Ethics: An Overview

for Texas CPAs

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the exam.

Board has recently taken to apply those rules.

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Defining Ethics ....................................................................................................................... 1

Ethical Reasoning and Ethical Dilemmas ................................................................................... 4

Case Study: Greed Can Get the Best Of You ................................................................................... 8

Case Study: Climbing the Corporate Ladder—David G. Friehling ............................................... 14

Case Study: Integrity, Objectivity, and Independence—Arthur Anderson .................................... 16

Texas Rule §501.73: Integrity and Objectivity .............................................................................. 16

Case Study: TSBPA Enforcement Action ...................................................................................... 17

Case Study: The Reporting Dilemma ............................................................................................. 19

Case Study: Attestation Engagement ............................................................................................. 31

Responsibilities to Clients .................................................................................................... 31

Case Study: Integrity and Objectivity ............................................................................................ 33

Case Study: Firm Names ................................................................................................................ 39

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situation, but it will greatly reduce that probability also.

In 1993, Mary Beth Armstrong completed a study (Mary Beth Armstrong, “Ethics and Professionalism

in Accounting Education: A Sample Course,” Journal of Accounting Education, 1993), in which she

also took an ethics and professionalism course scored significantly higher on Rest’s Defining Issues

 Stage 1: The morality of obedience: Do what you're told.

 Stage 2: The morality of instrumental egoism and simple exchange: Let's make a deal.

 Stage 3: The morality of interpersonal concordance: Be considerate, nice, and kind: you'll make

 Stage 4: The morality of law and duty to the social order: Everyone in society is obligated to and

 Stage 5: The morality of consensus-building procedures: You are obligated by the arrangements

 Stage 6: The morality of non-arbitrary social cooperation: Morality is defined by how rational

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eventually amounted to nearly one hundred thousand dollars.

So how did I make the leap from a one-time transaction to an ongoing process? As pitiful as any

explanation may sound, the merits of the additional income simply blinded me. The monetary reward

tapping into the savings that I managed to yield! The depths of my action (betraying my employer) and

hurting the company financially!)

Criminologists describe another dynamic in the mindset of the embezzler, something called “wages in

built a name for myself in the industry as a research analyst and generated a lot of publicity for the

company through my various research papers. I won employee recognition awards, I was allowed to

hire more staff and I basically had a very rewarding job in more ways than one. In all honesty, I truly

was passionate about the company and my work, and was known around the company for my uplifting

demeanor and my positive attitude. I sincerely cared about the success and future of the company.

Paradoxically, having this genuine heartfelt admiration for the organization made me all the less guilt-

ridden about what I did behind their back. It somehow alleviated the awfulness of my actions.

Equally delusional, I convinced myself at the time that cheating on the company was not necessarily

deplorable, since I truly cared for them! But now that I look back at those years, I realize that I did

hold some of those unfounded “wage in kind” views. To the extent that I believed I was making a lot

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justify your actions. What I advise you to do is to admit to yourself that no one reason justifies stealing

from your employer (or anyone else for that matter.) If that’s not enough to stop you, then think of the

hefty price you’ll pay in the end compared to the forgone privileges to which you believe you’re

entitled. For me, I’m going to prison very soon; a hefty price indeed!

Above all, remember that your biggest enemy is yourself. Look at the outrageous excuses I used to

justify my behavior (I made them money and so a little theft is okay!) I think I just wanted to believe

any excuses, as senseless as they were, so that I could subside the guilt I was feeling. And this was my

biggest lie: I believed that I believed my lies! The truth is, in all of this, the person I deceived the most

was not my employer; it was me.

me; it was the greed, the money, and most of all, the denial. I avoided facing reality by digging my

head in the sand pretending that if I didn’t see the problem it would just cease to exist.

There’s a famous fraud story about this CFO who had sole control over the accounting systems at a

making fake reverse entries in another account. He did this for a few years completely undetected and

amassed over $150,000 in illegal funds. Then one day, a customer made a double payment to the bank.

