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HISTORICAL DEVELOPMENT OF THE CODE OF ETHICS OF THE US PUBLIC ACCOUNTING PROFESSION

This chapter discusses the historical development of the code of ethics of the US public accounting profession and argues that the primary purpose of such a code has been to regulate accounting practice rather than to enhance the ethical behavior of accounting professionals. The changes that have been made to the code of ethics over a period of many years have been prompted primarily by changes in the market for accounting services, to which professional accountants have responded out of economic interest. Extending Preston et al. (1995) and Beets (1999, 305), we contend that the changes to the code of ethics have been caused by market forces and the accounting profession’s desire to expand its scope of its services. Agreeing with Parker (1994), we view these changes as accommodating the accounting profession’s desire to enhance its socioeconomic status and professional autonomy and self-control rather than enhancing the ethical stature of the profession. The chapter also seeks to demonstrate that the ethical discourse of the US public accounting profession can be best located not in the pronouncements of the code of ethics but in certain self-forming practices that commence early in the career of a prospective accountant that shape the accountant into an idealized “ethical” being: not an ethical being who complies with a code of ethics but rather an ethical being who is self-regulated and self-formed into an idealized member of the profession. Thus, the informal ethical discourse of the accounting profession is concerned primarily with the kind of person a person aspires to be when he or she behaves in a “moral” manner as a public accountant. In the US public accounting profession, this is exemplified by the partner in a large international public accounting firm who is an “ethical being,” not in the sense of one who conforms to a code of ethics but one who is able to satisfy clients, bring in new business, and be technically astute, while simultaneously exuding an impression of acting in the highest ethical manner (Covaleski et al. 1998; Baker 1993, 1999).

The remainder of the chapter is organized as follows. The second section provides an outline of key historical developments with respect to the code of ethics of the US public accounting profession. The third provides a theoretical discussion of codes of ethics based upon Foucault’s concept of codified discourse. The final sections offer a critical examination of the changes to the code of ethics and link them back to the concept of codified discourse.

The American Association of Public Accountants (AAPA) was the first body of professional public accountants to issue a code of ethics (Previts and Merino 1979; Preston et al. 1995). The 1905 code contained only two rules. One prohibited members of the AAPA from allowing nonmembers to practice using the member’s name. The second rule prohibited the payment of referral fees (Carey 1965). This initial code clearly focused on regulating the practice of public accounting rather than serving the public interest.

When the American Institute of Accountants (AIA) was formed in 1917, its Rules of Professional Conduct contained eight rules. The first rule restricted the types of firms that could describe themselves as being members of the AIA (i.e., only sole practitioners or general partnerships could be members; all partners had to be CPAs). The second rule warned that willful misstatements of facts in any accounting work might result in the expulsion of the member from the AIA. The third rule was similar to the AAPA’s 1905 rule that prohibited any person who was a not a member of from practicing in a member’s name. The AIA’s fourth rule proscribed the acceptance of commissions and brokerage fees. The fifth rule barred members from engaging in any business incompatible with public accounting. AIA’s rule six required that members certify only accounting work prepared under their direct supervision. Rule seven mandated that a member inform the Secretary of the AIA before engaging in any lobbying activity. Finally, AIA rule eight prohibited encroachment on another member’s business (Preston et al. 1995; Previts and Merino 1979). With the exception of the second rule, it can be seen that these rules regulated the practice of accounting rather than the ethical behavior of accountants. The 1917 AIA code involved “profession building” (Abbott 1988), which focuses on marking off exclusive domains in order to advance the commercial prospects of the profession’s members. These early codes equated practice regulation with serving the public interest. However, it was not acknowledged that the primary purpose of the rules was to restrict competition.

Between 1917 and 1941, the number of rules in the code of ethics gradually increased. By 1941, there were 15 rules, including eight from the 1917 code. Among the new rules were ones that prohibited contingent fees, advertising, and competitive bidding. These rules were primarily directed toward regulating the practice of accountancy rather than enhancing ethical conduct. Interestingly, independence from clients was not part of the code at that time. The code’s focus on regulating the practice of public accounting prevailed into the post-World War II period. Several codifications of the rules took place during the 1950s, ’60s, and ’70s, but the underlying principles remained virtually unchanged (Preston et al. 1995). In 1988, the AICPA adopted a revised code of ethics (now called a Code of Conduct) based on the recommendations of a special committee. The 1988 Code has served as the basis for subsequent revisions to the Code, including the most recent revision which took place in 2014 (see Section 2.5).

