IntroductionIn recent times, efforts have been made to establish a global set of accounting standards. Such efforts include the establishment of the International Federation of Accountants (IFAC) that was founded in 1977 and the establishment of the AICPA Code of Professional Conduct. IFAC develops global auditing standards, ethics and independence standards, quality control standards, and standards for education and government accounting. The efforts to globalize accounting standards have led to increased motivation and need to establish a global set of accounting standards. Sadowski &Thomas (2012, p. 15) define ethics as a broad sense that deals with human conduct and is concerned with what is morally good and bad and what is right and wrong. They describe ethics as the application of values such as honesty, fairness, responsibility, respect, and compassion, to decision making. The various ways in which the efforts of a global set of accounting standards lead to the need for a universal set of ethical standards are discussed in this essay. The manner in which AICPA and IFAC develop a common set of ethical standards and the challenges facing the two bodies are also discussed in the article.
Efforts for a Global Set of Accounting Standards and Need for a Universal Set of Ethical Standards
The globalization of accounting standards has led to the necessity of a common language. Accountants all over the world need a common language to understand and apply the global professional standards, which has given rise to the necessity of a universal set of ethical standards (Allen & Bunting, 2008). Accountants have realized the need for similar standards, both in terms of accounting and ethics in their efforts to increase the comparability of global businesses. Accountants working for cross-border businesses have realized the need to establish whether other accountants providing services to such companies comply to similar ethical standards as they do.
With globalization, many accounting firms have expanded the scope of their practice and expertise through mergers, acquisitions, experienced hires, and other means to keep pace with their clients (Allen & Bunting, 2008). For example, Pricewaterhouse Coopers operates in one hundred and fifty-seven countries and has more than one hundred and nine-five thousand employees around the world. The firm changed to its current name after the September 1997 merger of Price Waterhouse and Coopers & Lybrand. Similarly, Ernst & Young, another of the world’s leading accounting firms, operates in more than one hundred and fifty countries and has more than one hundred and ninety thousand employees around the world. It adopted its current name after the 1989 merger of Ernst & Whinney and Arthur Young & Co. There is, therefore, the need for a particular set of ethical standards for the firms to adopt to retain their identities and to remain relevant in the accounting field. Most such companies chose to keep their original identity, which means that they only merge, acquire, or hire other firms if such other companies share in their philosophies. Accounting standards and ethical standards are major areas of concern during the expansion process. However, it is worth noting that more than one hundred standard setting organizations around the world have adopted the global accounting standards, meaning that the expanding firms have a variety of businesses to choose from in the jurisdictions to which they wish to expand. Therefore, the decision regarding which firms to acquire or merge with depends on the similarity in ethical standards between the acquirer and the acquiree. As such, globalization, which has led to the expansion of accounting firms, has given rise to the need for a global set of ethical standards.
How AICPA Develops a Common Set of Ethical Standards
The US and the international community have made several efforts towards the development of a common set of ethical standards. The American Institute of Certified Public Accountants (AICPA) is the body that governs public accountants in the US. The body has a code of professional ethics for its members. The principles of the organization’s code of ethics express the responsibilities of its members to the public, to clients, and to their colleagues. It is divided into six articles, with each of the articles addressing a significant tenet of ethical and professional conduct (Larsen, n. d., p. 12).
Article I addresses the responsibilities of members. It requires members to exercise sensitive professional and moral judgement in their duties and activities. The responsibility should be exercised to all those who use the services of the members. Additionally, the article requires that members cooperate with each other to improve their practice, to maintain the public’s confidence in the practice, and to improve the profession’s self-governance ability (Larsen, n. d., p. 12).
Article II deals with the public interest and requires members to act in a way consistent with the public interest, to honour the public trust, and to demonstrate their commitment to professionalism. The article realizes that members may encounter conflicting pressures when discharging their responsibilities to the various members of the accounting profession’s public and requires them to act with integrity under such circumstances. The article is based on the principle that the interests of the clients and employers are best served when accountants fulfil their duties to the public.