The redundant check was forwarded to the CFO for processing. After the check sat at his desk

untouched for a week, the CFO finally took the check, endorsed it to himself and deposited it directly

into his account! When the customer got the returned check and realized the foul play, he called the

company and eventually an outside audit uncovered the entire scheme.

accustomed to the financial rewards. So be wary, if you’re already in the midst of committing fraud,

it’s NOT too late to stop. If you use the rationale of “I’m too far along in this mess to stop now,”

you’re wrong. It will only get worse from here, both in legal terms and in the sense of your ability to

stop. And if you think your lack of fear is a sign of your infallibility, you’re wrong again. The absence

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invoices I had submitted. In less than two days, a simple audit managed to uncover the entire scheme.

One Monday morning in the office, I was confronted with the findings and I admitted my crime and

provided full details about the nature of the scheme. I was fired on the spot and was told to expect legal

action against me. Here’s the horrifying part, and I’m being truthful when I tell you this: When they

way to avoid the shame awaiting me except by not being there to face it. Worse yet, I just couldn’t

and swallowed 90 pills of a sleeping aid, but ended up losing consciousness for 36 hours and losing

After recovering from that initial shock, I came to my senses and realized what had really happened. I

retained the services of an attorney and attempted to reach a civil compromise where I’d pay back the

money, which I had already spent over the course of two years.

The more I regained sight of reality, the more I realized how bleak that reality was. But I knew that

take responsibility for them. I waited, and two weeks later, I was arrested at my home.

any association with my employer, my colleagues included, became fully aware of the whole ordeal.

Shame and a tarnished reputation will haunt me forever. In committing my act, I have betrayed so

many people who trusted me; a breach of trust of which I’m reminded every other day in my

nightmares. I’ve disappointed those who believed in me, and gave them reasons not to ever believe

again. Worse yet, I’ve disappointed my family, especially my mother, who despite the support she

gave me during my crisis, her disappointed eyes can’t help but tell the truth.

much like the cheating boyfriend story I mentioned earlier, there is little you can do to alleviate the

harm you caused to others and to yourself, especially the legal consequences. All that’s left to do is to

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But there IS a law that prohibits it, and when you break that law, there are dreadful repercussions

I wish you the best of luck doing the right thing and staying out of trouble!

funds?

Answer: I think if someone were to bring to my attention a similar story like the one I'm now sharing

with the public, it would have likely brought me to my senses and made me see what I was doing for

perception of reality in a way that effectively subsides their guilt and quells their fear. But a reality

check in the form of hearing or reading about someone else's horrid tale is bound to bring them out of

that self-induced hypnosis and make them stop. Further, I think it has an even higher chance of

deterring then from embarking on the fraud in the first place.

Answer: Yes, I think I would have.

deposit the checks. My research on the topic, however, tells me that some people do enjoy the "drill." I

wasn't one of them.

that you would put into place to prevent someone from embezzling from you?

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Whether it be “climbing the corporate ladder” or “adding another zero,” to our salary, how much fame

or fortune does a person really need in order to feel successful?

pleaded guilty to all eleven charges. On June 29, 2009, Madoff was sentenced to a term of

imprisonment of 150 years.

David G. Friehling, the CPA who performed audit services for Madoff, pleaded guilty November 3,

2009 to nine criminal charges carrying a potential prison term of 114 years. Among the charges are

securities fraud, investment advisor fraud, making false filings with the SEC and obstructing or

impeding the administration of the Internal Revenue Office (IRS). At 49 years old, with a wife and

three children, Friehling’s career as a CPA is over.