In 1998, three events significantly affected the code of ethics of the US public accounting profession, and these events also had an impact on the codified discourse of the profession. The first event was the issuance of a new Uniform Accountancy Act (UAA).¹ The UAA addressed several regulatory and ethical issues, including acceptance of commissions, regulation of public accounting firms, public accountants working in non-accounting firms, and the experience requirements for entry into the profession (Kirtley and Brown 1998). The second event involved modifications and interpretations of the 1988 AICPA Code of Conduct. These modifications removed the remaining barriers to contingent fees and commissions and allowed alternative practice structures (APSs). The third event was the passage of the Sarbanes-Oxley Act in 2002.

Before discussing the UAA and the changes to the AICPA Code, the following section discusses changes in the market for accounting services. These changes had a significant impact on the ethical discourse of the US public accounting profession.

Since its inception, the US public accounting profession has been defined in terms of its provision of auditing and tax services. The designation certified public accountant conveyed the impression that public accountants provide a public service, primarily by through independent audits of company financial statements. While this continues to be the case, the market for accounting services has changed dramatically during the last three decades. These changes include the removal of prohibitions against advertising, competitive bidding and encroachment, competition and merger activity among accounting firms, growth in non-audit services, and the acquisition of public accounting firms by non-accounting firms. Many of these changes are related to efforts by public accounting firm to expand into alternative practice areas, including information technology and management consultancy that do not involve the traditional audit and tax services.

Two primary market segments distinguish the market for accounting services. The first segment is composed of large international accounting firms that perform audits for virtually all companies with publicly traded shares in the United States and who also provide a wide range of services for corporations and other entities. The second segment of the US public accounting profession is composed of many small and medium-sized practice units that provide accounting, tax, and other services to closely held businesses and individuals.

Non-auditing services began to constitute a significant portion of revenues for public accounting firms in the latter years of the 20th century. Even after the passage of the Sarbanes-Oxley Act of 2002, this continued to be the case. Many of the members of the US public accounting profession do not provide any type of audit service, nor are they even involved in the practice of public accounting (only 42% of the members of the AICPA are employed by public accounting firms) (AICPA 2012). The auditing revenues of all accounting firms declined during the 1990s, and it was only after the enactment of the Sarbanes-Oxley Act that audit revenues again began to increase (The Economist 2005). During the same time period, consulting revenues increased and revenues from “other services” also increased. These figures suggest that the nature of public accounting practice changed significantly in recent decades. In addition, there was a trend toward the acquisition of public accounting firms by non-accounting firms, such as American Express TBS (now part of RSM McGladry).

The business strategy of American Express TBS was illustrative of the changes in the market for accounting services. During the 1990s, TBS acquired small and medium-sized public accounting firms in 55 cities located in 18 states. Prior to a merger in 2005 with RSM McGladry, TBS employed more than 1,000 CPAs, making it one of the largest public accounting firms in the United States (Craig 1998). Previously, under the laws of most states, audits could be performed only by public accounting firms that were wholly owned by CPAs. To overcome this restriction, American Express TBS developed a business strategy that had the following features: TBS employed all of the personnel of the acquired public accounting firm, including the partners. The non-audit services previously performed by the public accounting firm were conducted under the TBS name. Even though it had no employees other than partners, the public accounting firm continued to be a licensed entity in the state of operation, and it performed audit services for clients. The public accounting firm leased the audit staff below the partner level from TBS and paid an administrative fee for the use of office space and equipment and other services. The partners supervised the audit work and issued reports in the public accounting firm’s name (Craig 1998).

Although there was concern expressed about the TBS structure, various states approved the strategy after analyzing their public laws and discovering that the laws did not prevent such a structure. Since the law did not prevent it, certain ethical barriers that might have impeded the implementation of such structures needed to be changed as well. The business strategy of American Express TBS and other similar organizations (see Mancuso 1999 for a discussion of alternative forms of accounting practice) has therefore underscored the changes taking place in the market for accounting services. As a result, state regulatory boards of accountancy reexamined the manner in which the US public accounting profession was regulated (Huefner 1998). In response to these changes, the AICPA and the NASBA created the Uniform Accountancy Act (UAA) (D’Angelo 1998), and the AICPA modified its Code of Conduct. The following section describes the changes that were made to the UAA.

