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 Download Attachment
J Bus Ethics (2011) 99:4959
Its Time for Principles-Based Accounting Ethics
Albert D. Spalding Jr. Alfonso Oddo
Published online: 6 January 2012
Springer... J Bus Ethics (2011) 99:4959
Its Time for Principles-Based Accounting Ethics
Albert D. Spalding Jr. Alfonso Oddo
Published online: 6 January 2012
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 It is now out of date and needs to be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
A. D. Spalding Jr. (&)
Associate Professor of Legal Studies, Wayne State University,
School of Business Administration, Detroit,
Michigan 40202, USA
Professor of Accounting, Niagara University, College
of Business Administration, Niagara University,
NY 14109, USA
Keywords Ethics Accounting standards Rules-based
Principles-based International accounting
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.
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
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
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.
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.
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
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
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.
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.
The IFAC code requires that a professional accountant
shall comply with the following fundamental principles:
and due care
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
Identify threats to
Evaluate the threats
Apply safeguards to
eliminate or reduce threats
Its Time for Principles-Based Accounting Ethics
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
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
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
specic statement made by the accountant constitutes a
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
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
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 particular,
is the promotion of those virtues that, in turn, foster human
ourishing. Bertland (2009) offers an additional insight by
taking into account the extent to which the advocacy of
virtues, and virtuous judgment, can not only promote human
ourishing in general but can also enhance the use of human
capabilities in particular. Indeed, some have argued that it is
the cultivation of character or virtue that is a precondition to
any reasonable expectation that rules would be respected
and understood as minimum standards of behavior (Arjoon
2000). That is, in part, because virtue ethics emphasizes both
behavior and motives, rather than behavior in isolation from
motives (Blackburn and McGhee 2004).
Here, we consider the implications of this emphasis on
virtue-oriented PBE on the professional ethics of accountants. We draw from traditional concepts of Aristotelian
virtue theory. As Graaand (2010) explains, virtues, under
this classical view, are habits of character that constitute a
golden mean between the vices of deciency, on one
hand, and excess on the other. For example, the Aristotelian
virtue of courage represents an optimal balance between its
deciency (cowardice) and its excess (recklessness, boorishness, or overcondence). The proper roles of ethical
epistemology and the development of ethical protocols
(such as codes of conduct and codes of ethics) are to enhance
such virtues and move them to higher levels of excellence
and prudence. The intellectual project of virtue ethics is the
identication of the most desirable virtues, as well as the
development of disciplines and habits that will foster such
virtues. The bell curve in Fig. 1 depicts the optimization of
virtues and the block arrow represents the development of
skills and disciplines that foster such virtues.
Fig. 1 Virtue as the development of excellence
A. D. Spalding Jr., A. Oddo
Ethical rules, by comparison, tend to delineate the vices.
To the extent that codes of conduct establish the boundaries
between acceptable and unacceptable behavior, they
emphasize the negative. That is, they emphasize the
crossover point at which behavior becomes impermissible.
The intellectual project of rule making is the identication
and justication of such crossover points.
Figure 1 depicts this tension and interaction between
rules and virtues. The vertical lines represent the rules, or
boundaries, beyond which an accountants actions are
ethically unacceptable. They are the outer limits of
allowable behavior. Virtues are those habits and characteristics that result in actions at or near the midpoint
between the two extremes. Virtues are enhanced, or made
more excellent, by disciplines such as ethical best practices that foster ethical habits. Codes of conduct can focus
on the rules that delineate acceptable behavior, or they can
emphasize the cultivation of virtues.
Five Cardinal Virtues of Professional Accountants
If both the AICPA and the IFAC codes are examined
through the lens of virtue ethics, ve cardinal virtues for
professional accountants seem to emerge. These are
integrity, objectivity, diligence, loyalty, and professional
behavior. All ve of these virtues are addressed in the
Principles of Professional Conduct that comprise the
preamble to the rules of the AICPA code of conduct. As
noted above, this preamble is not employed or enforced as
part of any disciplinary self-regulation by the AICPA.
These ve virtues are reected to some extent in the rules
themselves, but only in terms of minimum standards. They
are more clearly articulated in the IFAC code, which is
generally organized around them.
As used within the context of the accounting profession,
the concept of integrity has two elements: honesty and
courage. Accountants are communicators: They communicate information derived from data with which they
work. For this reason, accountants must be truth tellers rst
and foremost. This requires not only competence in truth
seeking but also courage in the telling of truth. One of the
greatest temptations faced by accountants, or any other
communicators of information, is the temptation to discount, exaggerate, or otherwise mold the communication
process so as to please (or, at least, to avoid displeasing)
the receiver of the information.
