An Examination of AICPA Disciplinary Actions:

Transcription

1 CURRENT ISSUES IN AUDITING Vol. 10, No. 2 Fall 2016 pp. A1 A13 American Accounting Association DOI: /ciia An Examination of AICPA Disciplinary Actions: Jack L. Armitage University of Nebraska at Omaha Shane R. Moriarity The University of Oklahoma SUMMARY: This study examines trends in the disciplinary sanctions imposed by the American Institute of Certified Public Accountants (AICPA) over the 35-year period It reveals that the sizable increase in the number of sanctions that followed the 1988 revision to the Institute s Code of Professional Conduct has mostly stabilized. However, there is still growth in the number of sanctions being imposed for substandard professional service. The sanctions imposed for substandard professional service have also become more stringent. In combination these actions confer assurance that continuing members of the Institute provide superior professional service. A 2003 bylaw change that imposes automatic sanctions for members disciplined by approved bodies has resulted in a substantial decrease in the number of investigations undertaken by the AICPA. However, there is a high incidence of noncooperation with the remaining investigations, the reasons for which are not established by the current study. Keywords: AICPA; disciplinary actions; sanctions. INTRODUCTION Licensed professional accountants in the United States are expected to provide services that meet high technical standards and to act ethically to serve the public interest. One way to achieve this goal is to maintain a code of conduct that is enforced through regulation. Mautz (1983) identified two basically distinct, but interrelated, dimensions in the regulation of the accounting profession: public regulation and self-regulation. Public regulation is backed by the full authority of government, whereas self-regulation relies on collective voluntary enforcement of standards by the members of the profession. In the United States, the American Institute of Certified Public Accountants (AICPA) enforces a code of conduct for its members. As the country s largest professional accounting association the conduct of its members reflects broadly on the Editor s note: Accepted by J. Gregory Jenkins. Submitted: August 2015 Accepted: March 2016 Published Online: April 2016 A1

2 A2 integrity of the profession at large and sets a level of expectation for all practicing CPAs. Thus the effectiveness of the Institute s disciplinary process is of public interest. The disciplinary enforcement process of the AICPA seeks to provide assurance to the public that it can maintain trust in the professional services provided by its members. A statement published by the AICPA indicated, The public trusts us to do the right thing, and we need to ensure that our enforcement process reflects that, and provides the public with the confidence it requires in hiring an AICPA member (Catalyst 2003). To meet this objective the Institute s Code of Professional Conduct and the mechanisms used to enforce it have evolved over time. This study examines the outcomes from the AICPA s disciplinary process over a 35-year horizon to identify changes that have occurred as the process evolved. It reveals there has been a recent decline in the use of self-regulation with more reliance now placed on public regulation. The AICPA s process is identifying more instances of substandard professional service. In addition, the ensuing sanctions being imposed are becoming more stringent. These trends should provide the public with additional confidence in the integrity of the Institute s ongoing members. The paper begins with a review of prior studies. Next is a description of the AICPA s disciplinary process, followed by a review of the data sources and collection methods employed. The sanctions imposed by the AICPA s regulatory process over the period are summarized by the type and nature of the violations that occur, and the type of disciplinary action taken by the AICPA. Trends in the process are identified, followed by a conclusion. PRIOR STUDIES For over 100 years the accounting profession in the U.S. has sought to provide high-quality service to the public. As early as 1894 the profession began to identify prohibited activities, and by 1909 the American Association of Public Accountants (a lineal predecessor of the AICPA) had adopted a constitution and bylaws that listed five prohibited activities and provided procedures for adjudicating complaints and imposing penalties. Although ethical sanctions in the accounting profession are important, few studies have systematically examined the AICPA s disciplinary actions. Three published studies relate directly to the current study. Tidrick (1990) examined disciplinary actions taken by the AICPA for the period 1980 through 1990, covering a total of 327 cases. Tidrick (1990) examined whether the disciplinary cases were brought under the AICPA Bylaws automatic provisions or under the authority of the Joint Trial Board. The results indicated that approximately two-thirds of disciplinary actions during this period were handled under the automatic provisions of the Bylaws, meaning that an outside party initiated the enforcement action to which the AICPA reacted. While the Institute s role seemed minor, Tidrick (1990) noted that regulation of the accounting profession involved a network of monitoring and enforcement (e.g., AICPA, state boards, state societies, and state and federal government entities). This network includes both public regulation and self-regulation, so he urged caution in drawing conclusions about the effectiveness and efficiency of the enforcement of professional standards based on only a single component of that intricate system. Moriarity (2000) analyzed disciplinary actions from 1980 through 1998 to look at trends in the sanctions imposed by the AICPA. There were 958 reports of sanctions during that time period. His review included a summary of disciplinary actions taken before and after 1988 when the AICPA made significant revisions to its Code of Professional Conduct and to the disciplinary process. The results revealed that following the 1988 changes there was an increase in the rate of sanctions for substandard professional service, there was more use of educational requirements to remediate deficiencies, and that more uniformity was achieved across states. Thus, Moriarity (2000)

