Journal of Accounting, Auditing

& Finance
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Ethics for Independent Auditors

Walter K. Kunitake and Clinton E. White, Jr.
Journal of Accounting, Auditing & Finance 1986 1: 222
DOI: 10.1177/0148558X8600100305

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Ethics for Independent Auditors
WALTER K. KUNITAKE"
AND CLINTON E. WHITE, JR.*

This ar'ticle suggests that the AICPA, state societies, state

boards, and CPA firms must reemphasize the need for professionul
conduct as well as the need to exercise self-restraint so that excessive
competitive behavior does not reduce the quality of service and
erode the accountant's professional image. It ulso recommends that
the kind of professional ethics likely to promote professionalism be
taught in auditing courses at universities as a way of instilling
durable professional ethics in young uccountants.

For a decade, congressional committees [I],the U.S. Justice Depart-

ment, and the U.S. Federal Trade Commission have urged the accounting
profession to alter its Code of Ethics so as to encourage competition within
the profession. Responding to this pressure, the AICPA [2] eliminated its
Code of Professional Ethics Rule 303 on competitive bidding and Rules 401
and 402 on encroachment, and drastically diluted Rule 502 on solicitation
and advertising. Many state CPA societies and boards of accountancy made
similar changes to their respective codes.
These changes and the increased competition engendered threaten to
alter permanently the profession's image, particularly if CPAs choose to
adopt and follow the competitive practices typical of the product market-
place. As a result of the changes in the competitive rules, aggressive behavior
has begun to appear in the accounting profession, resulting in adverse pub-
licity about the profession's objectivity and integrity and the quality of
service provided. Berton [3] noted that the accounting profession has been
thrust into a new, competitive world of survival, that fee cutting and client
theft have become a way of life in the profession, and that some small firms
may have to merge to survive these practices. Serlin [4]worries that opinion
shopping by clients may be another result of the newly competitive market
and lower auditing fees. He feels that perhaps the most damaging result of

*Walter K . Kunitake, Ph.D., CPA, and Clinton E. White, Jr., D.B.A., are assistant professors
of accounting at Pennsylvania State University.
The authors thank Professor Stephen E. Loeb for his helpful comments.

222
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ETHICS FOR INDEPENDENT AUDITORS 223
this opinion shopping will be the loss of public confidence in the integrity
of the accounting profession.
Meanwhile, R. Davis [ 5 ] recently found that only 33 percent of the
CPAs he surveyed disapproved of a CPA’s behavior depicted in a hypo-
thetical case in violation of Rule 201-3, prohibiting shopping for accounting
and auditing standards. Davis designed his study to determine the degree
of ethical knowledge CPAs possess and their attitude toward their profes-
sional code. He noted that the low disapproval rate suggests that professional
standards of conduct may now take second place to an opportunity to solicit
new clients.
This kind of evidence should cause serious concern about the profes-
sion’s image. The profession must act positively if it wants to preserve the
image it has built and maintained thus far.
This article discusses (1) the changes in the Code and their potential
long-run effects on the profession’s image and behavior, (2) the unfavorable
consequences excessive competition brings to the accounting profession, (3)
a need to reemphasize professionalism in the auditor’s behavior, and (4) a
need to emphasize professional accounting ethics in the university
classroom.

A Code More Conducive to Commercialism

Professional ethics are generally based on widely accepted social ethics
[ 6 ] .In 1956, Carey [7] wrote that “a code of professional ethics signifies
voluntary assumption of the obligation of self discipline above and beyond
the requirement of the law” (p. 13). A decade later, Carcy and Doherty [8]
noted that (1) advertising was neither illegal nor immoral, but was generally
regarded unprofessional; (2) engagement solicitation by a professional such
as an auditor serves to place that professional in a position psychologically
inferior to the potential client; and (3) restraint in encroachment practices
tends to preserve harmony among professional colleagues. Bedingfield and
Loeb [9] found, in a survey conducted more than a decade ago, that 88
percent of accounting professors teaching ethics in their auditing courses
agreed that CPAs should neither advertise nor attempt to obtain clients
through solicitation. It is important to note that these statements and ob-
servations appeared before recent events altered the competitive rules in
public accounting.
The Concepts section of the AICPA Code that encourages ideal behavior
remains generally intact after the changes in the Rule of Conduct on com-
petition. It still encourages professionalism and stresses a CPA’s respon-

