How much does it cost to take the PETH exam?
Name three key topics covered on the PETH exam.
What percentage of correctly answered questions is considered a passing
score?
Anecdotal evidence suggests that the PETH exam is more difficult than
the CPA exam. What are the benefits to the accounting profession and to
individual accountants for completing such a difficult exam?
Once the candidate has earned his/her CPA license, what is the
continuing education ethics requirement to keep the candidate’s CPA
license status as ‘‘active’’ in the state of licensure?
The candidate does not need to take the PETH exam in a controlled
testing environment (as with the CPA exam). What are the pros and cons
of this ‘‘take home’’ testing approach?
Step 5: Part II – Disciplinary Actions
Complete Part II Requirements. Locate, research, evaluate, and compare the
two most recent disciplinary actions in one state (the state you selected for
this project). Part II should be approximately 8-10 pages in APA format.
Use this link to locate all State Boards of Accountancy. Select your state
board and search for disciplinary actions to find the selected CPAs (e.g.,
name, license number, and license status). For each disciplined licensee you
will need to extract specific details of the formal disciplinary action. The
related case file is linked to the CPA; the related documentation is often
specified as ‘‘accusation and decision’’ or ‘‘decision and order’’ or “settlement
agreement and consent order.” In the event the detailed proceedings are not
available for your selection, you should select a different disciplinary action.
If you need help locating disciplinary actions on state board Websites, see An
Example: Locating Disciplinary Actions on State Boards of Accountancy
located in the Project 1 folder.
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062121 Last updated by Sharon L. Levin
Adapted from: AAA Issues in Accounting Education: The professional ethics exam and acts discernable:
an introductory assignment, by Adam Bordeman & Kimberly D. Westermann.
You may also search these two sites to find disciplinary actions:
AICPA: https://www.aicpa.org/forthepublic/disciplinaryactions.html
PCAOB: https://pcaobus.org/oversight/enforcement/enforcementactions
As an example of what you are looking for, here is the disciplinary proceeding
for Alan Weinberg, a CPA in the state of Maryland, whose CPA license was
suspended in 2018 (do NOT select Mr. Weinberg for this assignment):
https://www.sec.gov/litigation/admin/2018/34-82744.pdf.
For each violation, you are challenged to appraise and articulate whether the
penalty assigned is appropriate, too lenient, or too harsh, given the violation
(i.e., determine whether the ‘‘punishment fits the crime’’). More broadly,
Question 10 (below) requires that you critically evaluate the disciplinary
process and the role of due process in licensure.
Answer the following questions in paragraph format (not a numbered list):
Disciplinary Action #1:
1. Provide the name and license number of the licensee, case number,
and effective date. Include a copy of the summarized disciplinary
action as an attachment to this assignment (i.e., do not attach the
entire disciplinary proceeding).
2. Describe the CPA’s violation(s) and the penalty issued.
3. Based on your review of the CPA’s violation(s), which specific rule(s)
from the AICPA Code of Professional Conduct (name and number) do
you believe the CPA violated? Explain your rationale.
4. In your opinion is the punishment appropriate, too lenient, or too harsh
(i.e., does the ‘‘punishment fit the crime’’)? Explain your rationale.
Disciplinary Action #2:
5. Provide the name and license number of the licensee, case number,
and effective date. Include a copy of the summarized disciplinary
action as an attachment to this assignment (i.e., do not attach the
entire disciplinary proceeding).
6. Describe the CPA’s violation(s) and the penalty issued.
7. Based on your review of the CPA’s violation(s), which specific rule(s)
from the AICPA Code of Professional Conduct (name and number) do
you believe the CPA violated? Explain your rationale.
8. In your opinion is the punishment appropriate, too lenient, or too harsh
(i.e., does the ‘‘punishment fit the crime’’)? Explain your rationale.
Page 4 of 5
062121 Last updated by Sharon L. Levin
Adapted from: AAA Issues in Accounting Education: The professional ethics exam and acts discernable:
an introductory assignment, by Adam Bordeman & Kimberly D. Westermann.
Disciplinary Actions #1 and #2: Compare and contrast
9. Compare and contrast disciplinary actions #1 and #2.
10. Research and explain the due process undertaken by the State Board
of Accountancy (or other governing body such as the AICPA, SEC, or
PCAOB) to pursue and resolve the disciplinary violation.
Hint: the answers to these two questions will require multiple pages.
Step 6: Write a report of your findings suitable to submit to Browning, Levin,
& Wolod at the job fair. The report must be in MS Word and adhere to strict
APA Style.
IV.
Deliverables
Using strict APA Style, submit a written report in MS Word. The approximately
length will be 10-12 pages, excluding the cover sheet and reference page.
V.
Rubric – the rubric is located in Learning Resources>Assessments: Projects
VI.
Helpful hints
a. Read the grading rubric before beginning the project to fully understand the
requirements; ask questions about the requirements if needed.
b. Read the case study until you fully understand it.
c. The case study may not provide some information that is needed to make
a definitive decision on every issue. Use your professional judgment when
necessary and state any assumptions you may have used.
d. Submit the deliverable on or before the due date.
e. Ask your professor questions as needed.
Page 5 of 5
062121 Last updated by Sharon L. Levin
Adapted from: AAA Issues in Accounting Education: The professional ethics exam and acts discernable:
an introductory assignment, by Adam Bordeman & Kimberly D. Westermann.
An Example: Locating Disciplinary Actions on State Boards of Accountancy:
Start at NASBA’s State Boards of Accountancy
Select your state board from the list. For example: Maryland.
Click the link to Consumers, then Disciplinary Actions, then select the most recent
disciplinary action.