According to court documents,

from 1991 through 2009, Friehling worked as a sole proprietor at the

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Investors of Madoff Investment Securities relied upon these statements, which were filed with the

SEC, to make investment decisions. This resulted in the charging of Friehling for securities fraud,

investment advisor fraud, and making false filings with the SEC. Friehling pled guilty to these charges.

detention and one year of supervised release. Friehling avoided prison because he cooperated

crimes. Addressing the court at the hearing, Friehling apologized to Madoff's victims. Referring to

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Investigation No:09-03-07L

Respondent: Eric Duane Boyt

Hometown: Midland

License No.:066929

Violations:901.502(6) & 901.502(11)

Integrity means observing both the form and the spirit of technical and ethical standards. The Code

notes that while integrity requires a CPA to be honest (it cannot accommodate deceit or subordination

According to the Code, the principle of objectivity imposes the obligation to be:

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“Those who rely on members expect them to discharge their responsibilities with integrity,

objectivity, due professional care, and a genuine interest in serving the public. They are

ET Section 1.100.001.01 also states that:

A CPA may be considered in violation of this rule if he or she:

firm, when the firm has obtained confidential information during the course of the audit that

when the advice might be relevant to the parties’ competitive positions;

dispute with each other, such as during divorce proceedings or the dissolution of a

venture or similar interest with a competitor of the client;

acquiring;

commission agreement with one of the potential vendors of that product or service;

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supporting contemplated litigation against another client of the firm;

whom the member knows to have opposing interests; or

situations numerous times with this issue, and with one company in particular. “Our biggest problem

was the accounts receivable balance.” Sue explains.

The company provided training workshops to industry. The contracts for the workshops stated the

the full amount of the contract would be due in full (a no cancellation policy).

The problem was that many of the contracts stating this policy were not being signed by the client.

Although there were verbal agreements that this was the cancellation policy, without a written

do her best to meet the covenant requirements. Or would she? It wasn’t her responsibility to make sure

Sue refused to accrue the revenue for the unsigned contracts. Yes, there were some complaints in the

beginning, but thanks to the fax machine and a few fast moving sales representatives and clients, they

unsigned contracts appeared and as a result, the board of directors seemed to have more faith in Sue’s

ability to control the financial processes.

Independence

Upholding the values of integrity and objectivity calls for avoiding both actual and apparent conflicts

of interest. This is also referred to as being independent both in fact and in appearance.

without being affected by influences that compromise professional judgment, thereby allowing

an individual to act with integrity and exercise objectivity and professional skepticism.

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Construct Inc. is a small, family-owned-and-managed construction company that provides services to

the books and records, is familiar with GAAP and can prepare the financial statements. Because of a

process the company’s payroll. George oversaw the services in which the practitioner:

- Used approved timecards and other client records to calculate the payroll and

generate unsigned checks for the client’s signature.

Transmitted payroll data to the client’s financial institution (pre-authorized by the

recalculating the payroll for select employees and comparing his amounts to those the practitioner

calculated, reviewing disbursements to gauge consistency with prior periods and investigating any

inconsistencies. The practitioner considered George capable of overseeing the payroll work for

independence purposes.

However, during the audit, the practitioner identified a significant deficiency in internal control over

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1. An accountant who follows a rule even though it might not be in her client’s best interest is probably

A. Utilitarianism

B. Deontology

D. Principles-based ethics

2. The AICPA Code of Professional Conduct states that a CPA should maintain integrity and objectivity.

A. To maintain impartiality on all matters that come under the CPA’s review.

B. To independently distinguish between accounting practices that are acceptable and those that are

not.

C. Independence.

4. The appearance of independence of a CPA is most likely to be impaired if the CPA

A. Provides appraisal, valuation, or actuarial services for an attest client.

stock of a closely held client corporation.

B. Joined an accounting firm made up of three non-CPA practitioners.

C. Expressed an unqualified opinion on the year 2 financial statements when fees for the year 1

audit were unpaid.

C. Design the audit to detect all instances of fraud.

D. Base his level of skepticism on the perceived honesty of management.

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that is

A. Not addressed by the AICPA Code of Professional Conduct.

C. Prohibited under the AICPA Code of Professional Conduct.

D. A violation of GAAS.

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In its February 2010 edition of the Texas State Board Report (VOL. 102), the Board reported how the

enforcement procedures and policies of the Texas State Board of Public Accountancy (TSBPA) have

evolved over the past 95 years.

