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Read “It's Time for Principles-Based Accounting Ethics” which can be accessed through the DeVry online library. In 3-4 pages (12-pt type, double-spaced) answer the following questions:

1. Do you agree with the authors that a code of ethics should do more than establish minimum acceptable standards? Why or why not?
2. Describe the five cardinal virtues of professional accountants that the article’s authors discuss.
3. We’ve talked about rules-based versus principles-based accounting standards. Should we have rules-based ethics standards? Why or why not? Should they tell you exactly what to do in specific ethical situations?
4. Compare and contrast the AICPA’s Code of Professional Conduct and the IFAC Code of Ethics for Professional Accountants.


Its time for priciples based acct.pdf

J Bus Ethics (2011) 99:4959
DOI 10.1007/s10551-011-1166-5

Its Time for Principles-Based Accounting Ethics
Albert D. Spalding Jr. Alfonso Oddo

Published online: 6 January 2012
Ó Springer Science+Business Media B.V. 2012

Abstract The American Institute of certied public
accountants (AICPA) has promulgated a Code of Professional Conduct, which has served as the primary ethical
standard for public accountants in the United States for
more than 20 years. It is now out of date and needs to be
replaced with a code of ethics. Just as U.S. generally
accepted accounting principles are being migrated toward
principles-based accounting as part of a convergence
with international nancial reporting standards, a similar
process needs to occur with ethics. This article organizes
the primary rules of the AICPA Code around ve essential
virtues: objectivity, integrity, inquisitiveness, loyalty, and
trustworthiness. These virtues correspond to the general
principles set forth in the Code of Ethics for Professional
Accountants of the International Federation of Accountants
(IFAC). From this virtue ethics perspective, various rules
of the AICPA Code are critiqued as being inadequate at
best, and poorly crafted at worst. The article concludes
with the proposition that principles-based ethics serves the
profession and the nancial reporting process better than
the current rules-based approach.

This article was presented at the 16th Annual International
Conference Promoting Business Ethics, Niagara University, October
2009, and reects the comments and suggestions of conference
participants.
A. D. Spalding Jr. (&)
Associate Professor of Legal Studies, Wayne State University,
School of Business Administration, Detroit,
Michigan 40202, USA
e-mail: aspalding@wayne.edu
A. Oddo
Professor of Accounting, Niagara University, College
of Business Administration, Niagara University,
NY 14109, USA

Keywords Ethics Á Accounting standards Á Rules-based Á
Principles-based Á International accounting

Introduction
The accounting profession in the United States and around the
world is in the process of harmonizing its nancial reporting
standards (Benston et al. 2006). This process involves two
initiatives. First, the accounting standards within various
jurisdictions, such as the generally accepted accounting
principles (GAAP) used in the United States, are being converged into international nancial reporting standards (IFRS).
IFRS are also known as International GAAP (iGAAP). Second, as part of this process, countries whose nancial standards have generally been understood to have been rules
based are re-working those standards so that they are more
principles based. The United States is generally recognized
as a jurisdiction within which accounting standards are mostly
rules based (Bennett et al. 2006).
This harmonization of local nancial reporting standards
is being coordinated under the auspices of the International
Accounting Standards Board (IASB). The IASB is currently
closely working with the U.S. Financial Accounting Standards Board (FASB) in an effort to achieve complete harmonization of U.S. GAAP and iGAAP within the next few
years. This allows corporations and other entities to use the
same reporting standards that are used elsewhere, and will
make it easier for investors to compare the nancial performance of publicly traded corporations around the globe.
Before this harmonization process, U.S. GAAP has
emphasized, and relied on, rules-based standards (Nobes
2005). In part, this has been in response to the demand of
corporate managers and their auditors, who have sought
clear and precise guidance for the reporting of transactions.

