Decoding the VSCPA Ethics Process
March 1, 2008 12:00 AM
By Robert J. Cochran, CPA, Ph.D.
CPAs strive to offer high-quality service by adhering to high professional standards. But first, they must know what constitutes professional conduct and understand the consequences of unethical behavior — including the process by which consequences are imposed.
The VSCPA’s mission is “to enhance the success of CPAs.” Success for all CPAs can best be achieved when the environment in which the CPA operates is guided by a set of rules that is well defined and understood.
Such rules, a code of professional conduct, are an important characteristic that differentiates a profession from a mere vocation. Without that code of conduct, it is not possible to proclaim that one’s behavior is professional. VSCPA members follow the VSCPA Code of Professional Conduct.
However, the Code of Professional Conduct alone is not sufficient to achieve professional conduct among all CPAs because adherence is voluntary. When behavior deviates from the Code, there must be a mechanism in place to correct the deviation.
The majority of CPAs will never have firsthand experience with the adjudication process of the Code of Professional Conduct — they will never be seen to act unethically. Yet, all of us are subject to the process on a daily basis.
The first step of the process is the ongoing assessment by colleagues, clients and competitors that our actions are ethical and, therefore, not in need of examination. On those occasions when behavior is questioned, the process progresses in a predetermined manner to ensure that all CPAs alleged to have committed an ethical violation are adjudicated equally.
In addition, the process assures that the behavior is either exonerated or disciplined in a timely manner. Even though the majority of CPAs will never experience the entire process, it is important that we all understand how the process works. The effectiveness of an enforcement process is directly related to the level of acceptance by those subject to it.
The Code of Professional Conduct
In the Commonwealth of Virginia, there are three regulatory and/or professional bodies that oversee the professional conduct of CPAs: the Virginia Board of Accountancy (BOA), the American Institute of CPAs (AICPA) and the VSCPA.
The Code of Professional Conduct of the VSCPA is the same, in all material respects, as the Code of Professional Conduct promulgated by the AICPA. All members of the VSCPA, both CPAs and non-CPAs, are subject to the Code. However, the VSCPA has no jurisdiction over the ethical conduct of non-members.
In the same vein, all members of the AICPA are subject to the AICPA Code of Professional Conduct. If a CPA is a member of both the AICPA and the VSCPA, both organizations have jurisdiction over his or her professional conduct. Because the two codes of conduct are essentially the same, the AICPA and the VSCPA have entered into a Joint Ethics Enforcement Program (JEEP).
Under the JEEP agreement, one or the other organization will be responsible for the investigation of any complaint where the respondent is a member of both organizations. Upon completion of the investigation, the investigating organization will seek concurrence from the other organization. If the VSCPA is the investigating organization, the investigation is conducted by the members of the VSCPA Ethics Committee in accordance with the JEEP Manual of Procedures published by the AICPA, as well as the VSCPA’s own policies and procedures.
Ordinarily, a complaint received by the AICPA or the VSCPA will be delegated to, or retained by, the VSCPA for investigation. The AICPA will generally only assume responsibility for the investigation of ethical violations including those that:
- Have national or international implications
- Result from litigation or regulatory actions involving accounting, auditing or independence issues
- Are referred by the federal government or the Public Company Accounting Oversight Board (PCAOB)
- Involve a member who maintains membership in multiple state societies (e.g., a member working in a “Big Four” accounting firm)
Ethical violations come to the attention of the VSCPA in a variety of ways. Complaints can be received either directly by the VSCPA or by an individual Ethics Committee member. They can also come to the attention of the VSCPA from other sources such as governmental agencies, media reports and anonymous tips.
Regardless of the source of the complaint, a record is made of the receipt of the alleged violation and an acknowledgement letter is sent to the source. Immediately upon receipt of a complaint, the respondent will have his membership in the VSCPA placed on hold. This action precludes the respondent from resigning, which would strip the VSCPA of jurisdiction over the case.
