Ethical Obligations

Ethical standards have had vast changes over the years. Michael Josephson, in Chapter 1 of Ethical Issues in the Practice of Accounting, 1992, described the "Ten Universal Values." They were as follows: honesty, integrity, promise-keeping, fidelity, fairness, caring, respect for others, responsible citizenship, pursuit of excellence, and accountability. Good ethics does not always mean good business practices. The purpose of ethics in business is to direct business men and women to abide by a code of conduct that facilitates, if not encourages, public confidence in their products and services (Smith & Smith, 2003, 3). In the accounting field, the American Institute of Certified Public Accountants (AICPA) maintains and enforces a code of professional conduct for public accountants. The Institute of Management Accountants (IMA) and the Institute of Internal Auditors (IIA) also maintain a code of ethics (Smith & Smith, 3). Investors and accounting professionals have a responsibility to provide ethical guidelines for its members to follow; professional accounting organizations fill this role. Investors need to know that there is a universal standard for which they can use to determine if they should invest or not when taking into account financial information a company provides the public.

There are several organizations that mange ethics in accounting practices, writing guidelines and policies for which accountants must abide. The relationship between the three we will discuss is that they are all guided by the Securities Exchange Commission. These guidelines allow investors to have a comparable standard when looking at financial statements of corporations. The Financial Accounting Standards Board (FASB), Securities Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) are three such agencies.

The FASB is an organization that is not for profit. Since 1973, the Financial Accounting Standards Board (FASB) has been the designated organization, in the private sector, for establishing standards of financial accounting this includes reporting. The FASB regulates auditors of publicly traded companies. They are officially recognized as authoritative by the Securities and Exchange Commission (Financial Reporting Release No. 1, Section 101 and reaffirmed in its April 2003 Policy Statement) and the American Institute of Certified Public Accountants (Rule 203, Rules of Professional Conduct, as amended May 1973 and May 1979) (FASB [FASB],3 ). Standards of this nature are necessary for the efficient functioning of the economy. Again, this is because investors, creditors, auditors and others rely on credible and comparable information on financials of companies.

The Securities and Exchange Commission (SEC) is a division of the federal government, employing approximately 3,100 people (SEC [SEC]). The SEC has five commissioners appointed by the President of the United States. The SEC consists of four Divisions and 18 Offices. The Securities and Exchange Commission has the authority to establish financial accounting and reporting standards for publicly held companies that the FASB and the, later discussed, PCOBA enforce. Their main mission is to “protect investors and maintain the integrity of the securities markets (SEC [SEC], 1)” The SEC was developed as a result of the Securities Exchange Act of 1934. They rely on the fact that the private sector demonstrates the ability to understand and execute public interest in regard to financial accounting practices.

Each year the SEC brings between 400-500 civil enforcement actions against individuals and companies that break the securities laws. This is crucial to the SEC’s enforcement effectiveness. Typical security law breaches include; accounting fraud, insider trade practices and providing erroneous or misleading information about securities (SEC, 1). The PCAOB's adopts its rulemaking process as a result of the adoption of rules that are then submitted to the SEC for approval. PCAOB rules do not take effect unless approved by the SEC. PCAOB rules include auditing and related professional practice standards, forms, and the board's bylaws and code of ethics.

The Securities and Exchange Commission appoints the chairman and members of the Public Company Accounting Oversight Board (PCAOB). The boards aim the same as SEC and FASB, is to protect investors and other stakeholders of a public company by ensuring that the auditor of a company's financial statements has followed strict guidelines. But what authority enforcement do they possess?

The PCAOB was established as a result of the creation of the Sarbanes-Oxley Act of 2002 (Public Law 107-204, July 30, 2002) (PCOBA [PCOBA],1). Section 105 of the Sarbanes-Oxley Act of 2002 grants the PCAOB broad investigative and disciplinary authority over registered public accounting firms and persons associated with such firms