Article III deals with integrity and requires that members perform their duties with the highest sense of integrity to maintain and enhance the confidence of the public in the profession. It requires members to avoid subordinating personal gain and advantage to service to the public. It provides that integrity should be measured in terms of what is right and just and that it should be used as the benchmark against which accountants should base their decisions.
Article IV addresses the objectivity and independence of the members and requires them to maintain their objectivity and to free themselves of conflicts of interests when discharging their professional duties. With objectivity, members should be impartial, free of conflicts of interests, and intellectually honest. The article provides that members must continuously assess their relationships with the clients and their public responsibility to maintain their objectivity and independence.
Article V is about the due professional care of the members. It requires them to observe the technical and ethical standards of the profession and to strive to improve the competence and quality of the services they provide. It also requires them to discharge their responsibilities to the best of their abilities (Larsen, n. d., p. 14). The article requires members to possess the education and experience necessary for the best performance of their professional duties. As such, members are expected to commit to continuous learning and professional improvement throughout their career lives.
Article VI deals with the scope and nature of services provided by the members. It requires that the members provide services that are consistent with the acceptable professional behaviour. In other words, members should adhere to the other five articles as discussed above during the provision of their professional services (Pacioli, 1992). The article provides that members should practice in firms with internal quality-control procedures to ensure that they meet the requirements of the other five articles and that their services are competent and that they are supervised adequately. They should also use their individual judgement to determine whether the scope and nature of their services create conflicts of interests and whether the services are consistent with the profession and their roles as professionals.
It is worth noting that AICPA is a member body of IFAC, which will be discussed elsewhere in this essay. Therefore, AICPA must ensure that its code converge with IFAC’s Code (Allen & Bunting, 2008). The Professional Ethics Executive Committee (PEEC) is the body that interprets and amends AICPA’s code. It ensures convergence to IFAC’s Code by participating in all aspects of IFAC’s standard-setting activities and ensuring that its perspectives are considered in IFAC’s standards. Additionally, it monitors AICPA’s code and modifies it whenever necessary to align it to the IFAC code.
In addition to the articles, the AICPA professional code of conduct has rules to which members must adhere. To some extent, the rules serve to enforce members’ adherence to the articles as discussed above. For example, rule 101 is on independence and requires all members in public practice to be independent in the performance of their professional services. Rule 102 is on integrity and objectivity and requires all members to maintain integrity and objectivity, to be free of conflicts of interests, and not to misinterpret facts or subordinate their judgements to others (Pacioli, 1992). Rule 201 is on general standards and requires members to comply with professional competence, due professional care, planning and supervision, and to obtain and utilize sufficient and relevant data as the basis of their conclusions or recommendations. Others include Rule 301 on confidential client information, Rule 302 on contingent fees, Rule 502 on advertising and other forms of solicitation, Rule 503 on Commissions and referral fees, and Rule 505 on form of practice and name.
How IFAC Develops a Common Set of Ethical Standards
At the international level, the International Federation of Accountants (IFAC) guides the development and implementation of a global set of ethical standards in accounting. It has a framework that addresses the principles of integrity and objectivity, professional competence and due care, and professional behaviour in a similar manner as AICPA’s professional code of conduct. Unlike AICPA’s code of ethics, IFAC’s code of ethics for professional accountants is divided into sections (Sadowski & Thomas, 2012, p. 16). Section 110 deals with integrity while Section 120 deals with objectivity. Section 130 deals with professional competence and due care, and Section 140 deals with confidentiality, and Section 150 deals with professional behaviour. Others are Sections 290 that covers the rules for independence, Section 291 that deals with audit and review engagements and other assurance services, and sections 300 to 350 that outline the roles of professional accountants in business.