As described earlier, the critical element of truth telling
is poorly articulated in Rule 102 of the AICPA code. To
establish a standard of honesty that is limited to the
Its Time for Principles-Based Accounting Ethics
avoidance of willful misrepresentation is to overlook the
critical role that honesty plays within the accounting discipline. To be fair, some of the AICPAs interpretations of
Rule 102, and some other pronouncements by the AICPA,
expand the notion of honesty beyond this minimal threshold, but the rule itself is largely unhelpful as a standard that
encourages optimal honesty by accountants. As also
described above, the IFAC code, like the preamble to the
AICPA rules of conduct, does a better job of articulating
what it means for an accountant to strive for optimal, if not
absolute, truth telling in his or her professional work.
As a virtue, integrity in the telling of truth requires a
balance. Often, the vice of dishonesty results in misleading,
if not false, nancial information. But there can be too
much information disclosed by an accountant. For example, the duty of condentiality in regard to trade secrets and
other information properly owned and protected by an
employer or client must not be disclosed. For the professional accountant, the nding of a proper balance between
transparency and improper disclosure requires a certain
amount of skill and wisdom.
To be objective is to acknowledge that there is an external
standard by which one measures his or her work or communication. Within the accounting discipline itself, for
example, the objective standard for nancial reporting is a
fair representation of the economic activities of a particular business or other organization. Accounting standards serve as the objective principles by which the quality,
reliability, and usefulness of nancial reports are measured.
Compliance with such standards is not only a technical
issue but also an ethical issue: Accountants who attest that
their work comply with such standards are making a claim
that has both technical and ethical content. The ethical
content is the assurance that their work is consistent with
those standards, at least to the best knowledge and belief of
The AICPA code does not dene objectivity per se, but
it requires that conicts of interest be avoided, and that the
judgment of accountants is not subordinated to others.
Presumably, this latter requirement means that judgment is
not subordinated to others, except to comply with such
external standards as GAAP and IFRS. This is separately
addressed in Rule 202Compliance with Standards, and
Rule 203Accounting Principles of the AICPA code.
Similarly, Sect. 120 of the IFAC code avoids any denition
of objectivity, but acknowledges that the principle of
objectivity imposes an obligation on all professional
accountants not to compromise their professional or business judgment because of bias, conict of interest, or the
undue inuence of others.
Professional judgment allows, and sometimes requires,
an accountant to supplement, modify, or even deviate from,
nancial accounting standards, in appropriate circumstances. These departures from established standards must
be disclosed in the interest of transparency, but the fact that
such departures can occur shows that objectivity in
accounting means more than mere compliance with
accounting standards. It demonstrates that nancial
accounting strives to meet an ideal that is largely but not
entirely articulated within the standards. By striving to nd
an optimal balance between noncompliance with standards
and legalistic over-compliance with standards, the accountant is exhibiting true objectivity.
In accounting, diligence is expressed mostly by the virtue
of truth seeking. Accountants cannot be effective truth
tellers unless they are truth seekers. This requires an
intention as well as the skills to implement the intention.
Mere curiosity will not sufce, nor will mere data gathering without an alert and informed focus on the purpose of
the data gathering. Accountants must be aware of, and must
be ready to identify, sort, prioritize, and address, red ags
that signal potential weaknesses, fraud, or other problems
within an accounting information system.
In the AICPA code, diligence is addressed in Rule
201General Standards, wherein accountants are required
to ensure that their work reects professional competence,
due professional care, planning and supervision, and the
gathering of sufcient relevant data. Section 130 of the
IFAC code, similarly, details the concepts of professional
competence and due care by emphasizing such qualities as
professional knowledge and skill, sound judgment, thoroughness, timeliness, carefulness, and transparency in the
performance of accounting services.
Prudence in the area of diligence requires that accountants avoid both negligence, on one hand, and obsessive
perfectionism, on the other. Accounting is an art, not a
science, and it is an art that must be practiced within the
connes of the marketplace. For example, there can be no
such thing as a perfect nancial audit, if for no other
reason than the reality that the market (that is, the audit
client) will not pay for an audit that is guaranteed to
uncover every possible defalcation, departure, or deciency within an accounting system. And so the notion of
diligence requires the seeking of an Aristotelian Golden
Mean between competency and overkill.