Certain ethical violations allow for automatic disciplinary action without a hearing or investigation. Membership will be suspended or terminated for any member who:
- Is convicted of a crime punishable by imprisonment for more than one year
- Willfully fails to file his or her own income tax return
- Willfully prepares and files a false or fraudulent income tax return for a client
- Has his or her license to practice as a CPA suspended by the BOA as a result of a disciplinary action
- Is suspended from practicing before the Securities and Exchange Commission, the PCAOB or the Internal Revenue Service Office of Professional Responsibility
Suspension or termination of membership will be published, thus alerting other regulatory agencies and interested parties of the action.
If a complaint is received but does not indicate a violation that would warrant automatic disciplinary action, the complaint is presented to the Ethics Committee to determine if further investigation is warranted. Further investigation will not be warranted if it is determined that no provision of the Code of Professional Conduct applies to the complaint or if the facts, circumstances and respondent are already the subject of an ongoing or concluded investigation.
However, if a provision of the Code of Professional Conduct has been breached, and the respondent is a VSCPA member, the complaint and any investigation of the complaint will be handled by the Ethics Committee in strict confidence. No referral will be made to the BOA. If the respondent is not a member, the staff liaison to the Ethics Committee will respond to the complainant that the VSCPA lacks jurisdiction and explain how the complainant can contact the BOA.
If the Ethics Committee determines a complaint warrants further investigation, it opens a case and two members of the Committee are assigned to investigate the allegation. The lead investigator will send an opening letter to the respondent informing him of the alleged violation and the initiation of an investigation. The respondent is then referred to the AICPA JEEP Manual of Procedures to review how the process will proceed and to inform him of his rights and obligations with respect to the investigation. He will also be informed that the process will be confidential except to the extent that other persons having information germane to the investigation may be questioned. In addition, he will be told that the results of the investigation will be communicated with the complainant, including those cases where the complainant is a federal, state or other regulatory agency.
The respondent will be offered the opportunity to request that the investigation be deferred. Deferral can be requested when the alleged ethical violation is subject to an ongoing legal or regulatory proceeding. Deferral will be allowed until such time as the legal or regulatory proceeding is concluded. During the deferral period, the respondent is responsible for preserving any evidentiary material in his possession. Failure to do so is, itself, an ethical violation.
The primary purpose of an investigation is to determine if there is evidence of a violation of the Code of Professional Conduct. Evidence is gathered not only from the complaint and the complainant, but through:
- Inquiries of other parties knowledgeable of the alleged violation
- Examination of correspondence and engagement working papers
- Any other evidentiary matter that is relevant to the investigation
The initial letter from the Committee to the respondent will include such preliminary inquiries as are relevant to the investigation. The respondent is given the option of responding in a face-to-face interview or in writing. In the event of an interview, a summary will be prepared and made available to the respondent. As information becomes available, the investigation will proceed through several iterations of the process.
After the investigators determine that sufficient evidentiary matter has been collected, a case summary will be prepared. The case summary is then presented to the entire Ethics Committee for a formal finding. The investigators can agree on one of three possible findings:
- No prima facie (obvious) evidence of an ethical violation
- Prima facie evidence of an ethical violation
- The respondent has refused to cooperate with the investigation
If the Committee concludes that the evidence does not indicate an ethical violation, a “no violation” letter will be sent to the respondent, thereby closing the investigation. The letter will reiterate the nature of the investigation and state that no evidence of a violation was found and that the matter is closed. It also explains that the Ethics Committee reserves the right to reopen the investigation if future revelation of facts so warrant. The complainant is also informed of the finding.
If the Committee finds prima facie evidence of an ethical violation, it must precisely identify the Code section that was violated and what actions of the respondent constituted the violation. Depending on the severity of the violation, the Committee must decide whether to present the case to the AICPA Joint Trial Board Division, issue a letter of required corrective action or offer the respondent an opportunity to settle the charges.