3 A3 concluded that the results were encouraging and indicative of improvements in the effectiveness of the profession s self-regulation. Badawi (2002) summarized changes in the profession s codes of conduct over time. The objective was to describe the historical development of the AICPA s Code of Professional Conduct. The paper also reviewed the most common type of violations, and the different types of resolutions found in the then existing empirical studies (Badawi and Rude 1995, 1997; Moriarity 2000). Badawi (2002) comments that the literature on disciplinary actions is sparse but concludes that violations are being investigated and reported benefitting the profession and its clients. The prior studies that exist are now rather old. The current study updates the previous work. The objective is to investigate whether the disciplinary process is improving the standard of professional accounting service being provided. Specifically, this study addresses the following research questions: RQ1: Have the previously identified trends in the AICPA s disciplinary process continued? RQ2: Have any new trends developed? AICPA DISCIPLINARY PROCEDURES Codes of professional conduct are intended to significantly enhance the behavior and judgment of the members of a profession. Chatfield (1974, 153) observed that self-regulation is an identifying feature of every professional group. The American Institute of Accountants (another predecessor of the AICPA) adopted a set of ethical rules of conduct in These evolved over the years to become the AICPA s Code of Professional Conduct. The code continues to change, with the most recent changes coming in late The AICPA Bylaws contain the rules related to disciplining members. Disciplinary sanctions consist of either an admonishment (a public reprimand), a suspension of membership (for a period of up to two years), or termination of membership in the AICPA. In addition to a suspension, the ethics committee or a Trial Board panel may direct a member to complete specified continuing professional education courses or take other remedial actions (e.g., submit subsequent reports and/or having workpapers monitored) during the suspension period. Membership in the AICPA is suspended or terminated automatically without a hearing if a member is (1) convicted of a crime punishable by imprisonment for more than one year; (2) willfully fails to file an income tax return that he or she is required to file; (3) files a false or fraudulent income tax return on the member s or a client s behalf; or (4) willfully aids in the preparation and presentation of a false and fraudulent income tax return for a client. Also, membership in the AICPA is suspended or terminated automatically without a hearing if the member s CPA certificate, license, or permit is suspended or revoked by the issuing jurisdiction. The Bylaws also allow the professional ethics executive committee to approve automatic sanctions in response to actions taken by entities that have the authority to prohibit individuals from practicing before it or serving as a director, officer, or trustee of an entity. The Securities and Exchange Commission (SEC), the Public Company Accounting Oversight Board (PCAOB), and the Internal Revenue Service (IRS) are included under this provision. Prior to 2003 automatic suspension or termination from the AICPA was triggered if a state board suspended or terminated a member s CPA certificate or license. If the state board gave a lesser penalty, for example an admonishment and/or a requirement for additional CPE or peer review, then the AICPA was required to conduct its own investigation. Also, if the SEC or IRS sanctioned a member, then the AICPA was required by its Bylaws to conduct its own investigation.