In 1998, the AICPA and the NASBA issued a new UAA (Kirtley and Brown 1998). The UAA addresses a number of ethical and regulatory issues. Selected provisions of the UAA follow.

Substantial equivalency means that the education, examination, and experience requirements of one state are comparable to the education, examination, and experience requirements in the UAA. If a state meets this test, its public accountants would be allowed to practice in other states without obtaining permission to do so. Substantial equivalency allows CPAs to practice in any state, but it also reduces the regulation of CPAs by individual states.

A one-year experience would be requirement for licensure. Public accountants performing audit work may be required to meet additional experience requirements. Public accountants not doing audit work would be able to obtain the required one-year’s experience in non-audit work. Non-audit experience could be performed while in industry or working for a non-CPA firm. Non-audit experience would be verified by a CPA, but such experience did not need to be under the supervision of a CPA.

CPAs could practice in non-accounting firms as long as they did not offer audit services. This provision was central to permitting companies like American Express TBS to employ CPAs and to offer accounting services traditionally performed by CPAs.

Most states specified that only CPAs could own public accounting firms. The UAA provided that CPAs only needed to own a majority of an accounting firm that performed audit services.

The UAA ratified the agreement between the AICPA and the Federal Trade Commission, which allowed commissions to be paid.

All individuals who wanted to advertise their CPA credential would be allowed to do so, as long as they were subject to the same licensing requirements (Kirtley and Brown 1998).

The UAA modified the concept of who and what a public accountant is. In the first place, CPAs would neither be trained nor engaged in auditing. The AICPA and the NASBA publicly acknowledged that ordinary CPAs would be educated in auditing only to a minor extent, if at all. The concept of a public accounting professional would then change. Most CPAs historically spent at least some time during their careers performing audits, and they often identified themselves as being a former member of a large public accounting firm. This is no longer the case.

Moreover, most professional accountants in the United States are employed by organizations that do not derive their primary revenues from auditing. The advent of business structures such as those of American Express TBS has exacerbated this trend. The notion that public accountants are professionals who practice in professional partnerships has all but disappeared. The UAA confirms the fact that the market for accounting services has moved beyond professionalism. The only increment in regulation under the UAA is related to mandatory continuing professional education. Other provisions have led to reductions in the regulation of accounting practice. These are market-driven changes that appeared at a point in time when the revenues from auditing declined in relation to other aspects of accounting practice. In effect, the public accounting profession decided that it no longer needed the market-restricting practices that the codes of ethics provided from 1917 through 1988. The changes enhanced the profession’s ability to compete in alternative practice areas. The lesser degree of regulation provided ease of entry into alternative practice areas, allowing the profession to develop an entry into these areas.

Simultaneously with the issuance of the UAA, the AICPA Professionalism and Ethics Committee (PEEC) modified the AICPA’s Code of Conduct. The changes to the code facilitated alternative practice structures such as those of American Express TBS. Essentially, this interpretation described the American Express TBS structure and indicated that the activities of American Express TBS and similar entities did not raise independence problems. Interpretation 101–14 purports to extend the provisions of the AICPA Code to the immediate supervisors of persons who are engaged in attest functions. This provision raises an interesting question, in that non-CPAs may supervise CPAs while they work for American Express TBS. Interpretation 101–14 related to the direct supervisors of CPAs even though the AICPA had no jurisdiction over such persons. The question of enforceability thus became paramount.

Other provisions of the AICPA Code changed the definition of who the client is when assessing whether a CPA can accept contingent fees, commissions, and referral fees. The changes stated that when a CPA provides professional services (such as investment advisory or other consulting services) for the owners or employees of an audit client or for an employee benefit plan sponsored by an audit client, the owners, employees, and benefit plan are considered separate from the audit client. Consequently, a CPA can request contingent fees and also sell products on commission to the owners and employees of an audit client (Spaulding 1998b). A ruling under Rule 302 of the code allowed the charging of contingent fees when providing investment advisory services for an audit client. These provisions raise questions about the independence of auditors, but they are consistent with the competition among professions discussed by Abbott (1988).

There have been a number of criticisms of the changes to the AICPA Code. Vincent Love, the former chairman of the New York State Society of CPA’s Professional Ethics Committee, stated that he was “very concerned about the erosion of the appearance of independence” that appears in these changes. Love commented that “[t]he AICPA and the state society should think long and hard before allowing any service for a commission or contingent fee to be performed for owners of an attest client. You need to be very careful when separating the owner from the business in determining if you can accept contingent fees or commissions” (Spaulding 1998b).

The US Securities and Exchange Commission also criticized the changes. The SEC indicated that the changes which allowed alternative practice structures conflicted with SEC rules and would not be accepted for publicly traded companies (Spaulding 1998a). The changes to the code appeared to be primarily designed to accommodate the American Express TBS business structure. The change to ethics interpretation 505–2 states that if a CPA controls a non-accounting firm (i.e., TBS), then the non-accounting firm and its other owners and employees must comply with the AICPA Code. If the CPA does not control the non-accounting firm, the AICPA Code would not apply to the non-accounting firm, but it would apply to the CPA. Since more than 50% ownership defines control, it is unlikely that CPAs in the American Express TBS structure would be deemed to be in control; consequently, the AICPA Code does not apply to TBS or its non-CPA employees. Therefore, there is essentially no ethical structure for these new forms of accounting practice.

A question can also be raised whether a public accountant’s independence, integrity, and objectivity is compromised if he or she is employed by two different firms while serving the same client (Mancuso 1999). The same persons are performing both audit and non-audit work, even though they are employed by two separate legal entities. The revenues of the public accounting firm flow to the non-accounting firm in exchange for the services provided to the public accounting firm (e.g., administrative fees and the salaries of accounting staff). Questions such as who is actually providing the services have not been answered (Mancuso 1999).

The Sarbanes-Oxley Act of 2002 (SOX) has been described as “ground-breaking” legislation because of its creation of new institutional structures for the regulation of public accountancy but also for the breadth of its scope, which affects many different actors in the capital markets. The law includes 11 titles comprising over 60 sections. The various provisions of SOX affect different parties in different ways. Among the sections, there are topics dealing with auditors and public accounting firms, corporations and their officers and directors, the Financial Accounting Standards Board (FASB), financial analysts, securities lawyers, financial analysts and investment banks. Perhaps the most important part of the law, from the perspective of the public accounting profession, is found in Title I, which created the Public Company Accounting Oversight Board (PCAOB).

The PCAOB is a quasi-governmental entity that operates under the aegis of the US Securities and Exchange Commission (SEC), but with independent funding provided through fees charged to corporations issuing securities pursuant to the US federal securities laws (SEC issuers). Section 102 of SOX requires all public accounting firms that audit SEC issuers to register with the PCAOB. The larger public accounting firms (those with more than 100 audit clients) must have their audit practices inspected annually by the PCAOB. The PCAOB has the authority to censure, fine, or suspend an accounting firm that violates its standards, rules, or regulations. The PCAOB also has the power to issue auditing standards, quality control standards, independence standards, and ethics standards for registered accounting firms. Essentially, SOX removed self-regulation from the US public accounting profession, thus causing a significant change in the ethical discourse of the profession.

Title II of SOX addresses auditor independence by prohibiting certain types of non-audit services if provided to audit clients (e.g., bookkeeping; information systems design and implementation; actuarial services; appraisal or valuation; internal audit; human resources; investment banking; and legal services)(section 201). Title II also requires mandatory audit partner rotation (section 203) and mandatory audit reports to audit committees (section 204), and it prohibits auditors from being hired as financial officers of the audit client for a period of one year (section 206). Rulings of the PCAOB under the SOX have prevented alternative practice structures for companies with publicly traded shares. Thus, the ethical discourse of the public accounting profession has had to adapt to the fact that the PCAOB has removed certain opportunities for the profession to exploit the market for non-audit services. However, due to the large increase in audit fees that resulted from the increased work required by SOX with respect to audits of internal control structures, the public accounting profession has not reacted strongly to the removal of self-regulation from the profession. In fact, the ethical discourse has been relatively silent with respect to many of the provisions of SOX.

The AICPA Code of Professional Conduct was recodified on June 1, 2014, and became fully effective on December 15, 2015. Similar to the 1988 Code, the 2014 Code of Professional Conduct consists of principles and rules. Principles are ideals of ethical conduct and provide a broad conceptual framework for professional conduct. Rules provide more detailed guidance to help public accountants in carrying out their public responsibilities and are enforceable under AICPA bylaws.

One significant change in the revised 2014 code was the creation of a new section on “Ethical Conflicts” (1.000.020), which linked independence to the conflicts of interest provision. Conflicts may exist that create a potential impairment of integrity, objectivity, or professional skepticism, and the assessment of when a conflict of interest exists that impairs objectivity directly influences whether independence may be impaired.

Another change in the 2014 Code was the addition of a Conceptual Framework for Independence (1.210.010), which provides a structure to assess the importance of a conflict of interest with respect to independence in appearance. When a conflict exists, the public accountant is supposed to determine whether such influences, if present, create a threat to compliance with the rules. An example is a familiarity threat that exists because of a long or close relationship between senior personnel of the firm and the client or employee of the client with a key position. If a threat exists, the public accountant should determine whether the threat can be mitigated by safeguards (e.g., quality controls). If adequate safeguards exist, then the public accountant can provide the audit services; if the identified threats cannot be mitigated by any safeguards, then independence is impaired (Mintz 2018).

A question arises as to whether the public accounting profession is now relying too much on the threats and safeguards approach when conflicts of interest exist rather than prohibiting audit services when certain types of relationships exist. It seems questionable to leave assessments of threats and safeguards to the practitioner’s judgment when conflicts exist, especially in light of the code provision that the effectiveness of safeguards will vary, depending on the circumstances. The problem with this situational ethics approach is that it leaves the question of whether independence is impaired open to interpretation (Mintz 2018).

A review of prior literature reveals that practicing public accountants have produced a large amount of discourse pertaining to the code of ethics. This literature has generally maintained that the function of a code of ethics is to foster self-regulation in the public interest (see, for example, Higgins and Olson 1972; Olson 1979; Anderson 1985; Anderson and Ellyson 1986; Collins and McRae 1987; Larson 1987; Lowe 1987; Mason 1994).

In contrast, academic accountants have often taken a more critical view of the practicing profession’s assertion that self-regulation through the code of ethics serves the public interest (e.g. Briloff 1990; Willmott, Cooper, and Puxty 1993; Mitchell et al. 1993; Parker 1994; Preston et al. 1995; Beets 1999). For example, Preston et al. (1995) examined certain changes in the code of ethics between 1917 and 1988. These authors argued that the changes during this period up to 1988 were the result of challenges to the profession’s legitimacy and that the changes were attempts to fend off those challenges. Preston et al. also maintained that the changes to the code of ethics reflected wider transformations taking place in American society, such as a general reduction in religious beliefs.

Parker (1994) has argued that there are five functions for a code of ethics which largely focus on protection of the profession’s self-interests.

1. 1 Professional insulation: Ethical codes are constructed with a view to insulating the public accounting profession from observation and evaluation by outside parties.
2. 2 Interference minimization: Avoiding or minimizing interference in what the accounting profession regards as its own domain, including the type and scope of work undertaken, style of organization adopted, position in the business community, and regulation of members and activities.
3. 3 Self-control: Allowing the exercise of control over the profession’s own activities and members.
4. 4 Professional authority: Emphasizing the unique technical knowledge base of the profession, along with its resulting authority.
5. 5 Socioeconomic status preservation: This function pertains to member competition, service pricing policies, transfer of clients among members, tendering practices, and so forth.

Beets (1999) has argued that the code of ethics “is an emaciated symbol of its former self.” He maintained that even prior versions of the code of ethics “were not filled with ethical guidance but were corpulent with rules that mitigated practitioner competition.” He also maintained that the changes to the code were the result of the accounting profession’s acquiescing to agencies of the federal government. While I agree with Beets that the code of ethics has not restricted or reduced unethical behavior, I contend that market forces (rather than professional legitimacy and governmental influence) and the profession pecuniary desires have been the primary reasons for changes to the code. In support of this argument, I cite Abbott’s (1988) argument that professions fight for established areas of jurisdiction. The “winning” profession has the privilege of dominating desirable work areas. Professions maintain dominance through competitive strategies (Abbott 1988, 216). For example, medical doctors drove out competitors (i.e., non-licensed medical practitioners) and subordinated the nursing profession (Abbott, 71–72). Likewise, lawyers and accountants have vigorously contested the area of tax practice and insolvency (Abbott 1988, 233). In recent years, the members of the US public accounting profession have been contesting the fields of information technology and management consultancy. This has caused a disruption in the codified discourse of the profession. As the US profession has sought to move into more lucrative practice areas, the code of ethics has needed to be modified to accommodate these efforts. The code can now be seen as serving primarily the interests of the profession by protecting and advancing its “turf” or domain. In this sense, the code of ethics has essentially become a public relations exercise to reassure the public that public accountants are maintaining high standards of integrity and ethical conduct.

A codified discourse comprises the totality of linguistic usages attached to a given social practice, which, in turn, constitutes a regularized way of acting that involves relationships between the semiotic sphere (to which texts belong), the sphere of mental representations, and the physical sphere (Marks 2006; Jary and Jary 1991). In social theory, a codified discourse is considered to be an institutionalized way of thinking or mental boundary, determining what can be validly said about a given topic and establishing “the limits of acceptable speech” – or acceptable truth (Butler 1997; Foucault 1970). Codified discourses construct our worldviews because they provide us with the means to communicate what we think about the world. Codified discourses are intimately linked with power. The allowable range of discourses at any given point in time is determined by an “episteme,” which constitutes a total way of thinking about the world (Foucault 1970). Foucault’s concept of codified discourse must be understood both in its particular form and in its more general form, as a framework that establishes the boundaries surrounding a particular discourse. In its more general sense, a discourse includes not only words but physical dispositifs, such as an organization chart. The dispositif comprises the network of relationships that connect and construct codified discourses (Foucault 1970).

According to Foucault, discourses emerge out of conflict. He argues that truth is not objective or absolute but rather emerges out of conflicts over goals and objectives. Because truth and power are inextricably linked, Foucault maintains that power relations are immanent to discourse. Furthermore, discourse has no essentialist meaning. The same discourse can change political sides, thereby being appropriated and modified; hence there is a “polymorphic tactics” of discourse. In addition, discourses are not created by subjects; rather, the subject is a social construction of discourse. An important aspect of Foucault’s concept of codified discourse is that social phenomena are constructed from inside a discourse; there are no social phenomena outside of a discourse.

In The History of Sexuality (1986), Foucault examined “ethics” as a form of codified discourse. Foucault viewed morality as a meta-concept incorporating several sub-concepts, such as moral codes, moral behavior, and ethics. The moral code encompasses the set of rules (e.g., codes of ethics) established by dominant entities such as professional institutes, governments, religious institutions, schools and universities, etc. The moral code includes the rules and regulations that must be followed upon pain of sanction. These rules exist within a “complex interplay of elements that counterbalance and correct one another, and cancel each other out on certain points, thus providing for compromises and loopholes” (Foucault 1986). Because Foucault did not believe that the moral code is immutable, there is a significant difference between Foucault’s concept of a moral code and a deontological view of ethics. In contrast, moral behavior describes the actual behavior of individuals with respect to their moral code. The questions to be addressed here are whether individuals comply more or less fully with their code; the manner in which they obey or resist an interdiction or a prescription; and the manner in which they respect or disregard a set of values. Finally, from Foucault’s perspective, ethics is concerned with the kind of relationship a person has with himself or herself and the manner in which the individual constitutes himself or herself as a moral subject. Thus, ethics deals with the manner in which a person conducts himself or herself so as to become the “right kind” of person. Ethics deals with the self-forming practices that are directed toward creating an individual as an ethical subject (Foucault 1986).

From a public accounting perspective, the self-forming practices associated with ethical behavior are not to be found in codes of ethics. They are to be found instead in the practices that commence early in the career of a prospective accountant, ranging from difficult entry level examinations, to social rituals associated with joining accounting institutes, to the recruitment rituals of public accounting firms, to the long work hours devoted to tedious tasks. These ritualized practices are self-forming exercises that shape the prospective accountant into an idealized ethical being; not an ethical being who complies with a code of ethics but rather an ethical being who is self-regulated and self-formed into an idealized member of the public accounting profession. The disciplinary and self-forming practices of the public accounting profession are closely associated with the kind of person an individual aspires to be when he or she behaves in a moral manner (Covaleski et al. 1998; Baker 1993, 1999). Rather than the formal pronouncements of the code of ethics, it is instead the informal (yet codified) ethical discourse surrounding the “professional accountant” as an idealized being that constitutes the ethical discourse of US public accounting profession. We will return to this idea in a later section, but first we will examine the historical background of the code of ethics of the US public accounting profession in order to demonstrate its purpose in regulating the practice of public accounting.

The changes in the market for accounting services that has occurred in the United States have had a significant impact on the ethical discourse of the US public accounting profession. A code of ethics created during a time when the public accounting profession sought recognition as a legitimate profession has been seen as an anachronism in a period of post-professionalism where market forces and expansion into alternate practice areas have been the primary determinants of public accounting practice. The historical evolution of the codes of ethics indicates that the code has reacted to market forces in order to accommodate new market opportunities. It is insufficient to focus on the formal discourse of the profession without recognizing the more informal ethical discourse (i.e., the codified discourse in a Foucaultian sense), both in the way that formal and informal ethical codes restrict the market for professional services and also the way that they open up such markets. As Beets has said, the AICPA Code became an emaciated version of its former self. This slimming effect allowed public accountants to pursue market opportunities wherever and whenever it seemed profitable to do so. The AICPA Code, “asked very little of practitioners beyond what is already required by court precedents, laws, and regulations” (Beets 1999, 313). Beets argued that there “should be a repeal of the rules, interpretations, and rulings of the AICPA Code while retaining the principles, thereby providing high ethical standards that would serve as guiding tenants in professional practice.” This may be a meaningless gesture unless the idea of serving the public interest becomes a more important focus. Effectively, the formal code of ethics serves public relations functions. Through the code, the AICPA seeks to convince the public that CPAs adhere to high standards of ethical conduct and integrity. If this idea is accepted by the public, the perception will then allow CPAs to pursue economic opportunities with few limitations.

We return here to the subject of ethical discourse as envisioned by Foucault. In The History of Sexuality (1986), Foucault was intrigued by ethics as a form of discourse. Foucault considered the subject of morality to be meta-concept that incorporated sub-concepts like moral codes, moral behavior, and ethics. While the moral code includes rules like codes of ethics, moral behavior involves the actual behavior of individuals with respect to their moral code. From Foucault’s perspective, ethics is concerned with the kind of relationship a person has with himself or herself and the manner in which the individual constitutes himself or herself as a moral subject. Ethics focuses on the self-forming practices that are intended to create an individual as an ethical subject (Foucault 1986).

In the US public accounting profession, the self-forming practices are not found in the code of ethics. Instead they are located in the practices that commence early in the career of a prospective accountant, ranging from difficult entry level examinations, to social rituals associated with accounting institutes, to the recruitment rituals of public accounting firms, to the long work hours devoted to tedious tasks expected of junior accountants. These ritualized practices are self-forming exercises that shape the prospective accountant into an idealized ethical being; not an ethical being who complies with a code of ethics but rather an ethical being who is self-disciplined and self-formed into the idealized member of the public accounting profession. The disciplinary and self-forming practices of the accounting profession are closely associated with the kind of person an individual aspires to be when he or she behaves in a moral manner. This is exemplified by the partner in a large international public accounting firm who is an ethical being, not in the sense of conforming closely to the code of ethics, but one who is able to satisfy clients, bring in new business, and be technically astute, while simultaneously exuding an image of activity in the highest ethical manner (Covaleski et al. 1998; Baker 1993, 1999). Regardless of the formal discourse found in the code of ethics, it is the informal (codified) discourse about the ideal professional that constitutes the true discourse of the public accounting profession. It is this informal discourse that has the greatest power over accounting professionals.

The purpose of this chapter has been to examine the evolution of the code of ethics of the US public accounting profession. Since the emergence of the profession in the late 19th century, there have been various changes to the code of ethics. In examining these changes, it is clear that the formal code has focused on the regulation and control of accounting practice rather than on the ethical behavior of accountants. As discussed by Preston et al. (1995), prior codes aspired to produce legitimacy for the profession. In contrast, Beets (1999) argued that governmental influences actually drove many of the changes. As discussed in this chapter, market forces have also affected the code in significant ways. This development raised questions about the ethical discourse of the public accounting profession that were addressed by the AICPA and NASBA through the Uniform Accountancy Act and making changes to the AICPA Code. These changes removed the few remaining rules that were formerly considered to be important features of professionalism (i.e., rules about encroachment, competitive bidding, advertising, commissions, contingency fees, and prohibited forms of business practice). The primary purpose of these changes was to facilitate the competitive ability of public accountants in alternate practice areas. While the remaining sections of the code focused on independence, integrity, and objectivity, the AICPA did not stress these areas. In fact, these principles should be elevated beyond their “goal-oriented, positively stated and inspirational” status. These principles should become the hallmarks of a rejuvenated public accounting profession. Without a renewed emphasis on ethical excellence, a question remains: Will public accountants be dedicated to the principles of independence, integrity, and objectivity, or will they concentrate instead on achieving success in a competitive environment?