Although ethics is undoubtedly at the core of what it means to be a public accountant, there has long been dispute and divergence about how to ensure that new entrants to the profession possess the requisite ethical training to be licensed as CPAs. Recent efforts to codify ethics requirements in professional education, examination, and experience have differed state by state, hampering the mobility of young professionals. The authors argue that, while the bar for professional ethics needs to be set, more consistency in application would be benefit all.
Imagine a CPA that has hired a promising new accounting professional. She has 18 months of experience at a regional firm headquartered in another state where she earned her bachelor of science in accounting. She is a CPA certificate holder who passed the Uniform CPA Examination on her first attempt and was working on the two-year experience requirement prior to accepting this offer. The partners are excited to add a bright, promising professional to the team. Because your state also has a two-year experience requirement, everyone assumes she can be licensed once she has finished an additional six months of work experience and completes the appropriate paperwork. After speaking with the state board of accountancy, your new hire discovers that she must take a board-approved three-credit college ethics class. Once she has completed the class, she must retake the entire Uniform CPA Exam because the state requirements mandate that the ethics course be completed before a candidate can sit for the exam.
The circumstances described above are based on a recent real-life example encountered by the authors. The rule that state-approved ethics coursework must be completed before sitting for the CPA exam—or else the exam. must be retaken—is a requirement in Texas. According to section 901.258, “Transfer of Complete Examination Credit Between States” of the Public Accountancy Act (part of Texas’ Occupations Code): “The board may accept the completion of the uniform CPA examination given by the licensing authority of another state if: (a) the examination was prepared and graded by the American Institute of Certified Public Accountants or, if doing so would result in a greater degree of reciprocity with the exam results of other states; and (2) the applicant met the requirements in effect in this state at the time the credit was earned.”
For Texas-based graduates, the ethics class is built into their undergraduate curriculum and qualifies an applicant to sit for the CPA exam; ultimately, it meets the coursework requirements to be licensed as a CPA. For CPA certificate holders who move to Texas after completing ethics coursework outside the state and prior to being licensed in another state, however, this requirement imposes significant costs—no one would want to retake the exam.
Although the Texas ethics education requirement may be the most stringent, seven other states include an ethics requirement in their 150-hour coursework. This patchwork nature of ethics education requirements for licensure across the United States imposes barriers to relocation for yet-to-be licensed accountants. To the extent possible, professors can counsel students to visit the board websites for states in which students may want to live to identify ethics (and other) education requirements before completing their college work. On the other hand, unanticipated relocation early in one’s career is a growing reality for many professionals.
This article discusses professional ethics education for accountants: its purpose, its history, and some of the institutional details of state-by-state requirements. The authors argue that the education requirement become more consistent for all prospective CPAs, regardless of their location—especially in the current context of a looming shortage of young accounting professionals.
Most professions in the United States maintain a set of ethical standards to ensure that those who rely on professional services are not subject to incidents of carelessness or—even worse—malpractice. These standards help protect clients, but also the market for specialized, expert services, which would otherwise deteriorate under the pressure of adverse selection, thereby damaging social welfare. Professions subject to ethical requirements include engineering, medicine, and law, which have the National Society of Engineers Code of Professional Ethics, American Medical Association Code of Medical Ethics, and American Bar Association Attorneys’ Code of Ethics, respectively. Accountants have the American Institute of Certified Public Accountants’ (AICPA) Code of Professional Conduct.
Over time, each profession continuously examines its ethical requirements, which may result in introducing, updating, and even eliminating some of its requirements. The accounting profession is no different. Being responsible for examining, testing, and expressing an opinion on companies’ financial records and related internal controls, CPAs have been confronted with questions related to ethical standards for over a century. The American Association of Public Accountants, a predecessor to the AICPA, established a committee on ethics to develop standards for its members in 1906. Over time, this committee evolved into the Professional Ethics Executive Committee (1971), which currently has the “responsibility of interpreting and enforcing the AICPA Code of Professional Conduct” (https://bit.ly/35QSzr1).
The accounting profession’s value to society relies on accountants’ ethics. Those ethics are partially shaped by continuing professional education (CPE) in ethics, as mandated by the Code of Professional Conduct. These CPE courses are intended to inform the actions of professional accountants, such that those actions do not harm clients or the public out of self-interest. States have full discretion over the number of required credits and the content of the courses they approve to satisfy ethics CPE, or whether they require ethics CPE at all. (Georgia requires none.) This discretion leads to a lack of standardization. Some topics are common, including updates to the Code of Professional Conduct or practical frameworks, such as the threats-and-safeguards approach to managing the risks presented by CPAs behaving unethically (M. A. Leibowitz and A. Reinstein, “Help for Solving CPA’s Ethical Dilemmas. Journal of Accountancy,” March 2009, https://bit.ly/3DSbaPN). Others are idiosyncratic; for example, states often require approved ethics courses address state administrative rules and laws (as well as legal precedent) that impact ethical obligations in their state. Ethics CPE requirements also vary across states in more profound ways—in California, in addition to a CPE course in ethics, a separate course on regulatory review of the board ethics rules and a separate fraud course are required. Colorado requires CPE in rules and regulations, as well as other ethics courses.
