Solving and Preventing Ethical Dilemmas

Tax Professionals' Resource
April 18, 2013 — 2,140 views  
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It’s a common issue for CPAs and accounting professionals to face ethical dilemmas in the course of their work. There are many rules listed out in the AICPA (American Institute of Certified Public Accountant) Guide. Compliance to these rules and regulations is a mandatory affair for all accounting professionals. There are many steps that can be taken to prevent the violations of the codes of conduct that are mentioned in the Guide.

The Threats and Safeguards Approach

This approach helps to identify the threats which will affect the rules, and also evaluates the significance of these threats. If the threat is of an acceptable level, then no extreme actions have to be taken as the compliance to the rules has not been compromised. If the threat is not of an acceptable level, then the compliance to the rules has been compromised. The concerned authorities should see to whether safeguard measures can reduce the threat to acceptable levels and protect the CPA ethics. If this is not possible, then steps should be taken to avoid the situations that are responsible for the threat.

Identifying the Threat

To identify threats to accounting ethics, one should be have an idea about the basic 6 threat categories. The first category is the self-review threat where one fails to properly evaluate the prior services done by himself/herself or by any other employee. In the second type of threat known as advocacy threat, the member will promote a client’s/employer’s position in such a way that his/her objectivity becomes threatened. If the member’s interest conflicts with that of the client or the employer, it can give rise to adverse interest threat.

Long-term relationship with a client or employee can lead one to perform favors and this is known as the familiarity threat. If the concerned CPA subordinates his/her judgment to that of a client or an employee, it is known as undue influence threat. If the CPA acts for his own gains in a manner that is harmful to the organization, it is called self-interest threat.

Applying Safeguards

Once the threat has been identified and evaluated, you should apply the safeguards. This involves prohibited and required actions as well as internal control measures. Safeguards can also be the public regulations and legislations. If there is an influence threat, then you can perform peer reviews that take into consideration the reliance on external evidence. Periodic rotation of board members and senior members can reduce familiarity threats. Limitations of services of significant clients can also reduce self-interest threat. If there is an advocacy threat, then you can avoid joint ventures with clients. Applying corporate governance is a method of reducing self-review threats. By putting into action corporate policies that stress on CPA ethics, you can control undue influence threats.

Ethical Conflicts Unrelated to Threats

Apart from threats, members may also experience conflicts of accounting ethics from work environmental pressure or due to the conflict between certain professional standards. To resolve such conflicts, the concerned individual must recognize, consider, and evaluate all the necessary facts and circumstances, consider the internal procedures of the establishment and then formulate an alternate course of action. The course of action should be in compliance with the standard rules and regulations.

Tax Professionals' Resource