123

50

This has had the advantage of providing clarity to
accounting professionals, as well as a precise standard of
care that has served in the defense of accountants and
managers when they have been sued by plaintiffs charging
them with accounting negligence.
Detailed accounting protocols have not served the profession or its stakeholders well in the long run. Corporate
managers have honed their skills at nding and using
loopholes and technical exceptions to complex rules, so
they have been able to nesse the rules and augment their
nancial results. The result has been nancial statements
that comply with the technical rules of GAAP, but do not
provide a fair representation of the corporation or other
economic entity. This, in turn, has served to camouage
problems at reporting entities, until those problems become
so large that the entity itself is swallowed up by them.
And so the drive toward principles-based accounting
standards, as part of the convergence of U.S. GAAP and
iGAAP is, in part, an effort to improve nancial reporting in
the United States and elsewhere. Principles-based accounting is intended to allow reporting standards to be more closely aligned with the objectives of nancial reporting, such
as relevance and usefulness. They are intended to be based on
a carefully crafted and consistently applied conceptual
framework that minimizes exceptions and avoids loopholes.
An appropriate amount of implementation guidance is necessary and expected, within the principles-based approach,
but a balance is sought between generalized and abstract
concepts, on one hand, and very specic, almost mechanical,
rules, on the other (Benston et al. 2006).
Along with the movement from rules-based accounting
standards to principles-based accounting standards, there is
an opportunity for the accounting profession in the United
States to improve its ethical standards. In fact, the AICPA
has committed to conforming its Code of Professional
Conduct to an international Code of Ethics for Professional
Accountants, but has yet to complete that project (AICPA
2008a). Just as academic research has served to enliven and
assist the discourse among accountants and their constituents in the area of convergence of nancial reporting
¨
standards (Fulbier et al. 2009), we offer some suggestions
to enhance the ethical standards of the accounting
profession.

The AICPAs Code of Professional Conduct
The AICPA is the national professional organization of
certied public accountants in the United States. Its code of
conduct serves as the ethical standard for purposes of selfregulation within the profession. The AICPA code consists
of a set of principles and a set of rules (AICPA 2008a).
Each will be discussed briey in the following. It should be

123

A. D. Spalding Jr., A. Oddo

noted, however, that the bylaws of the AICPA require that
members adhere to the rules, but not the principles.
Principles
The principles section sets forth the objectives of the code
in somewhat lofty, if not compulsory, language. It is suggested, for example, that accountants should exercise
sensitive professional and moral judgments in all their
activities, and should seek to continually demonstrate
their dedication to professional excellence. Service to the
public trust should not be subordinated to personal gain
an advantage, and members should maintain objectivity
and avoid conicts of interest. Other ideals, such as
competence, cooperation with other members of the profession, and self-governance, are also commended.
Although some of the text of the principles section includes
language that seems to be mandatory and authoritative,
such as the assertion that integrity requires AICPA members to be honest and candid within the constraints of
condentiality, the principles themselves are nonbinding.
Rules
There are eleven rules of the AICPA code, and most of the
rules are supported by interpretations. The AICPA also
provides short hypothetical ethics rulings that serve to provide additional interpretation. Some of the rules are relatively brief, and can only be understood by reference to the
AICPA interpretations. Rule 101Independence simply
requires that accountants maintain independence from their
clients when performing such attestation services as audits or
reviews. The AICPA interpretation 101-1, however, is a
complex and lengthy document that details such relationships as immediate family and close relatives (for example,
grandparents are and domestic partners are included, but
aunts, uncles, cousins, and in-laws are not). It prescribes
those circumstances in which an accountant may own or hold
one share of stock in the rms attestation client, and when he
or she may not. Rule 101 is further bolstered by a separate
conceptual framework document that prescribes procedures for gauging independence in situations where the
interpretation provides insufcient guidance.
Rule 501Acts Discreditable is another very short rule
backed up by various interpretations and rulings. The rule
simply requires that AICPA members not commit an act
discreditable to the profession. The term discreditable
is not dened, but the interpretations of Rule 501 provide
examples of such acts. For example, interpretation of 501-1
is a lengthy set of instructions pertaining to how accountants ought to respond requests by clients and former clients for records. The interpretation provides, among other
things, that client records prepared by an accountant should

