Question

Certified public accountants have imposed on themselves a rigorous code of professional conduct.

Discuss the reasons that the accounting profession adopted a code of professional conduct.

One rule of professional ethics adopted by CPAs is that a CPA cannot be an officer, diredtor, stockholder, representative, or agent of any corporation engaged in the practice of public accounting, except for the professional coproartion form expressly permited by the AICPA. List the arguments supporting the rule that a CPA's firm cannot be a corporations.

Answer 1

Most state laws do not provide for their incorporation, either directly by name or indirectly through rules and regulations of the various state boards of accountancy. The code of professional ethics of the American Institute of Certified Public Accounts (AICPA) currently prohibits incorporation, as do the rules of professional conduct of most state accounting societies. The recent overwhelming trend of various state legislative enactments permitting certain professionals, primarily lawyers and physicians, to incorporate and the collapse of opposition to these types of corporations by the Internal Revenue Service creates a favorable climate for such permissive legislation involving CPA's. The traditional professional opposition to incorporation is now changing. Certain professional occupations-lawyers and doctors are now marching in time with the rest of society and are "finding better ways" to reduce their personal income taxes. The Internal Revenue Code of 1954 has allowed "better tax benefits" to an economic entity in the corporate form than one in the partnership or proprietorship form. The difficulty was, however, that many professions (attorneys, doctors, and CPA's) could not heretofore incorporate because of either an enforced code of professional ethics or state law prohibition. The lawyers and doctors found a better way-they changed the state laws and their codes of professional ethics. Over one-half of the states now, by statute, have enacted some type of professional incorporation statute. Yet, in California and other states, CPA's were not included within these statutes. Undoubtedly, there are far more than just tax consequences that follow from allowing a professional to incorporate. In the authors' opinion, the major drive for incorporation is primarily to achieve tax benefits.

The AICPA and the accounting profession as a whole have placed a great deal of emphasis upon the auditor being "independent" when he conducts his audit. The AICPA has stated that "independence is not susceptible of precise definition, but is an expression of the professional integrity of the individual."' Just as lawyers and physicians have maintained their professional integrity in the corporate form, we see no reason why CPA's cannot do the same. For example, the creditors, stockholders and management of Zip-Top Corporation assume the utmost professional integrity in Able, Baker and Conway CPA's, the auditors of Zip-Top. We think that these same creditors, stockholders and management should still be able to assume the same professional integrity in Able, Baker and Conway CPA's, Inc. Professional integrity is, on the part of the CPA, an attitude of the mind and heart; on the part of the creditors, stockholders and management, a feeling of confidence and trust in the work performed. This is in a large part a personal relationship. This personal relationship should exist just as much and just as professionally with the officers of Able, Baker and Conway CPA's, Inc. as it would with the partners of Able, Baker and Conway CPA's. Nor do we think that the auditor's independence would be impaired by incorporation of the firm. The AICPA has correctly said that "independence is an attitude of mind, much deeper than the surface display of visible standards."Able, Baker and Conway are just as capable and should be expected to display just as much of an attitude of independence as officers of their professional corporation as they were capable of and did display as partners. These questions of independence and professional integrity are matters of substance and mind and not of legal form.

A CPA is licensed through the states and has a duty to the public. If they fail on this duty, the public (who has been harmed) has the right to sue both the firm and the party responsible for the misconduct (usually the partner in charge). If a CPA firm was allowed to be a corporation, this direct liability would be removed. Only the "corporation" would be responsible for the monetary damages.

Instead of a corporation, CPA firms can organize in several other ways. The most common are a sole proprietorship, LLP, Partnership, or P.C. (Professional Corporation). A LLP partner has limited liability for others outside his direct control, but has personal liability for his own conduct and those working under him. For instance, if the New York office of one of the Big 4 intentionally overlooks material information on an audit, the partners in Miami will not be financially liable for that act. Only those who perpetrated the act would be liable.

The current trend toward corporate acquisitions of CPA firms poses potential threats to the autonomy and ethical standards of public accounting professionals. This recent consolidation movement suggests that for the first time a significant number of public accounting professionals are subject to the supervision and control of nonprofessionals.