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224 JOURNAL OF ACCOUNTING, AUDITING & FINANCE

sibility to the public. The desire among governmental regulatory bodies to

introduce more competition into the accounting profession reflects a renewed
social interest in the microeconomic theory of free exercise of market forces
and the associated interest in discouraging any commercial activity of the
sort prohibited by the Sherman Antitrust Act of 1890 [lo].
Although the ultimate objectives of the accounting profession and the
regulatory bodies to serve the public’s interest appear not to be in conflict,
many accountants believe that unrestrained competition undermines profes-
sionalism and erodes the general economic welfare of society. A study
conducted by the AICPA’s Special Committee on Solicitation [ 111 shortly
after the AICPA permitted direct uninvited client solicitation, revealed that
a majority of the AICPA members objected to the change. The AICPA
Committee consequently recommended that:
The [AICPA] board of directors should issue a policy statement ex-
pressing its view that members should exercise appropriate restraint if
they elect to engage in the commercial practices of advertising and
solicitation. [p. 51
The Committee based its recommendation on the findings in which (1)
approximately two-thirds of the sampled members objected to the general
practice of direct uninvited solicitation and (2) a consensus among members
believed that the AICPA Code should prohibit direct uninvited solicitation,
if legally permissible. Furthermore, several state boards have yet to change
their codes of ethics regarding the competitive rule and continue to resist
actions brought against them by the U.S. Justice Department [12].
The objections expressed by those AICPA members and state boards in
allowing direct uninvited solicitation and other competitive practices were
mainly in the method used to achieve the overall objective of serving the
public interest. Independent auditors provide a unique service where quality
cannot be easily evaluated as a tangible good. Herein lies the problem of
applying economic price theory in the market for audit services. Instead,
the value of audit services must be measured using intangible standards such
as the CPA’s integrity, independence, and reputation or professional image.
Although the professional image may be diminishing, an opinion poll
of corporate executives, securities analysts, regulatory officials, and uni-
versity professors, sponsored by Peat, Marwick, Mitchell & Co. (PMM) in
1983, indicates that the perception of auditor ethics remains high [13].
Eighty-seven percent of the respondents believed that auditors enjoy high
ethical and moral standards. The PMM survey occurred only three years
after the rules allowed auditors to engage in open competition; consequently,
it is too early to conclude that the high rating will continue. The authors

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ETHICS FOR INDEPENDENT AUDITORS 225
are primarly concerned with the long-run effects of the new free-market
system on the accounting profession.
The accounting profession should take note of what is transpiring in the
medical and legal professions. Both professions face problems with their
professional images, and there is controversy in those professions over
members who resort to blatant advertising and client solicitation. For ex-
ample, in the legal profession a considerable loss of professional image
attends the spectacle of an attorney’s resorting to ambulance chasing [ 121.
Also, controversy among plastic surgeons over distasteful advertising often
centers on implied invitations to undergo unnecessary cosmetic procedures
~41.

Consequences of Excessive Commercialism

In view of the trends just discussed, intense competition for clients
among public accountants could have the following results:
1 . An irreversible deterioration of the profession’s image;
2. Fees set so low as to lower the audit quality; and
3. A willingness to agree to unacceptable accounting methods and issue
compromised audit reports.
Deterioration of the profession’s image may result from other factors
as well, but fee cutting, client stealing, reduced scrvice quality, opinion
shopping, and a loss of collegial respect-all byproducts of excessive com-
petition-tend to exert adverse effects on professional image. Even before
the relaxation of the advertising and solicitation rules, the Cohen Commis-
sion [15] noted that “it is not lack of competition, but possible excessive
competition that appears to present a problem to the accounting profession
today” [ 15:1091. The Commission members also expressed concern that
time-budgeting pressures, caused partly by excessive price competition, tend
to encourage substandard audit work. The Commission emphasized that
when CPA firms compete intensively for clients, they tend to reduce their
fees to unreasonably low levels and, as a result, reduce audit performance
and audit quality. Additionally, the AICPA Committee on Solicitation [ 1 11
found that while the members did not believe that the quality of their practice
would diminish with direct uninvited solicitation, public expectations of the
quality of CPA services might well diminish, increasing both litigation
against CPAs and governmental regulation.
Addressing the issue of independence in auditor changes, DeAngelo
[ 161 found that auditors who bid for clients often offer a low fee in the early
periods with the expectation of making it up later. This practice (known as

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226 JOURNAL O F ACCOUNTING, AUDITING & FINANCE

‘‘low-balling’’) tends to create an independence problem because an auditor

who expects later recoupment may go beyond ethical boundaries to please
that client.
In 1981, Shockley [17] found that CPAs, bankers, and financial analysts
perceive that auditors, particularly those in smaller firms, often risk their
independence when they operate in a highly competitive environment. More-
over, especially during sluggish economic periods, permissive solicitation
rules subject CPA firms to more auditor shopping from both public and
nonpublic clients, obviously an undesirable situation if it encourages CPAs
to compromise on generally accepted accounting principles (GAAP) and
generally accepted auditing standards (GAAS) [ 181. In an administrative
proceeding reported in Accounting and Enforcement Release No. 54 [ 191,
for example, the SEC alleged that Broadview Financial Corporation im-
properly recognized $4 million of income. Broadview’s original auditor
insisted on restating the $4 million. As a result, Broadview contacted four
other Big Eight firms before finding one to recognize the $4 million as
revenue. This case also illustrates the importance of successor auditors’
communicating and cooperating with predecessor auditors concerning man-
agement integrity and opinion shopping. Excessive competitive practice
tends to weaken this important communication between auditors.