In the most egregious of cases, the Committee may decide to refer the case to the Trial Board. Generally, this action will only occur if the violation represents:
- A significant harm to the public or the profession
- A disregard for facts or standards
- A subordination of judgment
- A failure to act on the findings of a peer or quality control review
- A serious lack of honesty by the respondent
- A repeated violation
When a referral is made, the Committee will recommend to the Trial Board a course of action. If the Committee considers the possibility of rehabilitation to be remote, they will recommend expulsion from the AICPA and/or the state society. Otherwise, the Committee may recommend suspension, admonishment or other actions such as additional CPE, periodic reviews, etc.
If, after hearing the case, the Trial Board finds the respondent not guilty of the ethical violation, the case will be closed and the Committee is precluded from appealing the decision. If the respondent is found guilty, he has the right to appeal the finding to the Board of Directors of the AICPA and/or VSCPA. All final findings of guilt are published on the AICPA Web site and/or in the VSCPA’s magazine, Disclosures.
In those cases that do not rise to the level of referral to the Trial Board, the Committee may choose to issue a letter of corrective action. In addition to requiring the respondent to correct the action that resulted in the ethical violation, the letter may also require other corrective and/or educational action on the part of the respondent. If the respondent rejects the letter of corrective action, the Committee must then consider referral to the Trial Board. Such referral will follow the same process as with any other case referred to the Trial Board. If not referred, the case is closed and a letter of no further action is sent to the respondent.
In less serious cases, the investigating Committee member may conclude that the most appropriate course of action is to offer the respondent the opportunity to settle the charges. The proposed settlement offer must be approved by the AICPA Professional Ethics Executive Committee if the respondent is an AICPA member, and the full VSCPA Ethics Committee.
Settlement offers are not negotiable. If the respondent accepts the settlement agreement, he must waive his right to a hearing. The terms of the settlement agreement will be published. Where a settlement agreement involves deficiencies in a compilation or attest engagement and the firm of the respondent is enrolled in the AICPA’s Peer Review Program or the Center for Public Company Audit Firms Peer Review Program, the Committee will forward a copy of the agreement to the entity responsible for the firm’s peer review.
Complying with Ethical Rules
Cooperation with an ethics investigation is an obligation of membership in both the AICPA and VSCPA. A respondent who fails to honor this obligation may be referred to the Trial Board for the failure to cooperate without regard to the findings (or lack thereof) of the investigation with respect to the underlying charge. Failure to cooperate is a violation of the Bylaws of both the AICPA and the VSCPA, as well as a violation of Rule 501 — Acts Discreditable of the Code of Professional Conduct. The hearing for the failure to cooperate will proceed as would any other case presented to the Trial Board.
Over the past decade, a number of large highly publicized audit failures have cast a bright light on ethical conduct among CPAs. Within the profession, the issue is considered such a high priority that, in the Commonwealth, CPAs are required to attend an annual two-hour ethics course approved by the BOA in order to maintain their licenses.
The VSCPA serves more than 8,300 members. Currently, there are only 22 active cases under investigation by the VSCPA or the AICPA involving VSCPA members. Fortunately, most Virginia CPAs will never experience the ethics enforcement process. For the few that do, the process is highly defined and designed to provide for timely and consistent investigation and disposition of allegations.
While the foregoing is a general description of the process, you can find more information in the AICPA’s JEEP Manual of Procedures, available in its entirety on the AICPA Web site. More information on ethics, including the Code of Professional Conduct, is available in the “CPA Ethics” section on the VSCPA Web site. You’ll find instructions on how to file an ethics complaint in this section as well.
Robert J. Cochran, CPA, Ph.D., is an assistant professor in the College of Business and Economics at Longwood University in Farmville. He is a member of the VSCPA Professional Ethics Committee.
LAST UPDATED 3/1/2008