Establishing an Ethical Culture in a Tax Practice

Editor: Thomas J. Purcell III

The United States is conflicted about ethical behavior. Americans want people to be grounded in right behavior, but they collectively celebrate and admire people who skate close to the edge, or cross the line, on ethical behavior.

This attitude within society can and does affect individual behavior. But the thinking that something is all right because everybody does it needs to go away. More than this, individuals must have ethical values that match their actions.

Often, asking the following two questions is a good place to start in analyzing an ethical issue:

• Does the decision feel like the right thing to do?
• Can the decision be defended with confidence publicly?

The CPA profession is filled with individuals who know right from wrong. It is time to develop a business culture that is ethically strong. Every organization, including professional firms, operates within an organizational culture. Inherent in that culture is a code of conduct that influences the behavior of individuals within the organization.

This column offers practical suggestions for ways a professional firm can communicate, reinforce, and monitor its code of conduct in tax practice. Ultimately, it is the firm’s responsibility to ensure that its employees act consistently with these principles.

Sources of a Code of Conduct in Tax Practice

Underlying all of the specific rules, laws, and regulations governing a CPA’s provision of tax services is a basic code of conduct that defines what it means to act as a professional. A professional firm can look to a number of sources for key principles of ethical conduct to emphasize in its practice. A good place to start is the AICPA Code of Professional Conduct (AICPA Code). AICPA members are obligated to follow the principles in the AICPA Code (AICPA principles), which express the profession’s recognition of its responsibilities to the public, clients, and colleagues (ET Section 51, “Preamble”).

The AICPA principles guide members in performing their professional responsibilities and express the basic tenets of ethical and professional conduct. The AICPA principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage. In particular, the AICPA principles require members to act with integrity, objectivity, due professional care, and a genuine interest in serving the public (ET Section 53, “Article II: The Public Interest”).

Integrity is measured in terms of what is right and just. In the absence of specific rules, standards, or guidance, or in the face of conflicting opinions, a member should test decisions and deeds by asking, “Am I doing what a person of integrity would do? Have I retained my integrity?” Integrity requires a member to observe both the form and the spirit of technical and ethical standards; circumvention of those standards constitutes subordination of judgment (ET Section 54, “Article III: Integrity”).

The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest (ET Section 55, “Article IV: Objectivity and Independence”). Normally, the issue of objectivity arises in the context of an attest engagement, but it can arise in tax practice as well. For more on this issue, see Horwitz, “Conflicts of Interest: IRS Rules Differ From AICPA Professional Standards,” 42 The Tax Adviser 776 (November 2011).

The principle of due care obligates the member to observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability (ET Section 56, “Article V: Due Care”).

A distinguishing mark of a profession is its responsibility to the public. Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism (ET Section 53, “Article II: The Public Interest”). Again, this issue arises primarily in the context of attest engagements, but tax practitioners should be aware that they have some responsibility for making the tax system function properly. It is also important to remember the penalty-of-perjury attestation that is part of every tax return signature block for federal tax return preparers.

Other examples of principles of professional conduct can be found in the rules and regulations of state boards of accountancy and state CPA societies, in the rules of the International Federation of Accountants (IFAC), and in federal and state statutes and regulations. Useful information can also be found on the websites of various organizations that are dedicated to encouraging ethical conduct. These organizations provide resource materials, training, and assessment services for small and large firms. Two examples of this type of organization are Character First and the Oklahoma Business Ethics Consortium. Participation in such an organization can help a firm establish and refine an ethical culture.

Tone at the Top

The tone set by the firm’s leadership is a key element in determining the organization’s culture. If employees do not perceive that ethical behavior is important to the firm’s leaders, they may be less likely to behave ethically in their daily work lives. Leaders must model character. It is not what they say but what they do that makes a difference. Leaders decide whether character and ethics count. However, a firm’s culture is set not only by the firm’s most senior leadership. Junior employees typically look for guidance from colleagues and immediate supervisors. Therefore, it is important to embed ethical expectations within the organization’s culture and for everyone to have a common understanding of those expectations.

Firms of all sizes may want to consider adopting a code of conduct that is tailored to emphasize the ethical principles the firm considers most important. A code of conduct can be developed in a variety of ways. It can be chosen by firm leadership. It can be developed collaboratively by the entire firm during a retreat or by a special task force of individuals from throughout the firm. A code of conduct is easy to put in place. What is hard is the action. Will employees hold up the code when they make decisions? The best way to make it more likely they will is to keep ethics on the table at all times.

In a smaller firm, it may be possible for leadership to communicate its expectations directly and personally in staff meetings or one to one. Personal emails recognizing desirable characteristics and examples of positive behavior can be an effective tool.

The employees at co-author Nancy Hyde’s firm, Hyde & Co. CPAs in Oklahoma City, receive printed materials furnished by Character First. Making Character First, a book by the organization’s founder, Tom Hill, enumerates and describes 49 character qualities that build a common background for employees. Some of the covered traits are gratefulness, availability, cautiousness, decisiveness, discernment, diligence, dependability, initiative, thoroughness, punctuality, resourcefulness, responsibility, and wisdom (see the full list, with definitions). The organization’s monthly magazine, cf, highlights one of the virtues each month with illustrations of the trait’s practical applications and suggestions for making employees more aware of it.