Proactive Controls
To preserve the profession’s image, both practicing auditors and edu-
cational institutions must take action quickly. The AICPA Special Com-
mittee on Standards of Professional Conduct proposes a system of mandatory
quality assurance review focused on quality of performance and the elim-
ination of substandard work by CPA firms [20]. Recognizing the imple-
mentation problems, the authors concur with the Committee’s proposal but
go further to propose a more broad-based approach. Our two major proposals
are ( I ) to emphasize the positive behavior outlined in general ethics in
practice and (2) to instill general accounting ethics at the university level
before accounting students enter practice.

Reemphasis of General Ethical Values

As the Concepts of Professional Ethics .of the AICPA Code [2] states,
The Institute’s Rules of Conduct set forth minimum levels of acceptable
conduct and are mandatory and enforceable. However, it is in the best
interest of the profession that CPAs strive for conduct beyond that

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ETHICS FOR INDEPENDENT AUDITORS 227
indicated merely by prohibitions. Ethical conduct, in the true sense, is
more than merely abiding by the letter of explicit prohibitions. Rather
it requires unswerving commitment to honorable behavior, even at the
sacrifice of personal advantage. [Sec. 51.061
In and of itself, this language is unenforceable. It does, however, carry
a positive tone which emphasizes the importance of high ethical values.
The enforceable competitive rules in the ethical codes of individual state
societies and state boards, as well as the AICPA, have been legally
superseded. Therefore, any restraint on unethical solicitation, encroachment,
competitive bidding, and advertising must be achieved voluntarily and con-
form with the spirit of the Concepts section of the Code.
Each CPA firm, large or small, must specifically discourage overly
aggressive competition as well as communicate and monitor this policy
among its professionals. At a higher level, the AICPA, state boards, and
state societies should issue specific guidelines in the form of policy state-
ments outlining restraints desirable in competitive bidding, advertising en-
croachment, and solicitation practices. Those policy statements might
include the guidelines delineating self-restraint discussed in the following
paragraphs.
Competitive bidding. In competitive bidding, the authors consider at
least five areas needing self-restraint:
1 . Setting fees below cost should be avoided because it leads clients to
believe that such a pricing structure is the norm. Furthermore, low-
balling is simply unprofessional.
2. Setting fees at a level that erodes the quality of audit services is
unacceptable. The overall audit risk must be maintained at a low
level to ensure that financial statements are not materially misstated.
3. Charging a high fee for acquiescing to opinion shopping is blatant
misconduct.
4. Knowingly quoting a fee substantially different from one’s actual
rates is unethical.
5. Bidding for an audit engagement that is beyond the auditor’s abilities
is both unethical and may result in a violation of the first general
standard.

Advertising. Generally, advertising has caused few problems because

practitioners find it to be an ineffective means of obtaining clients [21].
Nevertheless, accountants should be aware of the AICPA Code’s Interpre-
tation 502-2 [2], which considers the following advertising activities to be
not in the public’s best interest:

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228 JOURNAL OF ACCOUNTING, AUDITING & FINANCE

1. Creating false or unjustifiable expectations of favorable results.

2. Implying an ability to influence any court, tribunal, regulatory
agency, or similar body or official.
3. Communicating unverifiable, self-laudatory statements.
4. Making unverifiable comparisons with other CPAs.
5 , Communicating testimonials or endorsements.
6. Communicating a representation that one will perform specific
professional services in current or future periods for a stated fee,
estimated fee, or fee range when it is likely at the time of the
representation that one will have to increase such fees substantially
and one neglects to advise the prospective client of that likelihood.
7. Communicating any other representations likely to cause a reasonable
person to misunderstand or be deceived (Sec. 502.03).
Direct uninvited solicitation. Direct uninvited solicitation may take sev-
eral forms. For example, a CPA may personally approach, telephone, or
write to a potential client without prior invitation, attempting to convince
management to switch auditors. Such activity in itself may be unprofes-
sional, but coupled with any of the other activities described in the com-
petitive bidding and advertising sections, it becomes unethical as well.
Shopping for accounting and auditing standards. A client who shops
for an accounting opinion actually searches for a CPA willing to express a
higher level of opinion than the circumstances warrant; for example, an
unqualified opinion is expressed when a significant audit scope limitation
warrants a qualified opinion. Shopping activities may include opinion, ac-
counting standards, or auditing standards shopping. For a CPA to acquiesce
in any of these interrelated activities would be unprofessional.
Overlooking GAAP deviations in financial statements and not disclosing
these departures in one’s report is obviously a violation of the Code, but a
more subtle violation may occur when a practitioner does not fully under-
stand Interpretation 201-3 of the AICPA Code [2]:
If a client of one public accountant asks another CPA for professional
accounting and auditing advice because the client disagrees with his
regular accountant, the second CPA may not provide the advice before
ascertaining from the first accountant all the facts pertaining to his
professional judgment of the appropriate accounting or auditing standard
to be applied. [Sec. 201.041
R. Davis [5] found that practitioners frequently are either unaware of this
provision or believe such a consultation to be unnecessary.
The authors believe that overly aggressive competitive bidding, adver-
tising, and solicitation should be discouraged immediately. But to reduce