According to the Uniform Accountancy Act Model Rules (dated November 2020), college ethics education is “a program of learning that provides students with a framework of ethical reasoning, professional values, and attitudes for exercising professional skepticism and other behavior that is in the best interest of the public and profession. At a minimum, an ethics program should provide a foundation for ethical reasoning and the core values of integrity, objectivity and independence.” Like CPE, college education requirements for accounting students planning to sit for the CPA exam are determined by individual jurisdictions. Although most college coursework (e.g., financial accounting, tax, cost, audit) satisfies relatively standardized requirements across the states, ethics courses do not.
The accounting profession’s value to society relies on accountants’ ethics.
Whether ethics education produces graduates who abstain from unethical behavior is of paramount importance, but it is not the primary focus of this article. Rather, the purpose is to highlight how different boards have addressed college ethics course-work for accountants who want to be licensed in their state. The potential problems that this patchwork of rules may create for accounting graduates who are moving across state lines are also discussed.
History of the Various State Board Ethics Requirements
Becoming a licensed CPA is a three-step process, comprising Education, Examination, and Experience (https://bit.ly/37rvn34). The AICPA administers the Uniform CPA Exam (the second “E”). This is the only exam that every state accepts for licen-sure; education and experience are governed by the individual boards. Although no state requires a graduate degree, starting in the 1980s many states introduced the “150-hour requirement” which required licensed CPAs to earn 150 hours of college credit. Currently, all 50 states have this prerequisite; however, each board specifies how candidates meet the 150-hour education requirement, and there is considerable variation across jurisdictions. One thing that was consistent in the initial adoption of the 150-hour education requirement was that no state specified a requirement for an ethics course, although an overwhelming number of boards required CPAs to take an ethics exam prior to licensure. In many cases, this exam consists of a set of questions that can be completed as self-study and submitted online. In addition, most boards implemented a requirement that licensed CPAs take a certain number of CPE hours in ethics. So, while ethics is obviously something state boards believe is important, none of them mandated it within the 150-hour requirement.
The authors identified 39 separate accounting scandals that surfaced in the wake of bursting of the dot-com bubble during the period from 2000 to 2004. (A longer list can be found at https://en.wikipedia.org/wiki/Accounting_scandals.)
Primarily in response to the Enron scandal, which led to the bankruptcy of the Houston-based energy company and the dissolution of its audit firm Arthur Andersen, Texas became the first state to expand ethics education. In 2002, it enacted a requirement to include college coursework in ethics for individuals wishing to sit for the exam. In other words, the ethics coursework requirement became part of the first “E”, education, and only those who met the specific standards could take the uniform CPA exam. The Texas State Board of Accountancy’s (TSBPA) requirement was not a generic ethics course; instead, it specified that the course must be “taken at a recognized educational institution and should provide students with a framework of ethical reasoning, professional values and attitudes for exercising professional skepticism and other behavior that is in the best interest of the public and profession. The ethics program should provide a foundation for ethical reasoning and include the core values of integrity, objectivity and independence taught by an instructor who has not been disciplined by the board for a violation of the board’s rules of professional conduct unless waived by the board” [Board Rule 511.58(c)]. The TSBPA approves these courses and universities are required to inform the board if there are any changes in terms of instructor, syllabus, course delivery or course content. The board also provides a list of topics that must be covered. Subsequently, California, Colorado, Maryland, New York, Rhode Island, West Virginia, and Illinois have enacted rules that require college coursework in ethics. Exhibit 1 summarizes the ethics coursework requirements for the eight states requiring college-level ethics education.
From a national perspective, the result is a patchwork approach to ethics education.
College-level ethics course requirements for the CPA license
The content of the rules for the eight states listed above vary substantially. Colorado’s ethics requirement can be only met by taking an auditing course concentrating on U.S. GAAS. California’s and Texas’ rules specify a designated ethics course covering the professional responsibilities of accountants. Illinois and West Virginia require business-specific ethics courses that may or may not contain information specific to the accounting profession. Rhode Island requires no specific ethics course, only that topics related to ethics be built into courses required to complete the degree. Finally, the ethics requirements in Maryland and New York can be fully satisfied by courses taken from the philosophy of ethics and the liberal arts departments, respectively.