The Rules of Professional Conduct were promulgated under the Public Accountancy Act, which directs

the Texas State Board of Public Accountancy to promulgate rules of professional conduct "in order to

the Act and the best interest of the public."

In 1915, the Public Accountancy Act established a Board of five members to examine and certify

accountants within the State of Texas. While the Board did investigate and attempt to maintain the

However, in 1945 The Public Accountancy Act was significantly revised to meet the demands of the

public for increasing education, experience requirements and professionalism within the field of

accounting. The Board would now have the ability to create and enforce rules of professional conduct,

On September 1, 1946, the Rules of Professional Conduct went into effect. Through the process of

establishing the rules, the Board required that all existing license holders vote on the rules.

Again revised in 1961, the Public Accountancy Act provided the Board with subpoena powers and

The Board soon realized that it may be considered inappropriate for it to both investigate complaints

The Rules of Professional Conduct are intended to be applicable to all professional services performed

in the practice of public accountancy, including services relating to:

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The TSBPA regulates the accounting profession in an effort to provide competent, objective

The TSBPAs disciplinary process begins with a complaint, filed either by a member of the public,

another government entity, or on the Board’s own initiative. A staff investigation follows, sometimes

the audits of failed or troubled savings and loan organizations, financial institutions, insurance

resources for pre-hearing preparations and prosecution. The Board engages the Texas Attorney

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similar standards of a national or international accountancy organization recognized by the

Commission, the General Accounting Office and other regulatory or professional standard setting

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insure that he does not inadvertently become a testifying expert through the actions of his client. An

accounting expert may not accept a contingent fee for part of an engagement and a set fee for part of

the part of his work done as a consultant, but must be compensated on a set fee basis for all of the work

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Investigation No:09-03-07L

Respondent: Eric Duane Boyt

Hometown: Midland

License No.:066929

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Respondent and Respondent Firm, after attempting to collect fees pertaining to litigation support, filed

a 1099-C Tax Form with the IRS advising that the client had realized income due to the discharge of

The Rules for confidentiality require that, except by permission of the client or the authorized

not voluntarily disclose information communicated to him or her by the client relating to, and in

connection with, professional accounting services or professional accounting work rendered to the

client by the person..

Upon request, a CPA or firm must, in all circumstances, provide to the client or former client any

accounting or other records belonging to, or obtained from or on behalf of, the client that the CPA

In addition, for a reasonable charge, a CPA must furnish to his client or former client, upon request

(2) a copy of any report or other document previously issued by the certificate or registration

holder to or for such client provided that furnishing such reports to or for a client or former

(3) a copy of the certificate or registration holder's working papers, to the extent that such

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or registration holder from the client.

Examples of working papers that constitute client records include, but are not limited to:

and equipment ledgers, or similar depreciation records;

of any report issued in connection with the attest service, unless otherwise required by another

regulatory body.

September 2015

Investigation No.: 15-03-17L

Respondent: Teresa Ann Byrd

Hometown: Wills Point, TX

Certificate No.: 058120

Firm License No.: C05868

Rule Violations: 501.74(b), 501.76, 501.90(12)

Act Violation: 901.502(6)

administrative costs within 30 days of the date of the Board Order.

Respondent failed to respond to a client’s inquiry, failed to return a client’s original records and failed

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Al-Shaikh admitted under

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employer.

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to renew a certificate or other authority to practice as a certified public accountant or a public

accountant, by any state, foreign country or other jurisdiction;

(3) The cancellation, revocation, or suspension of the right to practice as a certified public

accountant or a public accountant before any governmental body or agency or other licensing

an administrative agency or court, then the report shall set forth the title of the matter, court or

agency name, docket number, and dates of occurrence of the reportable event.

(d) As used in this section, a conviction includes the initial plea, verdict, or finding of guilt, plea of no

contest, or pronouncement of sentence by a trial court even though that conviction may not be final

or sentence may not be actually imposed until all appeals are exhausted.

