Independence: The CPA as journalist of your business

By Rodel C. Acosta, former Assurance partner

As we celebrate Independence Day year after year, we continue to write the story of the Filipino people working toward building a prosperous nation. As events unfold in our day-to-day lives, journalists have the daunting task to capture these events in a simple, accurate and factual manner. This information will eventually be recorded in Philippine history books for future generations.

A certified public accountant (CPA) in business works very much like a journalist does.

Using a distinct language called “accounting,” the CPA writes the story that answers the “what, when, where, how and why” of events of a corporate experience, usually for a period of 12 months.

For CPAs to write a good story, they must be guided by the Code of Ethics for CPAs in the Philippines.

The Board of Accountancy approved the Revised Code of Ethics for CPAs in the Philippines on December 18, 2015. It contains the fundamental principles with which accountants are expected to comply—integrity, objectivity, professional competence and due care, confidentiality and professional behavior. In the course of carrying out his work, a CPA may encounter situations that may not be in keeping with these fundamental principles. Since it is not possible to anticipate all situations, the Code provides a framework, which should guide the CPA in making decisions or taking actions consistent with the fundamental principles.

The CPA has to identify, evaluate and address “threats to independence,” which can lead to non-compliance with the fundamental principles. When such threats are identified, appropriate measures or safeguards are set up to mitigate the risk of non-compliance.

These measures will depend on the degree of risk of non-compliance. The process of identifying threats and setting up safeguards is what the Code refers to as “conceptual framework.” This framework assists the CPA in complying with the ethical requirements of the Code and in meeting his responsibility to act in the public interest.

The Code states that: “A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, a professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employer.” The Code provides five scenarios where the CPA may be faced with ethical dilemmas: potential conflicts, preparation and reporting of information, acting with sufficient expertise, financial interests and inducements. This article will cover the first three scenarios.

Potential conflicts

“It isn’t a conflict of interest. This was approved by our outside auditors and our board. It is in the best interest of the shareholders.” These was the response given by Kenneth Lay, then CEO of Enron Corporation (Enron) to Rebecca Smith and John Emshwiller, two Wall Street Journal reporters as narrated in their book 24 Days. The reporters raised the question because the CFO had partnerships that were doing enormous amounts of business with Enron that employed the CFO. It is a challenge, indeed, for the CPA to strike a balance between meeting corporate objectives and protecting public interest.

During a seminar that PwC conducted recently for CPAs, someone asked, “What do we do when we are asked to do something that does not seem right?” Another participant answered with a real-life story. Yes, it is difficult to handle an ethical dilemma. But the CPA had the courage to uphold the fundamental principles of being a CPA and she walked away from her Finance post. By doing the right thing, the good deed was rewarded because the CPA found an equally rewarding job a few months after.

Preparation and reporting of information

“There is an appearance that you are hiding something…the disclosure there in the footnotes is not complete enough for me to understand and explain all the intricacies of those transactions,” a stock analyst closely monitoring Enron shares said this during one of the conference calls hosted by Enron at the height of the October 2001 Enron inquiry.

The above excerpt from the book 24 Days highlights how a CPA is similar to a journalist who writes an article to inform the public. A CPA presents information fairly, honestly and in accordance with relevant professional standards so that the information will be understood in its context.

Acting with sufficient expertise

Expertise to handle threats to independence can be developed through training and conducting ethics and business conduct programs.

The accountancy profession emphasizes the need for continuous training. Required continuing education units include a subject on Ethics. This is because Ethics can be considered the cornerstone of the accountancy profession.

Business entities can implement corporate-wide ethics and business conduct programs, with the proactive involvement of Finance. For example, the CFO can organize circles of integrity where team members discuss and receive coaching on ethics concerns specific to the Finance function. Open communication is also a key success factor of an effective ethics and business conduct program. Best practices can be shared and challenging situations can be discussed to find the appropriate course of action.

The CFO is expected to take the lead in modeling and encouraging ethical behavior. This is highlighted in the October 10, 2013 discussion paper of the International Federation of Accountants (IFAC), through the Professional Accountants in Business (PAIB) Committee.

It says, “Strong ethical leadership and good governance are prerequisites for sustainable value creation . . . . CFOs have a shared responsibility of ensuring the entire organization is attuned to high ethical standards and aligned with the values, goals and objectives of the organization.”

CPAs and journalists share the responsibility of uncovering, recording and proclaiming the truth. With this responsibility comes a rule—a code of ethics that guides them in making the right decisions. Before the Philippines gained its independence, it needed a Constitution. In the same way that the Philippine Constitution defines what it means to be the Philippines, it is the code of ethics that defines what it means to be a CPA.