This diversity in college ethics education requirements is multiplied by the fact that some states require self-study exams and others relying only upon the ethics portion of CPE requirement. From a national perspective, the result is a patchwork approach to ethics education, as illustrated by the map in Exhibit 2.
The Rationales for Requirements for College Coursework in Ethics
To understand the rationales for the various state requirements for college ethics courses, the authors contacted organizations and individuals involved in the legislative process when the new rules were implemented. We received responses from two jurisdictions, Texas and California. According to the information relayed to the authors, the TSBPA acted on its own initiative in response to the national accounting scandals. At that time, many accounting educators were not in favor of this change and would have preferred to see ethics discussed in existing classes instead of developing a stand-alone three-credit course (see, e.g., K. Hurtt, and C.W. Thomas, “Implementing a Required Ethics Class for Students in Accounting: The Texas Experience,” Issues in Accounting Education, February 2008, pp. 31–51). This is consistent with Woo (C. Woo, “Personally Responsible,” BizEd, May/June 2003, pp. 22–27, 2003) and Madison and Schmidt (R. L. Madison and J. L. Schmidt, “Survey of time devoted to ethics in accountancy programs in North American colleges and universities,” Issues in Accounting Education, vol. 21, no. 2, pp. 99–109, 2006) who found that deans and other administrators preferred an integrated approach. The TSBPA did consider this option, but ultimately decided that CPA exam candidates would be required to take a separate college course in ethics that includes numerous topics from both a business and an accounting perspective. Ethics courses must be approved by the TSBPA, and the policy for approving them includes covering accounting-related moral and ethical dilemmas as well as the TSBPA’s rules of professional conduct. The TSBPA wants accounting students to understand that the CPA license is a social contract with the state and that action can be taken against a CPA who violates the rules of professional conduct (e-mail from TSBPA representative, March 11, 2019).
The response the authors received from the California State Board of Accountancy was similar, but it did not reference any accounting scandals as the rationale for introducing the ethics class requirement. Rather, the legislative bill analysis from 2009 simply elaborates that introducing the ethics mandate was part of a larger revision of the CPA licensing rules to better conform with common regulatory parameters outlined in the Uniform Accountancy Act (UAA), “a model legislation developed by the AICPA and NASBA designed to provide a uniform approach to regulation of the accounting profession” (UAA, Preface). The bill incorporated many features of the UAA, including the change from the 120 to 150 hours education requirement. However, the authors found no evidence in UAAs even as late as 2018 (AICPA, Uniform Accountancy Act, Standards for Regulation, Eighth Edition, January 2018) that college ethics coursework was required or suggested. However, the Uniform Accountancy Act Model Rules (dated November 2020), jointly issued by the AICPA and NASBA, contains a list of education requirements which applicants should meet to satisfy the education requirements. Included in the requirements is the following:
Earned a minimum of three SCH [semester credit hours] in an undergraduate and/or a graduate course listed or cross listed as an accounting or business course in ethics as defined in Rule 5-1(e). A standalone three SCH course in ethics may count towards meeting the accounting or business course requirements of Rule 5-2(d)(2) or Rule 5-2(d)(4). As an alternative, colleges or universities may choose to integrate the course throughout the undergraduate and/or graduate accounting or business curriculum. Universities must provide evidence of coverage under integration as specified in Rule 5-2(e). Proof of coverage may be provided through specific evaluation by a specialized or professional accrediting organization recognized by the Board, in which evidence is provided to assure the Board that the program of learning defined in Rule 5-1(e) has been adequately covered and at the equivalent of the three SCH minimum. Alternate methods for proof of ethics coverage may be determined and approved by the Board following careful scrutiny. [Article 5, Rule 5-2-Education requirements–determining compliance of the applicant’s education (d) (6)]
The above appears to suggest that both NASBA and the AICPA recognized the need for ethics education in the undergraduate or graduate course-work of accounting students planning to sit for the CPA exam. However, it is the boards of the individual states which have set these requirements. Given the evidence presented in Exhibit 1, only eight states have followed this suggestion.
Of these eight states, California’s ethics requirements are the most robust, including a three-hour accounting ethics course and seven additional hours which can be met by a diverse range of subjects including philosophy, religion, and theology. The authors were not able to discover the reason behind the state’s ten-credit hour requirement, when all the other states in this small cohort have only a three-credit hour requirement. However, the inclusion of the humanities courses in meeting the ethics requirement is not unique to California, as some other jurisdictions include liberal arts courses in meeting the ethics requirement. So, even in the states where college ethics courses are required, there is no consistency as to what type of content will be covered in this course or which type of courses offered by other departments may meet the requirement.