Its Time for Principles-Based Accounting Ethics

be provided to the client, unless there are fees due to the
accountant. Unfortunately, some accountants have from
time to time been tempted to increase their nal fees
charged to a departing client, and then hold the clients
records ransom. For all its detail, the interpretation 501-1
encourages, rather than discourages, this type of discreditable behavior.
Other rules are poorly drafted. Rule 102Integrity and
Objectivity, for example, mandates that AICPA members
shall be free of conicts of interest. In fact, accountants
face conicts of interests nearly every day of their working
lives, and are required to navigate those conicts in a way
that optimizes their professionalism. Unfortunately, the
AICPA code does not provide insight or guidance in regard
to this necessity. Similarly, the same rule prohibits members from subordinating their judgment to others (except,
presumably, the requirements of the AICPA and other
authoritative bodies affecting the work of the accountant).
The idea of honesty is also clumsily addressed. Rule 102
establishes a very low ethical watermark by requiring that
AICPA members not knowingly misrepresent facts. Of
course, dishonesty and deceit is not limited to outright lies.
On its face, this rule leaves open the possibility of misleading
others by omission, deliberate vagueness, circumlocution, or
purposeful efforts to confuse without outright misrepresentation. Oddly, Rule 502Advertising sets a higher standard
than does Rule 102. There, accountants are prohibited from
advertising in a manner that is false, misleading, or
deceptive. As written, the code holds accountants to a
stricter standard of honesty in their advertisements than in
their work and other communications.
The AICPA code has come under other criticism as
well. Neill et al. (2005), for example, suggested that the
enforcement of the code was ineffective because it was
largely dependent on grievances led by clients, former
clients, and other accountants. As a result, no comprehensive system is in place to assess whether members are
acting in compliance with the code. The lack of compliance
assessment by the AICPA (or third parties) not only
weakens the effectiveness of the code in transforming the
professional behavior of accountants but also deprives the
public from access to data regarding whether AICPA
members are complying with the code.
These criticisms remain relevant today. Through its
enforcement process, the AICPA investigates members
who are accused of violating the code and imposes sanctions as it deems appropriate. Sanctions range from the
assignment of required ethics education, to a temporary
suspension of membership, to a termination of membership. If, for example, a member has been disciplined
by a governmental agency or other organization that
has oversight authority (such as the Securities and
Exchange Commission, or the Public Company Accounting

51

Oversight Board), the AICPA routinely takes action to
sanction that member by requiring ethics education or by
suspending membership. If a complaint is led against the
member by a client, another accountant, or third party, the
AICPA joint ethics enforcement panel and joint trial board
will conduct an investigation to determine whether similar
sanctions should apply.
As Neill et al. (2005) observed, the AICPA maintains a
peer review process whereby accounting rms visit each
other and assess the quality of each others work. However,
the subject matter of this review process is limited to quality
control concerns in regard to compliance with technical
accounting standards. Ethical problems, and its risks of
potential ethics violations, are not explicitly addressed.

The IFAC Code of Ethics for Professional Accountants
The International Federation of Accountants (IFAC) includes
157 accounting organizations from 123 countries and jurisdictions worldwide. IFAC develops and promotes highquality international accounting standards and facilitates
collaboration and cooperation among its member bodies.
The IFAC maintains an International Ethics Standards
Board for Accountants (IESBA) as an independent standard-setting board. The IESBA has recently established a
Code of Ethics for Professional Accountants (IESBA
2009). The IESBA develops ethical standards and guidance
for use by all professional accountants under a shared
standard-setting process involving the Public Interest
Oversight Board, which oversees the activities of the
IESBA, and the IESBA Consultative Advisory Group,
which provides public interest input into the development
of the code. Some jurisdictions may have requirements and
guidance that differ from those contained in the IFAC
code. Professional accountants in those jurisdictions are
required to comply with the more stringent requirements
and guidance unless prohibited by law or regulation.
The code contains three parts. Part A establishes fundamental principles of ethics for professional accountants
and provides a conceptual framework that professional
accountants shall apply to:




Identify threats to compliance with the fundamental
principles
Evaluate the signicance of the threats
Apply safeguards to eliminate or reduce threats

Safeguards are necessary when the professional accountant
determines that the threats are not at a level at which a reasonable and informed third party would be likely to conclude,
weighing all the specic facts and circumstances available to
the professional accountant at that time, that compliance with
the fundamental principles is not compromised.