For professional accountants, loyalty involves a balance
between faithfulness to an employer or client, on one hand,
and to society on the other. Loyalty to the client or
employer most often includes the necessary maintenance of
condentiality of information about that client or
employer. Although most legal jurisdictions do not provide
for an accountantclient (or accountantemployer) privilege similar to that of physicianpatient, lawyerclient, or
clergyparishioner, the premise behind the duty of condentiality is similar to the reasoning behind these privileges. That is, an accountant must have the complete
condence of his or her employer or client, to promote
communication between them. As noted above, the work of
the accountant is as much about truth seeking, as truth
telling. The truth-seeking function necessitates that barriers
be removed in the discourse between the accountant and
his or her employer or client. The duty of condentiality,
articulated in a similar manner in both the AICPA and
IFAC codes (as well as in statutes and court cases in many
jurisdictions), supports this openness of communication
between the accountant and his or her employer or client.
In addition to a duty of loyalty to his or her client, the
professional accountant owes a larger duty of loyalty to
society as a whole. That is because many tasks of professional accountants involve nancial statements, tax returns,
or the providing of other information that is used by investors, creditors, employers, consumers, government entities,
and other stakeholders and elements within society. To
some extent, this duty to the public is often met as long as the
accountant maintains integrity, objectivity, and diligence.
That is, telling the truth is not inherently wrong or unethical,
unless that telling discloses condential information. And so
the protection of condential information, out of loyalty to
employer or client, can sometimes be harmful to society. A
tax return that fails to disclose taxable income, nancial
statements that fail to disclose related party transactions, and
any number of other circumstances can become the fulcrum
in the balancing of the accountants loyalties. To assist with
the balancing of these interests, both the AICPA and the
IFAC codes permit the duty of condentiality to be set aside
in some circumstances, such as when an accountant
responds to a court subpoena or testies in open court under
oath. The IFAC code, in addition, offers guidance for the
accountant to use in deciding whether to disclose condential information, taking into account the interests of all
parties, the type of communication involved, and the extent
to which parties to whom the communication is addressed
are appropriate recipients.
Trustworthiness is a key foundation for any ethical system
(Schwartz 2002), and it can be argued that the overriding
meta-virtue for accountants is trustworthiness. Each of the
four preceding virtues supports the trustworthiness of the
A. D. Spalding Jr., A. Oddo
accountant, and generally pertains to the accountants work
as such. Accountants who maintain integrity, objectivity,
diligence, and a proper notion of loyalty can be, and are,
more readily trusted than accountants who do not develop,
maintain, and optimize these virtues
For accountants who are engaged in attestation services,
such as audits and reviews, the appearance of independence
from the client is necessary for the accountant to have the
credibility required to render an opinion. An accountant
might be honest and loyal and diligent, but if those who
might rely on his or her opinion nd it difcult to believe in
the accountants honesty, loyalty, objectivity, or diligence,
because of the accountants closeness or relationship with
the client, the virtuousness of the accountant will not
matter. The accountants opinion will not carry the weight
and impact, even if it is correct and proper.
The AICPA has expended a great deal of time and effort
developing rules regarding independence. The AICPA
code requires that accountants who work on attestation
engagements must be independent in the performance of
those services as required by standards promulgated by the
AICPA and other authoritative bodies. This simple onesentence requirement is supported by 15 interpretations
composed of more than 18,000 words, and further supported by a conceptual framework document that is
intended to cover situations not sufciently or specically
addressed by the interpretations. All of this is in support of
the notion that even if an accountant is capable and willing
to perform services objectively and with the highest
integrity, an impression of a lack of independence, created
by too much relational proximity to the client, can sabotage
the credibility of the accountant and the attestation
engagement. In this regard, the appearance of independence is important, but it is as much impression management as it is ethics. This may help to explain why the IFAC
addresses independence for audit and review engagements,
and for other assurance engagements, separately from its
articulation of fundamental principles of ethics for professional accountants.
This fth virtue of professional behavior also adds to the
preceding four by directly pointing to the overall character
of the individual. An accountant may, for example, perform
his or her work in a manner that is entirely consistent with
these virtues, but may not be considered trustworthy because
he or she engages in activities that discredit him or her, and/
or the profession. Accountants who do not take care to le
their own tax returns, for example, or accountants who make
exaggerated claims for the services they are able to offer,
may actually perform good work, but nevertheless engender
a lack of trust and credibility. The AICPA code addresses
this concern by simply prohibiting the committing of any act
discreditable to the profession. The term acts discreditable
to the profession is not dened in the code, but that
Its Time for Principles-Based Accounting Ethics
Table 1 Five cardinal virtues
of professional accountants
Honesty and transparency
Too much disclosure
Fair and reliable
Statements based on
Breach of condentiality
Useful work product
Too little disclosure
prohibition, found in Rule 501, is supported by various
interpretations that serve as examples of such discreditable
acts. Section 150 of the IFAC code takes a similar approach,
requiring that professional accountants not bring the profession into disrepute.