The varied nature of ethics requirements arises in part from a lack of consensus regarding which ethics education features and approaches create licensed CPAs that are disposed to be more ethical. A stream of research on accounting ethics stretches back at least three decades largely focusing on the history and importance of accounting ethics education (Tamara Poje & Maja Zaman Groff, “Mapping Ethics Education in Accounting Research: A Bibliometric Analysis,” Journal of Business Ethics,https://doi.org/10.1007/s10551-021-04846-9, 2021; Neal R. VanZante, “Improving Professional Ethics: The Case of the Texas State Board of Accountancy,” The CPA Journal, May 2005, pp. 9–11; David F. Bean, and Richard A. Bernardi, “Accounting Ethics Courses: A Professional Necessity,” The CPA Journal, December 2005, pp. 64–65; Steven M. Mintz, “Accounting Ethics Education: A 43-Year Retrospective,” The CPA Journal, August/September, 2021, pp. 24–31). Nevertheless, the evidence that ethics education affects the character of students’ professional behavior is modest. The relevant studies often rely on student self-reporting about the extent to which they would act ethically [e.g., Nhung T. Nguyen, M. Tom Basuray, William P. Smith, Donald Kopka, Donald N. McCulloh (2008). Ethics Perception: Does Teaching Make a Difference? Journal of Education for Business, November/December 2008, pp. 66–75]. Other studies (e.g., Brian W. Mayhew and Pamela R. Murphy, “The Impact of Ethics Education on Reporting Behavior,” Journal of Business Ethics, vol. 86, pp. 397-416, 2009) have found that ethics education has been successful in helping students understand ethics but not in getting them to act ethically. The Texas requirement was found to improve students’ understanding of ethics and ethical issues, but practicing CPAs were found to be ambivalent (K. Hurtt and C.W. Thomas, “Ethics Education for CPAs in Texas: Is it Working?” Today’s CPA, July/August 2011, pp. 32–35). The authors are not aware of any research that demonstrates conclusively that covering particular course contents (e.g., professional ethics, historical surveys, philosophical perspectives), alone or in certain combinations, is more effective than others in creating more ethical professionals.
Ethics Requirements and Mobility for Accounting Students, Recent Graduates, and CPA Certificate-Holders
The authors agree with VanZante and Fritzsch (Neal R. VanZante and Ralph B. Fritzsch, “Comparing State Board of Accountancy CPE Requirements – with an Emphasis on Professional Ethics Requirements,” The CPA Journal, October 2006, pp. 58–60) that a patchwork of rules in various states poses a few key problems for accounting students, CPA candidates, and licensed CPAs, as well as those parties relying on CPAs’ work. First, ethical behavior for CPAs should not vary by state. If being a CPA comprises knowing and understanding the rules of professional conduct, adhering to high ethical standards, and being an ethical leader, ethics education should be uniform throughout the United States. Second, accounting majors who are planning to sit for the uniform CPA exam may not be familiar with the different ethics education requirements in a number of different states. Today’s student population is more mobile than ever before, and many graduates are being hired by CPA firms outside of the state in which they went to college. While this may be remedied by taking additional courses (which may be needed anyway to arrive at the 150 credits needed for licensure), this still provides a hardship to some students and graduates, because few public accounting firms hire full-time staff who are not CPA eligible. Not all universities offer ethics courses that meet the specific requirements outlined by the respective boards and taking a course online or outside of one’s college degree requirements might be costly. Finally, CPA firms and their clients will ultimately bear the costs associated with a limited labor pool to the extent that these regulations interfere with hiring otherwise well-qualified candidates from outside the state. These costs are likely to be especially high in states like Texas, where a candidate’s whole exam can be invalidated by taking it out of order with respect to Texas-approved college ethics education, or California, where the number of required semester hours is relatively large.
We believe that the accounting profession should, on a national basis, carefully consider the nature and extent of optimal ethics education for CPAs in order to ensure that everyone using this designation is adequately prepared to meet the ethical dilemmas common to the profession. States should also be encouraged to harmonize their ethics education requirements to avoid placing unnecessary obstacles to new accountants’ mobility across state lines. The authors believe that this guidance is especially timely given that the run up in the stock market over the last decade has been similar in trajectory and volatility to the 1990s. History indicates that big accounting frauds are often discovered during economic downturns. The sputtering stock market of early 2022 combined with expected federal funds rate increases portends a recession and the potential discovery of frauds or questionable behavior heretofore masked by positive macroeconomic conditions. Any revelation of such accounting scandals in the coming months and years would create incentives (and pressures) for state legislatures and boards to implement new (or enhanced) ethics education requirements. These states will update their laws and rules in more effective ways if the profession comes to a consensus today about the most appropriate ethics education requirements for CPAs.