Employees can together learn more about these character traits. Small group discussions allow managers and employees to share a standard of values, behavior, and aspiration. Employees strengthen their relationships as they build trust together.

Employees are recognized in monthly group meetings by their immediate supervisor. Specific examples are given of the character traits that the spotlighted employee possesses. Everyone meets to celebrate the employment anniversary of the employee. It is designed as a way to honor the employees, provide character training, and disseminate important information to everyone on ethics.

Monthly meetings provide a forum for discussing the character trait of the month. The traits are reinforced with discussions in department meetings. When birthday cards are circulated, employees are encouraged to affirm a specific character trait that the employee exhibits. More than just receiving a happy birthday wish, employees realize others value them for the positive traits they exhibit in their outward actions.

In a larger firm, more formal communication may also be necessary, such as articles in firm publications or a periodic affidavit confirming the employee’s familiarity with the firm’s code of conduct and ethical standards. Regular training on ethical topics should be considered and can take a variety of forms, including informal discussions, seminars, or annual web-based training. At Hyde and Co., training focuses on a review of formal sources such as Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10). Annual training focuses on basics previously mentioned, to keep members grounded on concepts such as conflicts of interest, confidentiality, and protection of the public interest. One more way to reinforce ethical behavior is to interact with other business professions through outside organizations. Employees of Hyde and Co. attend luncheon meetings of groups such as the Oklahoma Business Ethics Consortium, Character Council of Central Oklahoma, and other continuing-education sessions.

Analyzing Ethical Situations

Discussions of case studies that apply ethical standards to common workplace situations can be particularly effective, since professional conduct and ethical behavior depend on the good judgment of individuals in what are often complex, challenging, and ambiguous real-life situations.

The AICPA has a guide for analyzing ethical situations (AICPA Guide for Complying With Rules 102–505). The guide describes an approach members can use to evaluate the application of certain AICPA principles to the diverse types of relationships and circumstances the member may encounter. The guide adopts a threats-and-safeguards approach that seeks to identify threats to compliance with the rules of conduct, to evaluate the significance of the threat, and to identify safeguards that may eliminate the threat or reduce it to an acceptable level.

A firm can use the threats-and-safeguards approach to evaluate the types of policies and procedures that can or should be established to encourage compliance with the firm’s ethical standards and code of conduct.

Raising Your Hand

Every individual within the organization can play an important role in nurturing an ethical culture. Employees should be encouraged to speak up if something does not seem right, to seek advice when needed, to offer suggestions to improve the work environment, to raise any concerns, and to report potential violations of law or policy that might affect the firm or its clients.

Does your firm encourage people to bring ethical issues forward through appropriate channels? Do people understand what those channels are? Often a direct supervisor is the best person to whom an individual can raise an initial concern. A large firm may offer various avenues of communication, including senior leadership, the human resources function, or a designated individual, such as an ombudsman or a chief compliance officer. Some firms have established hotlines through outside service providers to allow employees to raise ethical concerns anonymously. A small firm needs to be particularly aware of staff concerns and take the time to listen. Employees in small firms must believe they can question a decision or action of the owner without incurring significant negative consequences.

The firm should have a process for investigating such concerns appropriately and confidentially. Careful development of all of the facts may be necessary to determine whether a significant ethical breach has occurred.

The firm needs to emphasize that it will not tolerate retaliation against an individual who raises a concern. Employees will hesitate to come forward if they are not confident that they will be protected from negative repercussions for reporting unethical behavior.

Choosing Associates and Clients

An ethical culture can be strengthened by associating with ethical people. In making employment decisions, the firm should seek to identify candidates with the characteristics the firm values as part of its ethical standards, such as integrity, diligence, dependability, and sincerity. In evaluating whether to accept a new client or to continue a relationship with an existing client, the firm should consider that client’s ethics and integrity. An individual’s compliance with the firm’s ethical standards and code of conduct should also be taken into account as part of that individual’s annual performance evaluation.

Assessment

Once a firm has established and communicated its unique approach to ethical standards and its code of conduct, it needs to assess whether the standards are appropriate and whether they are understood by the employees and have been successfully embedded in the firm’s culture. An employee survey is one tool for assessing the initiative’s success. An outside service provider can be hired to assess the firm’s ethics program. The firm can also benchmark its efforts by reviewing information available online, by holding discussions with other firms and business organizations, or by participating in annual competitions sponsored by ethics organizations.

Conclusion

For a number of compelling reasons, including professional responsibilities and the personal and financial risks inherent in behaving unethically, a firm wants to create a strong ethical culture. However, making ethical judgments is not always easy in a complex and fast-moving world. Pressures and potential conflicts make it difficult to act appropriately. Nevertheless, professionals have an obligation to carefully consider the implications of their actions and to ask themselves whether those actions reflect integrity, due care, and objectivity and serve the public interest.

Rewarding good character builds good character. Character touches everything people do. The time to prepare for tough decisions is before they must be made.