Ethics and leadership: fundamental vectors of the public accountant

Ethical conduct is the responsibility of every public accountant, regardless of leadership example.

Below is the statement from the Chief Accounting Officer of the U.S. Securities and Exchange Commission (SEC) and the disciplinary orders of the Public Company Accounting Oversight Board. (PCAOB) and the SEC, which explain the operation of the QMS and the results of their inspections.

Statement from the Chief Accounting Officer of the SEC

On May 15, 2024, Paul Munter, Chief Accounting Officer of the SEC, indicated that audit firms are private entities with the same right to obtain profits as any other, and are guardians of integrity for the capital markets. Tone at the top is critical to ensuring that their professionals do not sacrifice integrity for the sake of profits.

A deficiency or non-compliance identified during a regulator’s inspection represents a failure in the QMS or in the performance of the engagement; given this, leadership can minimize the fact or address it head-on. Treating the failure as an isolated incident and the cost of the sanction imposed as a “cost of doing business” and, at the same time, allowing the sanctioned partner to carry out other activities until they serve their sanction, may be an example of minimizing a failure.

Alternatively, the firm may choose to address failures head-on, through open discussions with its personnel about what went wrong and use them as an opportunity to learn and teach the relevance of behaving ethically, as well as internally sanctioning everyone involved in the failures, after analyzing the corresponding root causes.

Upon sanction by a regulator, the firm must identify the root causes of failures at the engagement and firm level and implement corrective actions.

PCAOB press conference and orders

On April 10, 2024, PCAOB Director, Erica Y. Williams, reported that the leadership (including the quality partner, in two cases), partners and professionals of the following member firms of two Big Four (Firm A and Firm B) shared training exam answers whose passing is required for compliance with continuing professional development standards through calls, meetings, and e-mails, as follows:

• Firm A1, from October 2017 to December 2022, sanctioned with USD $25,000,000.
• Firm B1, from 2021 to 2023, sanctioned with USD $1,000,000.
• Firm B2, from 2017 to 2019, sanctioned with USD $1,000,000.

SEC order

On June 17, 2019, the SEC imposed a fine of USD $50,000,000 to another member firm (Firm A2) of Firm A, for sharing exam answers, as well.

Root causes of failures

Two relevant conflicts are identified:

• At the engagement level, the achievement of business objectives (e.g., chargeability, billing and collection) and professionals training periods, as they may not be realistic.
• At the firm level, the effective operation of the QMS with the goals on which the compensation of operational managers is based.

When the resolution of these conflicts leans towards the business and the individual remuneration of leadership, the firm must implement corrective actions that allow professionals to comply with their training, as well as an operational and strategic plan for continuous improvement of the QMS.

On the other hand, no minimum hours on ethics-related topics are required for all firm personnel. This can be solved with the publication, understanding and verification of compliance with the firm's code of ethics, which covers all its personnel, regardless of the line of services in which they collaborate or their profession. It should be noted that public accountants must also comply with the requirements of the Code of Professional Ethics.

The ethical conduct of the public accountant protects the public interest through the exercise of the fundamental principles.

Solution

The Technical Commission on Quality of Public Accounting Firms of the Public Accountants of Mexico Association (the “CTC”), has designed the following technological solution that prevents the sharing of exam answers:

Based on natural language processing (NLP), deep learning (DL) and big data (BD), it has developed the “VIT Profile” that captures, processes and recognizes, using the computer of each professional, their voice, images and texts that they express orally, observe on the screen and write. The VIT Profile stores five years of historical data and keeps the information current in real time, ready to be used at the required time. The VIT Profile is incorporated into the audit file when it is generated, notifying the audit team, at the beginning and at random times during the audit, of its activation.

The VIT Profile always considers all interactions of all professionals, recognizing that audit documentation is prepared and reviewed by team members at different levels, from assistant to partner, and that a work role is transformed from its initial preparation until final review. The VIT Profile recognizes, processes, and stores each layer of the different interactions in its three dimensions: voice, image and text. The VIT Profile is part of the audit documentation and complies with all applicable professional standards and regulations, including those of its final file.

The objective of the VIT Profile is to grade the exams of the firm's learning courses. With the information available, the VIT Profile recognizes the way in which professionals (be it 10 or 10,000) express themselves orally, observe images and write texts (their “style”).

The staff must exercise their professional judgment to conduct themselves ethically in the face of different undue pressures to violate the fundamental principles.

Because the exams are open question format (not multiple choice or true or false), the VIT Profile recognizes professionals when answering the exam questions by comparing their style with their answers, identifying matches or discrepancies, and ensuring that professionals who are responding are who they really are and whether their answers are correct or incorrect. With this, the firm prevents the sharing of answers between professionals and designs courses focused on the development of their oral expression and writing, improving audit documentation and interactions with members of the audit team, clients, monitors and regulators.

Conclusions

Ethical conduct is the responsibility of every public accountant, regardless of leadership example. The public accountant must exercise professional judgment in the face of undue pressure to violate fundamental principles.

Upon sanction by a regulator, the firm must identify the root causes of failures at the engagement and firm level, and implement corrective actions to:

• Avoid repetition.
• Determine the lesson learned and communicate it to all personnel.
• Impose internal sanctions on the sanctioned engagement team and operational partners and managers of the QMS.
• Communicate the sanctions imposed by the regulator to the professional organizations in which the sanctioned partner participates so that they can take the corresponding disciplinary measures.

The VIT Profile designed by the CTC prevents the issue. The PCAOB could develop the VIT Profile and require registered firms to implement and operate it, and monitor said operation in real time, immediately addressing any anomalies reported by the VIT Profile. Thus, the PCAOB would add a standardized preventive approach to the detective approach of its inspections.

Society cannot tolerate unethical behavior from leadership, partners, or firm professionals. It should exercise zero tolerance in this regard. Ethical conduct should be the lifestyle of the public accountant.

---