Trustworthiness is inevitably determined by others. John
may try to assure Sally that he is trustworthy, but at the end
of the day only Sally can decide whether John is worthy of
her trust. Similarly, an accountant may be a truthful reliable
good citizen of high character, but this does not guarantee
that the accountant is considered credible or trustworthy by
every member of society. For this reason, the virtue of
professional behavior does not require that accountants live
perfect lives that would somehow meet anyones standard
for professionalism and trustworthiness. It does, however,
require that accountants be mindful of their professional
reputation, and the credibility of the accounting profession,
as they go about their work and their decisions that are likely
to reect on their professionalism.
Table 1 summarizes these ve cardinal virtues for professional accountants. Each deciency and excess represents habits and behaviors that violate the ethical principles
of the respective virtues. Most of the deciencies and
excesses violate both the AICPA and the IFAC codes.
When an accountant does not avoid the deciencies or
excesses associated with each virtue, the accountant is also
at risk for violating the CPA licensure regulations of most
states. Civil and sometimes criminal liability can also result
when an accountant does not avoid these extremes. As
noted above, the primary difference between the AICPA
code and the IFAC code is that the former focuses on
excesses and deciencies, whereas the latter emphasizes
the virtues themselves and the underlying principles represented by those virtues.
Moving Toward a Principles-Based Professional Ethics
Under a rules-based code of conduct, such as the AICPA
code, the ethical goals of the organization are promoted
through a disciplinary process that pays attention to
noncompliance with the rules. Avoiding noncompliance is
the primary objective, with the hope that by minimizing
noncompliance within the organization, the overall ethos of
the profession will be improved. Under this approach, the
AICPA, and each of its state associations or societies,
maintains ethics panels that receive and investigate complaints about members. If a member is found to have
violated one of the ethics rules, that number is warned,
chastised, or sanctioned.
The IFAC code requires more than mere rule enforcement. In support of the fundamental principles of its code
of ethics, the IFAC requires accountants to be aware of
circumstances, habits, behaviors, or other conditions that
would threaten adherence to the fundamental principles.
This conceptual framework is designed to foster more than
mere compliance with a minimal set of rules. Instead, it
guides the accountant toward the optimal ethical principles
that are being sought by the profession and requires the
accountant to consider how to improve his or her habits and
practices so that they better reect those principles.
The AICPA has adopted this conceptual framework
approach, but not in regard to ethical principles. Instead,
the AICPA has focused on one rule in particular, Rule
101Independence and has required that in addition to the
15 interpretations of that rule (described earlier), its
members consider risks or threats to independence above
and beyond the restrictions set forth in those interpretations. In some ways, this is an unusual application of the
threats-and-safeguards approach of the IFAC. That
approach is designed to foster continuous improvement
toward ethical principles, but it is used by the AICPA as a
backup procedure to support a single rule (that, in turn, is
less an ethics principle than an impression management
The professional ethics division of the AICPA did propose, in 2007, an interpretation of Rule 102Integrity and
Objectivity, that would require AICPA members to apply
the threats-and-safeguards approach to the fundamental
ethical principles as found in the preamble to the code
(AICPA 2007). In other words, the AICPA attempted to
shoehorn the preamble into an interpretation of one of its
rules, thereby overriding the organizational bylaws and
making the preamble enforceable. That proposal was never
developed beyond the exposure draft phase, and the
exposure draft is still outstanding at this time.
In 2008, the AICPA published some threats-and-safeguards guidelines to be considered for the purposes of
compliance with Rules 102 through 505 of the code
(AICPA 2008b). In other words, having already adopted
the conceptual framework approach of the IFAC to enforce
its independence standard, the AICPA proffered the same
approach to enforce the remaining rules of its code.
However, there is one major difference: independence
under the conceptual framework is enforceable, whereas
the remaining rules of the code are not enforceable, with
the conceptual framework serving only as a recommended
guide. For this reason, any violations of the guidelines are
not investigated or addressed by the ethics disciplinary
processes of the AICPA or its afliated state organizations.
The AICPA is continually engaged in assessing, developing, and codifying ethics standards, in part to bring its code
into closer alignment with the IFAC code. We recommend
that the process should rise above prior efforts to adapt the
principles-based emphasis of the IFAC code to the rulesbased structure of the AICPA code. To move toward a
principles-based code of ethics, the AICPA needs to adopt
two fundamental changes: First, dene what it means for an
accountant to be an ethical professional (that is, by what
virtues a professional accountant should be characterized).
