New York State Accounting Ethics:
Codes, laws and regulations
Traditionally, American accounting firms have been left to self-regulate. Accounting professionals have established their own professional regulatory boards. These boards have strict licensing requirements and codes of conduct.
In recent years, a number of high profile accounting scandals have provided the impetus for more government activism to regulate the accounting profession. The State of New York is no exception. It has adopted its own regulatory framework to accommodate and enhance federal legislative efforts. This increased regulatory framework is still a work in progress. It remains to be seen if it will achieve the desired effect of re-establishing public confidence and trust in the accounting profession.
Background and State perspectives
Ethics in the accounting profession are of vital importance. According to the American Institute of Certified Public Accountants (AICPA), the accounting profession serves “clients, credit grantors, government, employees, investors, the business and finance community and others who rely on the objectivity and integrity of CPA’s” (Encyclopedia of Business and Finance, 2008). The AICPA is one of three major accounting industry organizations that provide the ethical guidelines for its practitioners. Since these guidelines and state requirements often overlap, joint investigations of ethics are often undertaken with state regulators.
All associations that govern the accounting profession assert an accountant-client privilege. Accountants may not provide client information to outside parties. Clients must be informed, however, that this privilege exists only in the context of the professional relationship. The State of New York does not specifically recognize accountant-client privilege and has the power to subpoena, and obtain, client information.
Recent changes in the law have attempted to reconcile attorney-client privilege with accountant-client privilege. A very limited accountant-client privilege is in place. According to Tigue and Temkin “communications with an accountant will only be privileged if advice is of a legal, rather than accounting nature” (2002).
The State requires that work product be maintained for a period of at least seven years. The State’s definition of work product is not limited to official company documents. The definition also includes materials that are “handwritten, typewritten, printed, photocopied, photographed or electronic form of letters, words, pictures, sounds or symbols” (New York Society of CPA’s, 2008).
Any privilege for work product is similarly thin. In the U.S. v. Adlman, the second circuit court found that work product created specifically for “existing or expected litigation” qualifies for privileged status (Tigue and Temkin, 2002). Other work product is still fully subject to subpoena.
Violations, consequences and Sarbanes-Oxley
The New York State Board of Regents maintains a specific code of conduct for public and private accountants in the state. The provisions include the following restrictions:
· Undue Influence- Accountants may not promote the sale of goods or services in
an exploitive way (Sec. 29.1 (2)).
· Moral Unfitness- The accountant may not engage in activities inside or outside the profession that demonstrate “moral unfitness” to ethically perform the duties of the job (Sec. 29.1 (5)).
· Delegating Responsibilities- The accountant may not delegate responsibilities of his profession to a person he knows is unqualified (Sec. 29.1 (10)).
(New York Society of CPA’s, 2008)
Although the practice of accounting is largely regulated by the professional associations, the State of New York is the actual issuer of individual accountant licenses. Therefore the State has the right to suspend and revoke licenses when ethical code violations occur.
The Industrial Commissioner of the State can also bring charges for non-compliance with state bookkeeping regulations. The penalties can range from a simple order to comply, or to a prison sentence of one year and a $1,000 fine for each count.
Unethical accountants not only risk the actions of professional boards and state regulators, but also of individual clients. Clients can bring malpractice or negligence actions against their accountants. Even if the client is the ultimate source of illegal activity, he or she can file suit against an accountant who fails to notify him that there is no legally sanctioned accountant-client privilege.
The Enron scandal had a significant impact on New York State. The State Public Pension Fund lost $58 million dollars due to the collapse of the Texas energy giant. Just a year later the Global Crossing scandal cost the state another $60 million (Gantt, Generas and Lamberton, 2007). It was these high-profile schedules that prompted the State to take an expanded regulatory role. The State Board of Regents “expanded the concept of unprofessional conduct and mandated that such conduct be reported to the board” (Gantt, Generas and Lamberton, 2007). The Federal government also took action.
The Sarbanes-Oxley Act (SOX) created a new organization called the Public Company Accounting Oversight Board (PCAOB). All New York firms are required to register with this board. The act also set limitations on the range of non-audit related services that an accountant can provide. Reciprocal reporting of violations between the State and the professional associations was also streamlined.
One point of emphasis for State regulators is tax fraud. The Special Investigations Unit was formed in 2007 to address this issue. This unit uses the “latest developments in data mining” to uncover illegal and unethical activity (DiPiazza, 2007). The unit intends to bring prosecution of tax fraud to an unprecedented level.
The State Assembly followed suit. Bills S4642-A and A10132 increased the potential liability of accountants when performing non-audit services. The State Board of Regents enacted provisions requiring ethics training and retention of records.
One of the difficulties faced in enacting these new measures effectively is a lack of resources. In testimony before the State Senate it was claimed that a “massive infusion of resources” will be required to insure effective implementation (Gantt, Generas and Lamberton, 2007).
The high-profile accounting scandals of the 1990s and early 2000s triggered the intervention of both state and federal regulators. States in some cases have gone beyond federally mandated controls. The State of New York has established new regulations and created new organizations with the goal of increasing enforcement.
The reason the State and Federal governments have taken a proactive stance in regard to regulation is due to the importance of accountants to the performance of the overall economy. They are instrumental in maintaining smoothly running, efficient and ethical public and private sectors. The smooth operation of these sectors is essential to future economic growth, especially in a rapidly globalizing economy. The State does not have the resources to insure the ethical practice of accounting and prevent future scandals. For that reason, it is still heavily reliant on professional associations and the ethical behavior of the practitioners themselves. Therefore, a greater emphasis on ethics in collegiate programs and continuing education in ethics can only benefit the profession.
DiPiazza Jr., Thomas. 2007. “New York State’s New Initiative on Tax Fraud”. Woods,
Oviatt, Gilman. Retrieved 3/23/2008 from:
Encyclopedia of Business and Finance. 2008. “Ethics in Accounting”. ENotes. Retrieved
3/23/2008 from: http://www.enotes.com/business-finance-encyclopedia/ethics-accounting.htm
FindLaw. 2008. “New York State Consolidated Laws”. Retrieved 3/23/2008 from:
Gantt, Karen; Generas, George and Lamberton, Barbara. 2007. “Sarbanes-Oxley,
Accounting Scandals, and State Accountancy Boards”. The CPA Journal. Retrieved 3/23/2008 from: http://www.nysscpa.org/cpajournal/2007/907/essentials/p18.htm .
The New York Society of CPA’s. 2008. “Accountancy Regulations”. New York Board of
Regents. Retrieved 3/24/2008 from:
Tigue Jr., John and Temkin, Jeremy. (2002). “Accountants and the Attorney-Client
Privilege”. New York Law Journal. V.228; No. 98 (Nov.).