4 A4 In order to make the process more efficient for both the governing body and the member (an AICPA investigation lasted 18 months on average [Snyder 2003]), an amendment to the AICPA Bylaws was overwhelmingly approved by members that allows the AICPA to automatically discipline a member already disciplined by an approved entity without conducting its own investigation (Catalyst 2004). Bylaw Section 760 (AICPA 2009) requires publication of a disciplinary action taken against a member of the AICPA. This public notice gives the member s name, city and state of residence, the type of sanction, and a short statement of the reasons for the action. This information is currently published on the AICPA website and remains there for one year after an admonishment, one year after the end of a suspension, or for seven years after a termination. Complaints that the trial board determines to be unfounded and any infractions not leading to a sanction are not published. DATA COLLECTION The current study gathered data from the public notices issued concerning the AICPA s disciplinary sanctions for the years 1999 to The data were collected from either the AICPA website or from The CPA Letter. The CPA Letter was published by the AICPA from 1973 until 2009 and was a monthly newsletter to its members. Copies of The CPA Letter are available at the AICPA Library maintained at The University of Mississippi. Disciplinary actions taken against members were published in The CPA Letter. Beginning in 2002, disciplinary sanctions were also published on the AICPA s website. Since 2009 they are only available on the website. The new data were combined with the data previously gathered by Moriarity (2000). The combined set includes 958 disciplinary actions reported during the period and 1,358 during , for a total of 2,316 actions over the 35-year period. For each action, a record was made of the name of the individual involved, the individual s city and state of residence, the jurisdiction where the individual s license was obtained, the type of act, the nature of the act, the fact-finding body, the type of sanction imposed and, if the sanction involved a suspension, then the length of the suspension and any corrective action required of the individual. In a small number of cases, the type of sanction and fact-finding body was reported, but no description of the nature of the act was provided. Fewer than 3 percent of the cases involved instances where the same individual was sanctioned twice. In most of the cases two different incidents were involved. However, in a few cases individuals were suspended with a requirement for remedial action, but the individual failed to comply with the remedial requirements and later had his or her membership terminated. In these cases, both sanctions were included in the data, as the member committed two violations. RESULTS Figure 1 provides a graph showing the trend in the annual number of sanctions over the study period, excluding sanctions for Failure to Meet CPE. To moderate the annual fluctuations and make the underlying trends more obvious, this graph and subsequent ones are based on threeyear rolling averages of the data. Figure 1 indicates that the total number of cases was stable in the 1980s, jumped after the 1988 changes, and then became stable again. While the recent totals look stable there have been changes in the nature of the acts involved. Table 1 provides details on the number of disciplinary actions taken over the period by year and by the nature of the act. Trends in sanctions for each type of act are examined individually.

5 A5 FIGURE 1 Total Sanctions a per 100,000 Members Three-Year Rolling Average a Excludes Failure to Meet CPE. The data in Table 1 provide an explanation for why failures to meet CPE requirements were excluded from the graph in Figure 1. Disciplinary actions for Failure to Meet CPE are uncommon and the majority of them are clumped, distorting the underlying trend in the other sanctions. That is, the 13 actions in 1992 were all brought by one state s State Board of Accountancy, the 20 actions in 1993 all came from another state s board, and 38 of the 49 actions in 2013 also came from one state. Although these results suggest there may be value in state boards undertaking periodic reviews of compliance with CPE requirements, no longitudinal trend in these actions is obvious. Consequently, no further analysis is performed on these sanctions. Actions are also uncommon for Professional Practice Infraction. These acts usually involve the failure to meet a state s licensing or annual renewal requirements. Other causes are infrequent and suggest no pattern that can be subjected to analysis. A third category is also not reviewed. The lack of details prevents a meaningful analysis of the cases for Nature of Act Not Reported. Sanctions for Criminal acts constitute approximately 29 percent of the cases. Figure 2 provides a graph of the number of sanctions for criminal cases deflated by the size of the AICPA s membership. The rate is very small, hovering around six cases per 100,000 members per year. To determine whether there is any trend in the number of criminal cases brought over time, linear regression was used to fit a line to the data. A t-test was then used to determine whether the slope of the line differs significantly from zero. The parameter estimates and statistics from the regression are summarized in Table 2, Panel A. The slope coefficient of is not significantly different from zero (p-value of 0.98), implying there has been no significant change in the rate of criminal sanctions over time. Sanctions involving Substandard Professional Service are the most common and are those infractions that should be of most concern because of their potential to erode the integrity of the profession. These are the acts that impact clients and/or the users of audited financial statements. They include failures to gather sufficient evidence to support an audit opinion, failures to adequately supervise staff, the preparation of misleading financial statements, not being

6 A6 Year Substandard Professional Practice TABLE 1 Number of AICPA Disciplinary Sanctions by Type of Act Criminal Failure to Cooperate in Investigation Failure to Comply with a Directive Professional Practice Infraction Nature of Act Not Reported Failure to Meet CPE Total Totals ,316 independent of the entity for which an audit opinion is expressed, misrepresentation of the scope of a review, and similar serious breaches of society s expectations. These represent failures to comply with accepted standards for professional service and if left unchecked could cause the public to lose confidence in the opinions issued by CPAs.