123

52

A. D. Spalding Jr., A. Oddo

Parts B and C of the code describe how the conceptual
framework applies in certain situations. They provide
examples of safeguards that may be appropriate to address
threats to compliance with the fundamental principles. They
also describe situations where safeguards are not available to
address the threats, and consequently, the circumstance or
relationship creating the threats should be avoided. Part B
applies to professional accountants in public practice. Part C
applies to professional accountants in business. Professional
accountants in public practice may also nd Part C relevant
to their particular circumstances.
The IFAC code establishes ethical requirements for
professional accountants and provides a conceptual
framework for all professional accountants to ensure
compliance with ve fundamental principles of professional ethics. Under the IFAC framework, all professional
accountants are required to identify threats to these fundamental principles and, if there are threats, apply safeguards to ensure that the principles are not compromised. A
member body of IFAC, such as the AICPA, may not apply
less stringent standards than those stated in the IFAC code.
Fundamental Principles
The IFAC code requires that a professional accountant
shall comply with the following fundamental principles:
Integrity
Objectivity

Professional
competence
and due care

Condentiality

Professional
behavior

123

To be straightforward and honest in all
professional and business relationships.
To not allow bias, conict of interest, or
undue inuence of others to override
professional or business judgments.
To maintain professional knowledge and
skill at the level required to ensure that a
client or employer receives competent
professional services based on current
developments in practice, legislation, and
techniques and act diligently and in
accordance with applicable technical
and professional standards.
To respect the condentiality of information acquired as a result of professional
and business relationships and, therefore,
not disclose any such information to
third parties without proper and specic
authority, unless there is a legal or
professional right or duty to disclose, nor
use the information for the personal
advantage of the professional accountant
or third parties.
To comply with relevant laws and
regulations and avoid any action that
discredits the profession.

Conceptual Framework Approach
The IFAC code establishes a conceptual framework that
requires a professional accountant to identify, evaluate, and
address threats to compliance with the fundamental principles. The conceptual framework approach assists professional accountants in complying with the ethical
requirements of the code and meeting their responsibility to
act in the public interest. It accommodates many variations
in circumstances that create threats to compliance with the
fundamental principles and can deter a professional
accountant from concluding that a situation is permitted if
it is not specically prohibited.
When a professional accountant identies threats to
compliance with the fundamental principles and, based on
an evaluation of those threats, determines that they are not
at an acceptable level, the professional accountant shall
determine whether appropriate safeguards are available and
can be applied to eliminate the threats or reduce them to an
acceptable level. In making that determination, the professional accountant shall exercise professional judgment
and take into account whether a reasonable and informed
third party, weighing all the specic facts and circumstances available to the professional accountant at the time,
would be likely to conclude that the threats would be
eliminated or reduced to an acceptable level by the application of the safeguards, such that compliance with the
fundamental principles is not compromised.
A professional accountant shall evaluate any threats to
compliance with the fundamental principles when the
professional accountant knows, or could reasonably be
expected to know, of circumstances or relationships that
may compromise compliance with the fundamental principles. The following illustration outlines the conceptual
framework approach.

Conceptual Framework

Identify threats to
fundamental principles

Evaluate the threats

Apply safeguards to
eliminate or reduce threats

Its Time for Principles-Based Accounting Ethics

Revised Code
The IESBA has issued a revised Code of Ethics for Professional Accountants, clarifying the requirements for all
professional accountants and signicantly strengthening
the independence requirements of auditors. The revised
code has been released following the consideration and
approval by the public interest oversight board (PIOB) of
due process and extensive public interest consultation. The
revised code, which is effective on January 1, 2011,
includes the following changes to strengthen independence
requirements:









Extending the independence requirements for audits of
listed entities to all public interest entities
Requiring a cooling off period before certain members
of the rm can join public interest audit clients in
certain specied positions
Extending partner rotation requirements to all key audit
partners
Strengthening some of the provisions related to the
provision of nonassurance services to audit clients
Requiring a pre- or post-issuance review if total fees
from a public interest audit client exceed 15% of the
total fees of the rm for two consecutive years
Prohibiting key audit partners from being evaluated on
or compensated for selling nonassurance services to
their audit clients

The revised code maintains the principles-based
approach supplemented by detailed requirements where
necessary, resulting in a code that is robust but also sufciently exible to address the wide-ranging circumstances
encountered by professional accountants. The International
Federation of accountants statements of membership
obligations have as a central objective the convergence of a
countrys national code with the Code of Ethics for Professional Accountants. Furthermore, the requirements
specify that member bodies should not apply less stringent
standards than those stated in the code.

Virtues as Ethical Principles
Both the AICPA and IFAC codes contain ethical standards,
but the content of the latter is more principles based than
that of the former. In regard to honesty, for example, Rule
102 of the AICPA code prohibits intentional misrepresentation. This rule begs the interpretation of the extent to
which actions are willful, and the extent to which
actions constitute misrepresentation. The emphasis is on
the element of wrongdoing associated with behavior of the
accountant. To determine whether an accountant has violated Rule 102, it becomes necessary to examine whether a

53

specic statement made by the accountant constitutes a
willful misrepresentation.
Section 110 of the IFAC code, by comparison, brings
more focus to the character of the professional accountant
as a person. Honesty is associated with straightforwardness. Accountants are prohibited from being associated
with reports, returns, communications, or other information
that contains statements or information furnished recklessly, or omits or obscures information in a way that
would be misleading. In other words, the emphasis is on
the accountants responsibility for the overall quality of his
or her work.
Each of these two codes also provides a different
approach to conicts of interest. Rule 102 of the AICPA
code states that accountants shall be free of conicts of
interest when rendering professional services. To make any
practical application of this part of Rule 102, the denition
of conict of interest must be so circumscribed and
limited that it does not take into account the complexity of
commerce in the twenty-rst century (or the even greater
complexity of the accounting discipline within a globalized
society). Some readers of the AICPA code, who are
mindful of the fact that auditors are usually compensated
by their own audit clients, may reasonably conclude that
the professions notion of conict of interest is driven by its
own myopic manner of dening its code language.
The IFAC offers no pretense about the fact that
accountants are then faced by a myriad of real or potential
conicts of interest in many circumstances. The IFAC code
does not prohibit the existence of conicts of interest or
undue inuence. Instead, it requires that accountants not
allow conicts of interest, undue inuence of others, or
even their own personal bias to override professional or
business judgments. This is a more realistic standard that
speaks to the professional accountant as a person, and
challenges the accountant to rise above the realities of such
conicts.
Among the differences between the AICPA code and the
IFAC code is a greater emphasis, within the latter, on those
qualities and behavior patterns that characterize the ethical accountant. Such virtues as honesty and integrity are
described in greater detail, and held out as the ideal ethical
standards to which accountants ought to aspire. The IFAC
code tends to point toward the highest levels of excellence
and professionalism, rather than to simply delineate minimally acceptable ethical standards.
This emphasis on personal character is consistent with
the virtue theory approach to business and professional
ethics that has gained greater currency in recent years. As
Whetstone (2001) notes, moral philosophizing during the
last half century or so has tended to focus either on actoriented theories (such as the consequentialism of Benthams utilitarianism and the deontology of Kants rational

123

54

ethics) or on virtue-oriented theories. When applied, the
former focuses on normative rules, whereas the latter tends
to result in the articulation of ethically optimal habits and
characteristics. Whetstone suggests that both are important,
but that principles-based ethics (PBE) has the advantage of
emphasizing the promotion of virtuous judgment.
Dawson and Bartholomew (2003) expand on Whetstones approach by suggesting that an important role of
business ethics generally, and codes of conduct in particu...

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