(e) Interpretive Comment: A crime of moral turpitude is defined in this chapter as a crime involving

grave infringement of the moral sentiment of the community.

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Investigation No.:09-09-19L

Respondent: Clinton Wayne Putman

Hometown: Denison

Certificate No.:086290

Act Violations:901.502(6), 901.502(10), 901.502(11)

expired license.

Frivolous Complaints

Responses to Board Communication

A person shall substantively respond in writing to any communication from the Board requesting a

response, within 30 days. The Board may specify a shorter time for response in the communication

was mailed, delivered to a courier or delivery service, faxed or e-mailed to the last address, facsimile

number, or e-mail address furnished to the Board by the applicant or person.

A person shall provide copies of documentation and/or work papers in response to the Board's request

at no expense to the Board within 30 days. The Board may specify a shorter time for response in the

request was mailed, delivered to a courier or delivery service, faxed or e-mailed to the last address,

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Mandatory Continuing Professional Education

Each certificate or registration holder shall comply with the mandatory continuing professional

education reporting and the mandatory continuing professional education attendance requirements.

hours in each one-year period. CPE, except as provided by board rule shall be offered by board

contracted CPE sponsors. The exception to this requirement is an initial licensee, one who has been

total CPE credit hours required from the non-technical area in a three year reporting period.

A licensee shall retain documents or other evidence supporting CPE credit hours claimed for the three

most recent full reporting periods to the date the credit hours are reported to the board, and shall

submit the supporting evidence to the board if such data is specifically requested.

Once an individual's license has been suspended a third time by the board for failing to complete the

120 hours of continuing professional education, the individual's certificate shall be subject to

revocation and may not be reinstated for at least 12 months from the date of the revocation.

On the home page, scroll down to QUICK LINKS and then click on TEXAS STATE BOARD

problem was that if Joe reported this contribution in the financial statements that he submitted to the

Joe discussed this issue with the board of directors, who then encouraged him to falsify the date that

the large contribution was received, to make it appear that it was not received until the following year.

Hesitant, but fearful of losing his job, Joe did as the board requested and filed the documents with the

state knowing that the financial statements were not reported in accordance with GAAP.

In addition to the criminal acts which Joe has committed, Joe has violated the professional standards in

the Rules. By fraudulently reporting the date that the contribution was received, he has acted without

integrity and also committed discreditable acts under the Rules.

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off and now his CPA license had expired. The TSBPA had since sent him several notices, but those

Brian has obviously not met the CPE requirements of the Rules. In addition, he has been teaching with

a delinquent license and held himself out to be certified, although he was aware that his license had

expired. Acting without integrity, committing discreditable acts and not responding to TSBPA

inquiries could also be added to the Rules violations which Brian has committed.

position of internal audit manager. She has worked for the company for over 10 years and feels she

deserves the position. The problem is that one of her co-workers, Sally Cramer, has also been with the

Becky is fearful that Sally will be offered the position, because Sally gets along better with the rest of

Besides acting without integrity, Becky has also committed fraudulent and discreditable acts and made

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1 Which of the following would be defined as a financial statement?

A. A spreadsheet showing supporting data for a recommendation made to a client

B. A document supporting a report that is governed by Standards for Attestation

Engagements

C. Notes derived from accounting records intended to convey the current economic state of a

business

D. 48months.

3 A licensee convicted of a crime related to his or her duties of a public accountant or certified

public accountant who is convicted of a crime related to the performance of such duties must

submit a report to the Texas State Board of Public Accountancy

A. orally to the board within 90 days of the date the licensee has knowledge of the event.

B. in writing to the board within 60 days of the date the licensee has knowledge of the event.

D. orally within 15 days and in writing within 120 days of the date the licensee has knowledge

4 In the event a certificate or registration holder’s license has been suspended three times for not

meeting the mandatory continuing professional education requirements,

A. the individual’s certificate will be revoked and not reinstated for at least six months.

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Standards]) to interpret the code, the Professional Ethics Executive Committee has issued the following definitions of terms