Second, develop a continuous improvement process that
helps accountants to foster those virtues. Recommendations for the former have already been presented above. A
recommendation for the latter is discussed next.
The ethics panels and disciplinary processes that are in
place at the AICPA and its state afliates continue to be
necessary to address the most obvious and worst-case situations involving unethical behavior by accountants. But
these damage-control mechanisms, while necessary, are no
longer sufcient. The AICPA will need to develop other
procedures and processes that serve to foster a revised code
of ethics that emphasizes virtues and principles.
The notion of helping accountants to identify threats to
the highest standards of professionalism is not new within
the accounting profession. It already has a peer review
system in place, but that peer review system applies only to
accounting standards and the quality of accounting services, and not to ethical standards per se. To retain their
membership in the AICPA, members who are engaged in
the practice of public accounting are currently required to
participate in a practice-monitoring program. These peer
reviews are not designed to be punitive, but rather to
A. D. Spalding Jr., A. Oddo
enhance and ensure the quality of the accounting, auditing,
and attestation services provided by public accounting
rms. These peer review efforts also contribute to the
quality and effectiveness of accounting rms. Although
independence, integrity, objectivity, and due professional
care are required on the part of accountants who participate
in peer reviews, adherence to those standards by the rms
being reviewed is not explicitly addressed as part of the
review process. Firms and individual accountants enrolled
in the AICPA peer review program are required to have a
peer review of their accounting and auditing practice once
every 3 years (AICPA 2009).
Peer reviewers within the AICPA peer review system
tend to focus on ways in which the reviewed rm can
improve the quality of their accounting services. A typical
report by such a peer reviewer makes recommendations
regarding such matters as how the staff employed by the
accounting rm can be trained and supervised better, how
the rms partners can be more involved in the planning of
engagements, or how checklists and other tasks and tactics
can be employed to improve the quality of work. These
types of suggestions are made by reviewing the rm,
irrespective of whether the reviewed rm actually passes
or fails the peer review. This reects the professions
emphasis on improvement rather than punishment.
We recommend that the accounting profession in the
United States develops a peer review process for professional
ethics. This process, like the peer review process for
accounting standards, should focus on ways in which participating rms can reduce the roadblocks to the development of
a highly ethical ethos within the reviewed accounting rm.
The threats-and-safeguards language of the IFAC code can
serve as a foundation for such a review. Over time, however, a
best practices approach could develop guidelines to reduce
threats of unethical behavior, and increase the prospects for an
ethical culture within accounting rms (and within the profession generally) that more closely reects the virtues to
which the accounting profession continues to aspire.
In their comparison of the differences between the original
1917 code of conduct and the 1988 version that continues
to serve the AICPA today, Preston et al. (1995) noted the
increasing specicity and number of rules. They concluded
that these rules at best regulated minor points of professional conduct, and act as a benchmark from which
malfeasance may be judged (p. 536). Our current critique
of the AICPA code leads us to the same conclusions about
the shortcomings of the rules-based approach.
A code of ethics should, in our view, do more than
establish minimum acceptable standards. As part of their
Its Time for Principles-Based Accounting Ethics
survey of codes of ethics of professional business organizations, Gaumnitz and Lere (2002) considered the role of a
code of ethics. In their literature review, they noted the
importance of ethics codes in providing guidance for
individuals and rms in novel situations, especially when
explicit norms and external regulations offer insufcient
guidance. For the accounting profession, most licensing
jurisdictions and many federal agencies, such as the securities and exchange commission, have rules that establish
minimum behavioral requirements. As a common example,
these external rules prohibit accountants from knowingly
and willfully misrepresenting facts as part of their professional services. And so a professional code of ethics for
accountants may properly address such problems as
deception and the falsication of accounting information,
but it should do more. It should provide guidance for the
achievement of the highest ethical standards.
In our effort to nd ways to improve the AICPA code,
we have compared that code of conduct to the Code of
Ethics for Professional Accountants as recently amended
by the IFAC. This latter code is more principles based, and
can serve as a model for the development of a principlesbased code of ethics for U.S. accountants. A truly effective,
relevant, and useful code of ethics for professional
accountants, in our view, will require both a careful articulation of those virtues or qualities that characterize an
ethical accountant or accounting rm and a continual
improvement process similar to the peer review system
already in place in the U.S.
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. Do you agree with the authors that a code of ethics should do more than establish
minimum acceptable standards? Why or why not?
An effective code establishes the expectations from management and...
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