7 A7 FIGURE 2 Trend in Criminal Convictions per 100,000 Members Three-Year Rolling Average TABLE 2 Regression Results for Parameter Estimates of Trends over Time Panel A: Criminal Convictions : R 2 ¼ Intercept Slope Panel B: Substandard Professional Service : R 2 ¼ Intercept , Slope , Panel C: Substandard Professional Service : R 2 ¼ Intercept Slope Panel D: Suspensions as a Percent of Total Sanctions : R 2 ¼ Intercept Slope (continued on next page)

8 A8 TABLE 2 (continued) Panel E: Terminations as a Percent of Total Sanctions : R 2 ¼ Intercept , Slope , Panel F: Admonishments as a Percent of Total Sanctions : R 2 ¼ Intercept , Slope , Panel G: Failure to Cooperate/Comply : R 2 ¼ Intercept Slope Panel H: Failure to Cooperate/Comply : R 2 ¼ Intercept Slope Panel I: Failure to Cooperate/Comply : R 2 ¼ Intercept Slope Figure 3 provides a graph of the number of sanctions for Substandard Professional Service deflated by the size of the AICPA s membership. It shows a clear increase in sanctions over time. That perception is confirmed by regression that produces a positive slope parameter estimate of , which is statistically significant (see Panel B of Table 2). But Figure 3 also shows that there was a sharp increase after the changes made in It is possible that the sharp increase is driving the statistical result and that there is no further significant increase. To determine whether sanctions for Substandard Professional Service are continuing to increase another regression was performed using only the post-2000 data. It yields a statistically significant slope parameter of (see Panel C of Table 2). This is consistent with a conclusion that the rate of sanctions for Substandard Professional Service is continuing to increase post 2000 but at a somewhat slower rate than previously. Further analysis was undertaken to gain greater insight into possible causes for the increase in cases of substandard professional practice. One possibility we considered is that the increase reflects a policy to investigate minor infractions that were previously ignored. If that is the case, then it is expected that the imposition of a greater proportion of mild sanctions would be observed. But Figure 4 indicates that suspensions of membership and terminations of membership are increasing while admonishments (the mildest sanction) have decreased. Linear regression

9 A9 FIGURE 3 Trend in Substandard Service Sanctions per 100,000 Members Three-Year Rolling Average FIGURE 4 Trends in Nature of Sanctions for Substandard Service Three-Year Rolling Average

10 A10 FIGURE 5 Fact-Finding Body for Substandard Service Three-Year Rolling Average confirms this impression. The slope of lines fit to suspensions and terminations are both positive and statistically significant (see Panels C and D of Table 2). In contrast the slope coefficient for admonishments is significant but negative (Panel E of Table 2). Thus, the results indicate that sanctions are getting more severe. This is inconsistent with the increase in sanctions for substandard professional service being due to an increase in the investigation of minor infractions. Another possible explanation for the increase arises from the 2003 change in the Institute s Bylaws. Findings from state boards, the SEC, the IRS, and the PCAOB are now accepted without further investigation (and delay). Figure 5 illustrates that a dramatic change has occurred over time in the mix of bodies identified as the fact finder for sanctions. State Boards of Accountancy and Other (SEC, IRS, and PCAOB) are now the fact-finding bodies for nearly all of the cases. Since these agencies also investigate non-aicpa member practitioners, the record of sanctions imposed on Institute members may now more closely reflect actions being taken profession wide. The change also represents an increase in the efficiency of the process with the removal of redundant investigations. The acts Failure to Cooperate in Investigation and Failure to Comply with a Directive both suggest that the affected individual assesses the cost of cooperation/compliance as exceeding the expected cost of the sanction that might be avoided. This may reflect an admission of guilt (cooperation is not expected to mitigate the imposition of a sanction) or an evaluation of relative costs. The trend in the rate of noncooperation/noncompliance over time is presented in Figure 6. Over the study s entire time frame there has been a statistically significant increase in the rate (see Panel G of Table 2). But the graph suggests the rate peaked about 1999 and has been falling since. A second regression was performed on the data from 2000 onward. It yields a negative slope, but in traditional terms it is only marginally significant (p-level of 0.061; see Panel H of Table