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ETHICS FOR INDEPENDENT AUDITORS 229
this sort of behavior over the long run, college and university auditing classes
must emphasize positive ethical behavior and discourage conduct detrimental
to the profession’s image.

Instilling Professional Ethics in Accounting Students

General values can be instilled in college students through family, re-
ligion, society, educational institutions, and peers. Professional ethics, how-
ever, can be addressed more effectively when accounting majors are still
in college.
Much attention has been focused on instilling professional attitudes in
studcnts through professional schools of accounting. A weakness in these
pre-practice programs in undergraduate accounting and professional ac-
counting schools is that courses in auditing ethics focus mainly on the Code’s
enforceable Rules of Conduct rather than on the higher, ethical values
emphasized in the Code’s Concepts section.
Mayer-Sommer and Loeb [22] observed that “ideally, what students
hear from professors should be consistent with the way they arc treated by
professors. The way students are treated in school should be consistent with
the way they are likely to be treated as professional accountants” [22:125].
They acknowledged, however, that the durability of the profcssional so-
cialization that students acquire in school may be limited. F. Davis [23],
for example, discovered that when subjected to the pressures of actual
employment, nurses found their school-acquired beliefs and attitudes over-
whelmed; Schein 1241 found that, after a year away from the school envi-
ronment, most management students abandoned the values and attitudes
they had acquired in their academic study; and Brenner and Molander [25]
suggested that the behavior of superiors can be a primary factor in forcing
business executives to make unethical decisions.
The AICPA [ l I] found that, after years of public practice, practitioners
tended increasingly to favor restrictions on direct uninvited solicitation, but
staff members with fewer years of practice expressed more tolerance for
solicitation. Loeb [26] found, however, that a CPA is most likely to commit
a solicitation violation during his or her early ycars of practice, most fre-
quently after acquiring a proprietary interest in a firm.
To instill sound professional ethics, college classroom accounting stu-
dents first receive a thorough understanding of the spirit of the AICPA
Concepts section of the Code. Specific case studies, for example, can depict
behavior allowable under the enforceable Rules of Conduct section but
detrimental, nevertheless, to the profession’s image. The enforceable rules,
after all, rcprescnt the minimum rather than the desirable level of conduct.

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230 JOURNAL OF ACCOUNTING, AUDITING & FINANCE

Cases might also include examples that violate the minimum level allowed
in the Rules of Conduct and Intcrpretation sections of the Code.

Summary and Conclusion

The accounting profession’s ethics have been showing signs of strain
attributable to an emphasis on commercialism now permitted by the com-
petitive rules in the enforceable section of the AICPA Code. Further em-
phasis of this commercialism could damage the enviable image accountants
have worked hard to earn. Therefore, auditors must exercise self-restraint
by following a behavior modci that incorporates the spirit of the Concepts
of Professional Ethics section of the AICPA Code, a spirit that must be
emphasized both in practice and in college and university auditing courses.
The AICPA and the various state societies should issue policy statements
urging restraint in the areas of price cutting, aggressive business solicitation,
and unprofessional advertising. At the actual practice level, the CPA firms
should adopt a similar posture so that the individual CPAs they employ
behave professionally.
To protect and enhance the profession’s overall image, auditing classes
should instill positive professional ethics in their students long before they
enter practice. The topics of professional ethics covered should focus on
the positive spirit of the Concepts section of the Code and discourage any
behavior that sullies the profession’s image, whether or not the enforceable
rules allow it. With the combined effort to promote professionalism in both
education and practice and to monitor professional conduct as proposed by
the AICPA Special Committee on Professional Conduct, professional ethics
could become durable. Once tarnished by excessive competition, however,
the profession’s image may never recover its original status in our inherently
skeptical, often cynical, society.

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5. R. R . Davis, “Ethical Behavior Reexamined,” The CPA Joitninl (December 1984), pp. 32-36.

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ETHICS FOR INDEPENDENT AUDITORS 23 I
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