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03/18/2010

Entrepreneurial Tip Corner: Ethics is the Cornerstone Principle for All Professionals


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Someone once remarked, after seeing a long putt of mine barely drop into the hole for a birdie, “Gravity, not just a good idea, it’s the LAW”. Yes, this was a corny remark, but it certainly can be related to ethics within the professions. Ethics is not just a good idea; it’s the LAW for CFA® charterholders and the CPA profession, as well as many other professions.

As a CFA candidate, I have the opportunity and the duty to learn the CFA Code of Ethics and Standards of Professional Conduct. Since becoming a CPA in 1981, I have been working within the framework of the AICPA Code of Professional Conduct. I would like to compare and contrast the two different bodies’ ethics rules. Before doing so, it should be noted that CPAs and CFA charterholders are very different and distinct professions, with CPAs providing, at the highest level, an attest service related to an audit of a financial statement, and at the highest level of that audit service, auditing Form 10-K of a large, publicly-held company. In contrast, CFA charterholders mainly analyze and generate research reports and recommendations to buy, sell or hold the securities of publicly-held companies. In each case, thousands of individual and institutional investors and potential investors rely on the CPA and CFA reports, prior to making their investment decision.

The AICPA Code of Ethics (“A-Code”) focuses first on responsibilities and the exercise of professional and moral judgments in all CPA activities. This is more of a general statement of conduct. The CFA Code of Ethics (“C-Code”) section on professionalism is more specific and focuses on 1) Knowledge of the Law; 2) Independence and Objectivity; 3) Misrepresentation; and 4) Misconduct. The A-Code then talks about The Public Interest and accepting any engagement with an obligation to serve the public interest, honor the public trust, and demonstrate commitment to professionalism. This section of the A-Code also covers the topic of Conflicts of Interest. The C-Code is more specific and has a complete section devoted to Duties to Clients, which involves loyalty, prudence, care, fair dealing, suitability, performance presentation and confidentiality. The C-Code then continues with a complete section devoted to Duties to Employers, which involves loyalty, additional compensation arrangements and responsibilities of supervisors. The C-Code also has a complete section devoted to Conflicts of Interest, which covers disclosure of conflicts, priority of transactions, and referral fees.

The A-Code includes a section on Integrity and speaks to the actions of a CPA to be honest and candid within the constraints of client confidentiality. Again, the A-Code is more general here and requires the CPA to observe both the form and the spirit of technical and ethical standards. The C-Code speaks to the Integrity of Capital Markets, which includes material nonpublic information and market manipulation.

The A-Code then has a section devoted to Objectivity and Independence, which requires CPAs to be impartial, intellectually honest and free of conflicts of interest. This section focuses on demonstrating not only objectivity but also independence in both fact and appearance. The C-Code covers this area under the Professionalism standard.

The A-Code includes an entire section on Due Care, which states that CPAs should observe the technical and ethical standards, strive continually to improve competence and the quality of services and discharge professional responsibility to the best of their ability. This standard speaks mainly to the quest for excellence and the assurance of competence to undertake a particular engagement, where such competence is derived from a synthesis of education and experience. The C-Code doesn’t specifically cover this area, but it is included in the section Investment Analysis, Recommendations and Actions. This section covers diligence and reasonable basis, communication with clients and prospective clients, the use of reasonable judgment, distinguishing between fact and opinion, and record retention requirements. This section really deals with the operational activities of CFA charterholders and sets out the guidelines for such activities. The A-Code’s last section, entitled Scope and Nature of Services, really covers the same area of operational activities of CPAs. Further, the standard covers the need for firms to have proper quality-control procedures to ensure that services are competently delivered and adequately supervised and for CPAs to assess, in their individual judgments, whether an activity is consistent with their role as professionals.

The C-Code concludes with a section on Responsibilities as a CFA Institute member or CFA candidate, which covers the prohibition of engaging in any conduct that compromises the reputation or integrity of CFA Institute or CFA designation or CFA examinations. This standard also covers reference to CFA Institute and the prohibition against misrepresenting or exaggerating the meaning of membership in CFA Institute, holding the CFA designation or being a CFA candidate.

The other major difference between these two professions is that the CFA designation is awarded and administered by CFA Institute, whereas the CPA designation is awarded and administered by each state’s respective licensing board. In New York State, where I am licensed, CPAs are required to take 40 hours of continuing professional education (CPE) courses each year and as part of this curriculum, are encouraged to take the ethics course periodically. CFA charterholders are not required to take any CPE courses, but many do so voluntarily.

Recent events have underscored the necessity to uphold and maintain ethics and professional conduct in the financial profession. As a member of the financial community, you should be aware of the standards by which you are governed and be cognizant of the practices that you can adopt to steer clear of any ethical challenges. If you’re studying for the CFA exam or just want to ensure you’re up to par on the standards, click here to download the ethics matrix.

--Michael Herz, CPA, MBA 

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