The code has three primary purposes, all which are related to the threats faced by accountants and auditors in the provision of professional services. It aims at identifying the threats to the compliance with the accounting principles, to evaluate the significance of the threats identified, and to apply the necessary safeguards to eliminate or reduce the risks to acceptable levels. The various categories of threats include self-interest threat, which is the threat that financial or other interests will influence the accountants’ judgement or behaviour, and self-review threat, which is the risk that the accountant fails to evaluate prior work for the current engagement. Others include advocacy threats, familiarity threats, and intimidation threats (Sadowski & Thomas, 2012, p. 16). IFAC’s code of ethics for professional accountants also provides two types of safeguards against the threats to compliance, which are the professional, legislative, or regulatory safeguards and the work environment protections.
IFAC has International Education Standard 4 (IES4) that deals with the development and maintenance of professional values, ethics, and attitudes in accounting education programs. However, according to Sadowski &Thomas (2012, p. 16), the standard is currently undergoing revisions. Sadowski &Thomas state that the new standard will focus on educational competence, international professional development, and continuing professional development.
In addition to the code of conduct for professional accountants and IES4 as discussed above, IFAC has an Ethics Education Framework. It has the purpose to develop a sense of ethical responsibility in future accountants, to improve their moral standards and attitudes, to develop problem-solving skills that contain ethical implications, and to develop a sense of professional responsibility in accountants. The framework has four stages that are knowledge, sensitivity, judgement, and behaviour (Sadowski & Thomas, 2012, p. 16). In the knowledge stage, accounting trainees are provided with the knowledge of issues that relate to values and ethics. A lot of emphases is placed on the nature of ethics, theories and principles of ethics, virtues, and individual moral development. The sensitivity stage involves the application of ethical principles to the various functional areas of accounting such as taxation and auditing. The judgement step requires the integration and application of the knowledge and sensitivity of ethics to make reasoned and informed decisions about ethical dilemmas. The behaviour stage exposes accounting trainees to situational or contextual business environments and monitors their responses concerning how they utilize the professional standards of conduct to resolve ethical dilemmas.
Challenges Faced by the Two Governing Bodies
AICPA and IFAC some various challenges in their efforts to develop and implement a common set of ethical standards. Some of the problems are discussed in the following part of this essay.
Membership to the two bodies is voluntary. Therefore, they do not have as many members as it is desirable to implement a global set of ethical standards. AICPA has only around three hundred and fifty thousand members in the US while IFAC has only around one hundred member bodies around the world. As such, it is highly likely that most of the non-member jurisdictions do not adopt AICPA’s and IFAC’s sets of ethical standards. Additionally, the fact that not all countries are AICPA or IFAC members mean that there lacks a global regulator to ensure uniform adoption and enforcement of ethical standards (Global Accounting Alliance, 2012, p. 10).
The differences that exist between jurisdictions make it difficult to establish and implement a global set of ethical standards. The moral standards that suit one country may not necessarily suit another country. Additionally, there is always the threat that the local adaptation and interpretation of the global ethical standards will differ between different accounting jurisdictions (Global Accounting Alliance, 2012, p. 10). It is worth noting that different countries have different enforcement regimes, corporate governance practices, ethical norms, legal systems, auditing practices, financial industries, and education and training practices (Global Accounting Alliance, 2012, p. 10). The differences make it difficult to produce uniformity in the adaptation and interpretation of ethical standards.
Conclusion
The efforts towards a global set of accounting standards have led to the motivation and the need for a universal set of ethical standards in some ways. For example, it has resulted in the necessity of a common language among accountants providing services to international businesses. Globalization has led accounting firms to expand internationally, and ethical standards have been the most significant factor in determining the appropriate companies to acquire or merge with to achieve the expansion goals. AICPA and IFAC have been in the frontline for the development and adoption of a global set of ethical standards. AICPA has a code of conduct which is divided into six articles and which governs the various aspects of ethical standards for its members. Additionally, it has rules that enforce adherence to the ethical standards. Similarly, IFAC has a code that governs the ethical conduct of its members. The code is divided into various sections, and most of them are similar to AICPA’s articles. Additionally, IFAC has an Ethics Education Framework that develops different aspects of ethics in future accountants. The framework also oversees the education and training of accountants. Finally, the two bodies are faced with some challenges such as lack of enough members to supervise the implementation of the standards and differences in jurisdictional adoption and interpretation of the standards.