“To be ethical in a profession, a person needs to be both competent and honest. It is unethical to act dishonestly, and that is particularly evident when it is for personal gain. But it is also unethical to project competence, or to pretend to know something professionally, when in fact you do not.”
** From the Editor: “How to Lose a Profession” is a sobering essay on the value of integrity and having moral courage when integrity is lacking. In the interest of integrity and morality, read the full article before you react. **
In recent days, the Securities and Exchange Commission announced that they were fining Big 4 accounting firm KPMG $50 million for systematically stealing the PCAOB inspection lists for the years 2015-2017 to know in advance which of their audits would be inspected. All but one of the partners or managing directors involved have entered guilty pleas or been convicted, so the announcement was no surprise. In fact, the $50 million penalty seems relatively modest in light of the charges.
The surprise that came along with that SEC Accounting and Auditing Enforcement Release was that KPMG had not only hired people who would create a pipeline for acquiring those inspection lists but that there was a broader culture of cheating on the firm’s continuing professional education requirements. What made the SEC particularly sensitive was that some of the cheating took place in sharing answers on continuing education exams that had been ordered by the SEC because of an earlier audit failure involving an Alaska-based oil company. The settlement, in that case, required that all KPMG audit personnel receive, within a 15-month period, four hours each of training in valuation, the use of specialists in an audit, and, ironically, fraud. And, as it turns out, KPMG gave professionals three chances at the exam, with potentially significant consequences if they did not pass by that time. This certainly created the motivation to cheat.
This is not a jeremiad against KPMG, and the very top management of the firm took immediate action in firing some of its highest-ranking partners when the inspections scandal was discovered. This is likely why the SEC penalty was not larger, despite the severity of the offense. They have also fired and sanctioned people involved in manipulating the continuing education system. But the investigation led to a broader revelation of a culture that would cut corners in ways that seem hard to explain.
Part of that culture can be explained as simply a lack of controls in place. KPMG provided its own continuing education, allowing for the kinds of sharing and even “gaming” the passing score on exams that was reflected in the SEC release. This can be remedied easily by hiring an outside firm to administer continuing education to its professionals. KPMG can control the opportunity for this behavior, but that does not necessarily change the individual auditor’s motivation or the culture that rationalizes this behavior.
So why does this seem like such a big deal? To be ethical in a profession, a person needs to be both competent and honest. It is unethical to act dishonestly, and that is particularly evident when it is for personal gain. But it is also unethical to project competence, or to pretend to know something professionally, when in fact you do not.
People understand why people are dishonest for personal gain, though it may lead to sanction or exclusion from the profession. There is something uniquely troubling about “professionals” who violate their integrity to project competence, because it removes safeguards from those whom they are intended to protect. A doctor who is incompetent at diagnosing diseases or prescribing drugs, a lawyer who cannot provide an adequate defense for a client—it is easy to shake our heads when they are allowed to continue to practice. These types of actions indicate that they actually possess neither integrity nor competence.
This is not about losing a firm. In my opinion, KPMG will learn from this, institute controls, and do a better job of monitoring excesses, and the SEC release indicates they are clearly already doing this. This is about losing a profession. You do not lose professions by engaging in dishonest behavior for personal gain. You may lose a partner, or even a firm, that way. The way you lose a profession is to engage in behaviors that are dishonest to project competence, without any correcting force to change that behavior.
Currently in the U.S., there is no correcting force for the accounting profession other than the federal government. The American Institute of CPAs is impotent and unwilling when it comes to challenging this behavior, and none of the Big 4 firms will publicly criticize one another, largely because they all live in glass houses. In fact, the other large firms are likely scrambling to make sure that all is well with their continuing education programs in anticipation of a call from the SEC.
I have been asked which of the offenses is worse. The easy answer is the stealing of the inspection lists because it involved very high-level partners and resulted in significant public consequences from that decision. But the pervasiveness of the continuing education problem in the firm is stunning.
And both reveal a “low oxygen” culture, one where it is difficult to tell the truth or to confront others over moral choices. One partner’s trial revealed that at least 47 people were aware of the inspection lists being taken; until one Chicago audit partner pressed the issue, no one said a thing to top management. The continuing education cheating involved hundreds, and likely thousands, of auditors, and yet, to quote the SEC, “. . . no one reported the improper sharing of exam answers to the firm’s Ethics and Compliance Hotline.” No one.
It takes moral courage to go above you and report what you see or to say no to a partner who tells you to send the answers to a quiz. And moral courage is in short supply not just in the accounting profession, but in society.
Maybe large audit firms really do just want to be professional services firms and feel they are being held back by the integrity required to do a good audit from providing the services their clients want. My answer would be, go ahead and become that. Stop asking those of us who care about the long run good of the accounting profession to defend unconscionable behaviors that happen serially. What the world needs, or at least what the market needs, is a set of good audit firms they can trust. Anyone can be a consultant.
And the way to build trust is to value integrity even more than you do projecting competence. Perhaps this is a learning opportunity for all of us who love the profession. To me, it is time to stand up and say, “No more,” not, “I’m glad that’s not me.”
Otherwise, we risk becoming an object lesson. Because this is how you lose a profession.
Categories: Bottom Line Ethics