11 A11 FIGURE 6 Number of Sanctions per 100,000 Members for Failure to Cooperate or Comply with the Disciplinary Process Three-Year Rolling Average 2). Another interpretation of the graph suggests that the primary increase in the rate may have been due to the 1988 change in the Code of Professional Conduct. Hence a third regression was performed using the data from 1989 onward. It results in a slope coefficient of , which is not statistically different from zero (see Panel I in Table 2). This result would support a claim that no change has occurred after the effect of 1988 amendments. Combined, the three analyses indicate an increase in noncooperation/compliance has occurred over the 35-year period, but it is inconclusive as to whether the rate has now stabilized or is decreasing. Following the 2003 change, the fact-finding body for each reported sanction is now identified in the AICPA s notice of disciplinary actions. This allows a comparison of the rates for noncooperation/noncompliance across investigating bodies. Figure 7 compares the AICPA s sanctions issued for noncooperation/noncompliance as a percentage of all sanctions to the comparable percentage issued by state boards (there were only two sanctions for failure to cooperate and one for failure to comply issued by the SEC, IRS, or PCAOB during the period; so the percentages for them are primarily zero). As illustrated in Figure 7 the rates for noncooperation/ noncompliance for the AICPA are much higher than those for the state boards. This likely reflects that the sanctions that state boards can impose (including the loss of a license to practice) are viewed as potentially much more costly than those imposed by the AICPA. However, the very high rates of noncooperation/noncompliance experienced by the AICPA may also reflect that the investigative process is viewed as being very costly. CONCLUSION Acts identified by the AICPA as Substandard Professional Service are acts with a direct negative impact on the public s perception of the quality and integrity of the work being provided by members of the profession. This study has examined the profession s response to such acts as exemplified by the outcomes from the Institute s disciplinary process. It shows that the rate at which instances of substandard service are being identified is increasing and there is a growing intolerance for such acts as evidenced by the imposition of more stringent sanctions. These trends

12 A12 FIGURE 7 Percent of All Sanctions Issued by the AICPA versus State Boards for Noncooperation/Noncompliance are consistent with a continuing professional commitment to improving the quality of accounting services being provided to the public. The Institute s disciplinary process has been simplified by dispensing with redundant investigations of findings reached by selected governmental bodies. Those bodies are now the fact finders for most of the cases currently being reported by the Institute. Since these bodies also investigate licensed accountants who are not members of the Institute, the identified trends are likely to closely reflect trends in the profession as a whole. However, the reduction in Institute investigations has been accompanied by an increase in the rate of noncooperation/compliance with the remaining investigations. Whether this is due to members conceding guilt or being concerned with the associated cost has not been determined by this study and provides an avenue for further investigation. REFERENCES American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct and Bylaws, As of June 1, Section 760 Publication of Disciplinary Action. New York, NY: AICPA. Badawi, I A cross-state analysis of disciplinary actions by the AICPA in ethics cases. Conference Proceedings of the American Academy of Accounting and Finance, , New Orleans, LA, December Badawi, I. M Accounting codes of conduct, violations and disciplinary actions. Review of Business 23 (1): Badawi, I., and J. Rude AICPA CPC and disciplinary actions in ethics cases against CPAs. Conference Proceedings of the International Conference Promoting Business Ethics, , New York, NY, November 2 4. Catalyst AICPA conducts member referendum on enhanced disciplinary measures. (September/October): 45.

13 A13 Catalyst AICPA ethics enforcement proposals pass by 7:1 margin. (January/February): 55. Chatfield, M A History of Accounting Thought. Huntington, NY: Robert E. Krieger Publishing Company. Mautz, R. K Self-regulation Perils and problems. Journal of Accountancy 155 (5): Moriarity, S Trends in ethical sanctions within the accounting profession. Accounting Horizons 14 (4): Snyder, L. A Streamlining ethics enforcement. Journal of Accountancy 196 (2): Tidrick, D Disciplinary actions by the AICPA against individual members, Research in Accounting Regulation 6: