—'——-—-‘-

 

A STUDY OF 'FHE IMPORTANCE OF
lNDEPENDENCE TO THE CER'FIFEED
PUBLIC ACCOUNTANT

Thesis for flu; Degree 05 M. A.
MICHIQAN STATE UMJERSITY

Irwin Ronald Ettinger
1959

THES“ [I 7' lilf'r.'~ .‘,_

 

L I B R A R Y
54i¢33i133h State
University

 

 

 

A STUDY OF THE IMPORTANCE OF INDEPENDENCE

TO THE CERTIFIED PUBLIC ACCOUNTANT

by

Irwin Ronald Ettinger

AN ABSTRACT

Submitted to the College of Business and Public Service
Michigan State University of Agriculture and
Applied Science in partial fulfillment of
the requirements for the degree of

MASTER OF ARTS

Department of Accounting and Financial Administration

1959

Approved : QUWAZJ'WW

IRWIN RONALD ETTINGER ABSTRACT

The certified public accountant occupies a unique
position in the economy of the United States. He expresses
his opinion as to the fairness of management's represen-
tations in the financial statements. Many groups such as
creditors, bankers, investors, and governmental agencies
rely on the certified public accountant‘s opinion to insure
the credibility of the financial statements upon which a
great many important decisions are based. Thus, the smooth
functioning of our credit and investment economy is
facilitated by the certified public accountant.

The prime reason for the certified public accountant's
ability to command such confidence is his independent posi-
tion. The American Institute of Certified Public Accountants
and many prominent certified public accountants maintain
that independence is more important to the certified public
accountant than technical ability, although both attributes
are essential. The opinions of the Institute and some
prominent practitioners are referred to, in order to estab-
lish the significance of independence. Although the certi-
fied public accountant is retained by his client, he maintains
an unbiased attitude. He does not subordinate his opinion
to that of his client and he has no substantial financial
or personal interest in his client. The certified public
accountantrrecognizesIris duty to the public and, therefore,

maintains his independent position.

IRWIN RONALD ETTINGER ABSTRACT

However, to achieve and maintain optimum effectiveness,
the certified public accountant must communicate his inde-
pendence to the entire business world and the public in
general. Furthermore, he must fully recognize the importance
of independence to his clients, his profession, and the
public.

The purpose of this thesis was to determine how aware
the business world is of the importance of independence.
Therefore, three hundred questionnaires were sent to banks,
industrial corporations, and certified public accounting
firms throughout the United States, to obtain their opinions
on the importance of independence and related matters. The
results indicate that the proper recognition is not given
to the importance of independence. Although the majority of
the respondents considered independence to be the most
important quality or one of the two most important qualities
of the certified public accountant, many respondents con-
sidered technical ability to be the most important quality
or one of the two most important qualities of the certified
public accountant.

Certain conclusions are indicated from the results of
the survey: (1) the importance of independence to the
certified public accountant must be stressed in the colleges,
universities, and business schools; (2) a program of

Veducation should be undertaken both within and without the

IRWIN RONALD ETTINGER ABSTRACT

profession; (3) more objective standards pertaining to

independence should be adopted.

A STUDY OF THE IMPORTANCE OF INDEPENDENCE

TO THE CERTIFIED PUBLIC ACCOUNTANT

by

Irwin Ronald Ettinger

A THESIS

Submitted to the College of Business and Public Service
Michigan State University of Agriculture and
Applied Science in partial fulfillment of
the requirements for the degree of

MASTER OF ARTS

Department of Accounting and Financial Administration

1959

i)

ACKNOWLEDGMENT

The author wishes to
to Dr. Robert Kvam for his
suggestions throughout the
his constant support it is

have been possible.

express his sincere appreciation
encouragement and invaluable
writing of this thesis. Without

doubtful if this thesis would

Thanks are also due to Dr. Roland Salmonson whose

continuous support and criticism provided the writer with

much needed guidance.

To Professor J. Ruswinckel go the author's deepest

apprcéiation for his participation on the examining

committee.

TABLE OF CONTENTS

CHAPTER PAGE

I. THE PURPOSE, DEFINITIONS, AND REASONS

FOR STUDY. . . . . . . . . . . . . 1
Purpose . . . . . . . . . . . . 1
Scope 2
Definitions

Independence. 2
Ethics. . 4
Standards. 5
Auditing 5

U1

Reasons for study

Independence--distinguishing character-
istic of a certified public accountant 5
Opinions as to significance of

independence . . . . . . . . 6

Need for independence. . . . . . 9

Need for objective standards . . . . 12

II. HISTORY OF INDEPENDENCE . . . . . . ..IX 16
British Companies Acts . . . . . .\\¢/ 16
Companies Clauses Act--1845. . . . . 16

Companies Act-21938 . . . . . . . 18

American Association of Public Accountants‘
and American Institute of Certified

Public Accountants' regulations . . . 18
AAPA Bylaws-~1897 . . . . . . . . 18
AAPA Bylaws--l907 . . 19

AIA Rules of Professional Conduct-~19l7. 20
1934 Resolution. . . . . . 23

iv

CHAPTER PAGE
Early literature and prominent figures . . 24
"Editorial, " Journal of Accountancy,1905 24

St. Paul AAPA Convention, 1937. . . . 2A
1937--1917 . . . . . . . . . 28

 

The Securities Exchange Commission and
independence. . . . . . . . . . 29

Early government-~certified public

accounting cooperation . . . . . 29
SEC-~AICPA cooperation . . . . . . 33
Rule 2-01 of Regulation S-X. . . . . 33
Accounting Series Release #81 . . . . 32

Summary . . . . . . . . . . . . 34
III. QUESTIONNAIRE RESULTS. . . . . . . . . 36
Background . . . . . . . . . . . 36
Response . . . . . . . . . . . 36
Limitation . . . . . . . . . . 37
Subgroups. . . . . . . . . . . 37
Answers . . . . . . . . . . . 38
Industrial corporation response . . . . 38
Size of respondents . . . 38
Uses made of certified statements. . . 43
Reasons for such use . . . . . 43
Most important quality of a CPA . . . 43
Concepts and comments regarding the
most important quality. . . . . . #5
Concepts of independence. . . . . . A6
Importance of independence . . . . . 47
Objective standards . . . . . . . M8
General comments . . . . . . . . 51
Summary . . . . . . . . . . . 52
Conclusions . . . . . . . . . . 53
Bank response . . . . . . . . . . 54
Size of respondents . . . 5h
Certified or non- -certified statements . 55
Reasons for faith in reliability of
certified statements . . . . 57
Most important quality of a CPA . . . 58

Concepts of independence. . . . . 61

CHAPTER

Importance of independence

Most CPAs are independent .

Economic size of CPA firm and
independence . .

Objective standards .

Knowledge of AICPA position on

independence
Respondents' suggestions.
Summary
Conclusions

Certified public accountant response.

Size of respondents .

Most important quality of a CPA

Concepts of and comments on this quality
Concepts of independence. . . . . .
Objective standards . . . .
Adequacy of present AICPA rules .
CPA recommendations for improvement
Summary .

Conclusions

Comparison of responses of all groups
Most important quality
Importance of independence
Objective standards
IV. SUMMARY AND SUGGESTIONS . .
Summary
Suggestions
Education. .
Educate CPAs and public
More objective standards.
SELECTED BIBLIOGRAPHY.
APPENDICES
APPENDIX A—~American Institute of Certified Public
Accountants Rules of Professional Con-

duct—-1958, Pertaining to Independence.

APPENDIX B--Questionnaires.

PAGE

100

102

TABLE

II.

III.

IV.

VIII.

IX.

LIST OF TABLES

Number of Replies from Subgroups of each
Major Group Surveyed.

Uses made of Certified Financial Statements by
Industrial Corporations. . . . .

Industrial Repondents' Choices of the Most
Important Quality or Trait of the CPA .

Attitudes of Industrial Respondents Toward
Having More Objective Standards to Provide
Guideposts for the CPA and Evaluative
Criteria for the Public~—Regarding
Independence . . . .

Bank Respondents' Opinions as to the Reliability
of A) Statement Prepared by Prospective
Borrower Himself
B) Statement Prepared by an Accountant who
is Not a CPA
C) Statement Prepared by a CPA
Rated Most Reliable, Next Most Reliable, Least
Reliable, or Equal . . . . . .

Qualities Bank Respondents Consider to be Most
Important for the CPA . . . . .

Bank Respondents' Opinions as to the Signifi-
cance of Independence for the CPA .

Bank Respondents' Beliefs as to Whether All,
Most, or Some CPAs Live Up to the Concept of
Independence . . . . . . . .

Bank Respondents' Opinions as to the Economic
Size of CPA Practice and Its Effect Upon
Independence . . . . . . .

Bank Respondents' Replies to the Question
"Would You Place More Reliance in CPAs if
Their Independence Were Readily Measured
Objectively?".

39

41

44

67

69

vii

TABLE PAGE

XI. Bank Respondents' Knowledge of the Present
AICPA Rulings on Independence. . . . . . 71

XII. CPAs' Choices of the Most Important Quality
of the CPA . . . . . . . . . . . . 76

XIII. Attitudes of CPAs Toward Having More Objective
Standards to Provide Guideposts for CPAs and
Evaluative Criteria for the Public--Regarding
Independence . . . . . . . . 8O

XIV. CPAs' Opinions as to the Adequacy of Present
AICPA.Ru1es on Independence . . . . . 81

XV. All Major Groups' Choices of the Most Important
Quality or Trait of the CPA . . . . 8A

XVI. Industrial Corporations' and Bank Respondents‘
Opinions as to the Significance of
Independence for the CPA . . . . . . . 85

XVII. Attitudes of CPA and Industrial Corporation
Respondents Toward Having More Objective
Standards to Provide Guideposts for the CPA
and Evaluative Criteria for the Public—-
Regarding Independence . . . . . . . . 86

CHAPTER I
THE PURPOSE, DEFINITIONS, AND REASONS FOR STUDY

The independence of a Certified Public Accountant1 is
generally considered to be a state of mind, an inherent
quality, unamenable to objective measurement. However,
this independence must be communicated to clients, banks,
governmental regulatory agencies, investors, and the public
in general if the accounting profession is to receive and
maintain the utmost faith of these groups. The question
of how well the CPA is communicating the tremendous impor-
tance and Significance of his independence is open to

speculation.
I. PURPOSE

The purpose of this thesis is to determine how aware
clients, bankers, and CPAS are of the importance and‘use-
fulness of independence to the CPA. As corollaries to this
purpose there are two others: (1) to determine the
advisability of creating more objective standards to help

the CPA maintain the proper professional attitude, and to

 

lHereafter referred to as the CPA.

act as evaluative criteria for the public to determine how
well the CPA has lived up to his obligation; (2) to deter-
mine whether the CPA with the large practice, medium prac-
tice, or small practice most often lives up to the concept

of independence.
II. SCOPE

To find the answers to these questions a survey of 303
CPAS, banks, and industrial corporations was conducted.

The survey is too limited to draw any definite conclusions,
but certain indications were uncovered. The survey is sum-
marized in Chapter III.

Accounting literature dealing with independence was
also reviewed. The opinions presented in the literature as
to the importance of independence and objective standards
are examined in this chapter. Other events and opinions
presented in the literature were referred to in compiling

Chapter II which deals with the history of independence.
III. DEFINITIONS

Independence. What is this quality we so glibly call

independence? The Rules of Professional Conduct2 of the

3

 

 

American Institute of Certified Public Accountants do not

 

2American Institute of Certified Public Accountants,
By—Laws--Ru1es of Professional Conduct (New York: American
Institute of Certified Public Accountants, 1958), pp. 14—15.

 

’3
JOn June 3, 1957, the name of the American Institute

define or even mention independence. The Institute's

Codification of Statements on Auditing Procedure refers to

 

 

 

the independent CPA thus:

To be independent he must be intellectually honest;
to be recognized as independent he must be free from
any obligation to, or interest in management, owners,
creditors, . . . or others entitled to rely on his
report. . . which might influence his judgment as to
the fairness of the financial statements.

In Generally Accepted Auditing Standards, Their

 

Significance and Scope the Institute says:

 

Independence in the last analysis bespeaks an honest

disinterestedness on the part of the auditor in the

formulation and expression of his opinion,which

means unbiased judgment and objective consideration

of facts as the determinants of that opinion.
This same publication states, "In all matters relating tof
the assignment an independence in mental attitude is to be
maintained by the auditor or auditors."

Webster defines independence as "freedom from assis-

tance by others or rule by others."7 Independent is

 

of Accountants, the national society of CPAS, was changed
to the American Institute of Certified Public Accountants.
Therefore, when the national society of CPAS is referred to
the designations AICPA or the Institute will be used.

”Codification of Statements on Auditing Procedure

(New York: American Institute of Accountants, 1951), p. 8.

5Generally Accepted Auditing Standards, Their Signifi-
cance and Scope (New Yofk: American Institute of Accountants,
1954), p. 21.

6Ibid., p. 13.

7Louis G. Adams (editor), Webster's New American
Dictionary (New York: Books Inc., 1956), p. H83.

 

 

defined as, "Free, uncontrolled by another."

These definitions stress mental attitude, unbiased
judgment, and freedom from any obligation to or interest in
the client which might influence the CPA‘S judgment. There-
fore, the definition attached to independence in this thesis
is: Independence is basically a state of mind whereby the
CPA is able to withstand subordinating his opinion to that
of his client or a third party. It involves unbiased judg-
ment and objectivity, and complete honesty in reporting
regardless of the effects of the report. Furthermore,
independence entails freedom from a financial or personal

interest in the client.

Ethics. The New Standard Pocket Dictipnary defines
9
ll

 

ethics as "a standard of right conduct. Mr. Lincoln G.

Kelly defines ethics as a "system of moral principles to
govern the relations of members with each other, with
clients, and with the public."10 Mr. Kelly further states,
"The promulgation and enforcement of ethics set apart a
professional group in our society as distinct from a commer-

cial enterprise or business."11

 

8Ibid.

9Charles E. Funk (editor), New Standard Pocket Diction-
ary (Chicago: Wilcox and Follett Co., 19H6), p. 3A2.

 

 

lOLincoln G. Kelly, "The Value to the Individual Profes-
sional Man of Strict Adherence to His Code of Ethics," Journal
of Accountancy, Vol. 96 (November, 1953), p. 57.

llIbid.

\U

The definition adopted for this thesis is: Rules of
right conduct to govern the actions and relationships of

CPAS with each other, with clients, and with the public.

Standards. Standards are defined as a "type, model,

 

or example for comparison; criterion; pattern," by the New
Standard Pocket Dictionary.12 This is the definition adopted

for this thesis when reference is made to objective standards.

Auditing. The definition of auditing employed by Mr.

 

Arthur W. Holmes will be utilized in this thesis:

Auditing involves a critical analysis and examina-
tion of the transactions and records of a concern,
the interpretation of the results, and normally an
expression of opinion concerning the records and
financial statements of the client. This work is
done by a person or persons independent of manage-
ment, and is intended to determine the reliability
of management's representations.13

IV. REASONS FOR STUDY

Independence-distinguishing characteristic of a CPA.
The CPA certificate is the obvious distinguishing character-
istic between the CPA and the non-certified public accountant.

However, underlying this certificate is the basic quality of

 

12Funk, op. cit., p. 870.

1
3Arthur W. Holmes, Auditing Principles and Proce-
dures (Homewood, Illinois: Richard D. Irwin, Inc., 1952),
l.

p.

the CPA, his independence. Once a CPA obtains his certi-
ficate he is morally and professionally obligated to main—
tain the high degree of independence required by the
profession. While the certificate is indicative of an
advanced degree of proficiency, its principal value lies in
denoting the obligation of the CPA to maintain the highest
degree of independence. A non-certified public accountant,
no matter how proficient, is not required to measure up to
the same level of independence as the CPA (although many
non-certified public accountants probably do maintain the
highest degree of independence). In order for a person to
sit for the CPA examination his character and background
must be impeccable. Before he can receive his CPA certi-
ficate a thorough investigation is made of his integrity
and background in an attempt to insure the fact that this

prospective CPA will live up to the code of ethics.

Opinions as to significance of independence. In 1947
the Institute issued an official pronouncement on indepen-
dence that stated, "Independence, both historically and
philosophically, is the foundation of the public accounting
profession, and upon its maintenance depends the profession's
strength and its stature."1u Thus, the AICPA officially

recognized independence as the keystone of the CPA profession.

 

14
Executive Committee of the American Institute of
Accountants, "Independence.of the Certified Public Account-
ant," Journal of Accountancy, Vol. 84 (January, 19u7), p.53.

 

Carmen Blough, currently Director of Research of the
AICPA, speaking before the Virginia Society of Public
Accountants said, "Technical ability is essential for suc-
cess in the field of public accountancy, but it is the
quality of a CPA'S integrity and his independence more than
his ability that determines the extent of his usefulness to
society.”15 Mr. Blough places integrity and independence
above technical ability as essential for success in public
accounting. Because of the unique functions the CPA
performs for society (discussed in the next section), his
technical ability is secondary in importance to independence.
Technical ability alone would not permit the CPA to occupy
his special position in the business world.

Mr. John L. Carey takes a similar position, although
he does not mention technical ability when he says, "In the

last analysis, therefore, it is independence which is the

16 The justification

CPA's economic excuse for existence."
for any profession, business, or service is the economic
.function it performs. According to Mr. Carey the CPA pro-
;fession's existence could not be justified if its members

mmere not independent. This is certainly a strong opinion of

tune significance of independence for the CPA.

 

 

15Quoted in "Editorial," Journal of Accountancy, Vol.
82? (December, 1946), p. 453.

16John L. Carey, Professional Ethics of Certified
EEHZAiC Accountants (New York: American Institute of
ACCountants, 1956), p. 6.

An editorial in the Journal 9f Accountancy specifically

 

compares the importance of independence and competence,
stating, ”The value of audits depends on the competence and
independence of the auditors. Of these two indispensable

17 The con—

qualities, independence is the more important."
clusion of the editor is that independence is the most
important quality of a CPA.

Montgomeryfs Auditing takes the position that the best

 

recommendation for the employment of a CPA is his indepen-
dence. The text states:
Public accountants know that a reputation for indepen—
dence is their principal asset, and they are impelled
by enlightened self interest, and supported by certain
rules of professionaé conduct, to maintain indepen—
dence at all costs.1
Here again independence is considered before technical
ability. Mr. Louis H. Rappaport takes the same position
stating, "Public accountants know that their reputation for
independence is their principal stock in trade."19

Independence is not considered to be the most important

attribute of a CPA by only those within the profession. For

 

l7"Editorial," Journal of Accountancy, Vol. 82 (Dec-
ember, 1946), p. 453.

18
Norman J. Lenhart and Philip L. Defliese, Montgom—

ery's Auditing (eighth edition; New York: The Rona ress,
1957), p. 24-

19LouiS'H. Rappaport, SEC Accounting Practice and
Procedure (New York: The Ronald Press, 1956), p. 434.

 

 

 

instance, Mr. Earl C. King, past Chief ACcountant of the

Securities Exchange Commissiongosaid, while speaking before

the Georgia Society of Certified Public Accountants, ". . .,
we regard the complete objectivity implied by the term
independence as the major, if not sole, justification for
the certification requirement in SEC filings."£u'0nce more the
emphasis is upon independence. The SEC accepts certified
reports22 because they feel the public can rely on the
opinion of the CPA due to his unbiased,independent position.
Accounting literature is replete with statements
similar to those quoted in this section, all acknowledging
independence as the one quality that supports all other
qualities of the CPA. Without this strong support the CPA

profession could not and should not be.

Need for independence. Independence is so very sig-

 

nificant for the CPA because Of the unique position his
profession occupies and the function he serves. This func-

tion, of necessity presupposes complete independence on the

 

20Hereafter referred to as the SEC.

21Earl C. King, "What the Securities and Exchange Com-
mission Desires in Financial Statements" (address before the
Second Annual Institute, The Georgia Society of Certified
Public Accountants and the University of Georgia, College of
Business Administration, Athens Georgia, November 9, 1948).

22The CPA does not certify any segment of a financial
report. However, through usage the term "certified" report
has come to mean a financial report upon which a CPA has ex-
pressed his opinion as to the fairness of the information
Contained therein. The term, certified, will be used through—
Out this thesis in accordance with common usage.

13

part of the CPA. He must serve both his client and the
general public. He is relied upon to furnish information
which is useful to his clients and at the same time de-
pendable from the viewpoint Of the interested public.

As Mr. Holmes says:

Auditing has become so much a matter of public inter-
est that groups other than Owners must be satisfied
with the accuracy, clarity, and unequivocality of
financial statements. These other- than- -owner groups
. , rely upon opinions rendered by competent
persons of independence and high moral integrity. 2

A glance at some of the purposes served by certified
financial statements will indicate the interest the public
has in these statements:

As a report of stewardship.

As a basis for fiscal policy.

To determine the legality of dividends.

As a guide to wise dividend action.

As a basis for the granting of credit.

As information for prospective investors in an
enterprise.

As a guide to the value of investments already made.
As an aid to government supervision.

As a basis for price or rite regulation.

As a basis for taxation.2

OKOCDN GUI-DUOMH

1—‘

Many of the listed purposes are of interest to both the
CPA'S clients and others. These other persons must be
satisfied as to the CPA's independence if they are to rely

on the certified reports.

2
3Holmes, op. cit., p. 28.

2[*George 0. May,Financial Accounting (New York: The
ancMillan Company, 1943), pp. 19- 21.

 

11

The Institute, in its official release pertaining to
independence, stresses the maintenance of confidence between
the CPA's clients and the public as the reason for the need
of independence on the part of the CPA.

A most important function which the CPA performs

in our economic life today is the part he plays in
the maintenance of mutual confidence which is nec—
essary in business relations and transactions.
With the growth of business enterprises, the public
accountant makes a vital contributiOn in meeting the
need for independent, impartial, and expert opinions
on the financial position and results of operations.
This is his unique contribution, a service which no
one else offers or is qualified to perform.
The CPA is able to occupy this unique position because of
his independent position which must be communicated to the
entire interested public if the CPA profession as a whole
is to perform at optimum efficiency.

The CPA is obligated to the public professionally and
for the profession‘s existence. Certified statements are
utilized to satisfy creditors, banks, investors, government
agencies, and all other interested parties as to the
reliability of the.clients' representations. If there were
no need to report to these groups, the value of the CPA
would be greatly diminished. He is professionally obligated
to the public because of the reliance and faith placed in

his unbiased opinion. The CPA Handbook states:

 

Independence is an essential auditing standard
because the opinion of the independent accountant

25"Independence of the Certified Public Accountant,"
op. cit.

.1 i p. 52.

12

is furnished for the purpose of adding justified
credibility to financial statements which are
primarily the representations of management. If
the accountant were not independent of the manage-
ment of his client, his opinion would add nothing.
Those who rely on the credibility he furnishes are
apt to be creditors or investors. . . . It is for

their assurance that the independent expert opinions

are provided, and the accountant incurs a profoundly

professional obligation to this unseen audience. .26

Thus, independence is important to the CPA because

of the unique position he occupies in the economy. He adds
credibility to financial reports and facilitates our econ-
omic system of credit and investment. The CPA's position
will increase in importance as business continues to grow.
As a professional man, occupying a position of extreme

trust, the CPA owes to all those who rely on his certifi—

cation, unfaltering independence.

Need for objective standards. More than maintaining
an independent attitude and position, the CPA must communi—
cate this fact to all those who may have use for certified
reports. One excellent method of spreading this knowledge,
while at the same time preventing the presumption of a loss
(bf independence and furnishing guideposts for the CPA to
.follow, is to employ objective standards. These objective
EAtandards should enumerate the situations which are presump-
tiive of a lack of independence.

The AICPA has stated:

[26Edward Wilcox, "Professional Standards," CPA Hand-
bOok, Robert L. Kane, editor (New York: American Institute

ETITIAccountants, 1952), Chp- 13: P-

13

As a code of ethics the profession has gradually
compiled through the AIA's Rules Of Professional
Conduct and the similar pronouncements of its state
bodies, precepts and conditions to guard against
the presumption of a loss of independence.

'The Institute stresses presumption because it feels that
independence is a state of mind, and as such cannot be
Ineasured objectively. However, the Institute feels that
rules of conduct are necessary to prevent the appearance of
a lack of independence.

John L. Carey, on the other hand, feels that ethical
codes are useful as guideposts for the CPA as well as to
foster confidence among the public. He states:

The ethical code also serves the purpose of providing
members of the profession with guides to the types of
behavior which the historical experience of the group
as a whole has indicatedzhs mogt likely to attract
the confidence of the public.2

Carey further lists three primary uses for a professional
code of ethics:

1. They show the practitioner how to maintain a
professional attitude which experience indicates
will help him to succeed.

2. They give clients and potential clients a basis
for confidence that CPAS sincerely desire to
serve them well and place service ahead of reward.

3. They give third parties who may rely on financial
statements a basis for confidence that the CPA
has done his work in conformity with objective
standards and is independent in expressing his
opinion.29

27GenerallyAccgpted Auditing Standards, Their Sig-
Eflggicance and Scope, op. cit., pf“2I.

 

28Carey, op. cit., p. 4. 29Ibid., p. 6.

14

Rules of ethics and objective standards are instrumental
in developing the proper attitude in CPAS and building
confidence among the public.

Mr. Edward Wilcox while agreeing with Mr. Carey that
rules of conduct serve a dual function, feels that the basic
function of such rules is to guard against the appearance
of a loss of independence. Wilcox says:

Without going into the specific paragraphs in the

Rules of Professional Conduct of the American Insti-
tute of Accountants which deal with the concept of
independence, the point emerges that the rules are
designed first to guard against an appearance or
presumption by others that there has been a loss of
independence by the accountant, and only secondarily
to require conduct conducive to indggendence or at
least not conducive to its absence.

Mr. William W. Werntz feels that one of the require-
ments necessary for the public to recognize a human activity
as a profession is a group of objective standards to which

31

the performers of such activity are expected to adhere.

An editorial in the Journal gf Accountancy has this

 

'to say: "Nevertheless, because even the appearance of

IIPejudice should be avoided, objective standards are often

useful."3‘2

 

30Wilcox, op. cit., Chp. 13, pp. 8-9.

31William w. Werntz, "What the Professional Respon-
E3ibility Of the CPA Means to the Public," Journal of
fflEfiiQuntancy, Vol. 86 (October, 1948), pp. 304-305.

 

 

32"Editorial," Journal of Accountancy, V01. 97 (June,
1954), p. 673.

 

15

While all these opinions justify the present Rules of
Professional Conduct, there are also indications that the
present rules need revision, expansion, and publicity. An
article by Maurice Stans quoted a survey which reported
that forty-five per cent of the public believes that
reported profits of corporations are deliberately under-
stated.33 Mr. Thomas Higgins, a member of the Institute's
Committee on Professional Ethics has this recommendation:

Tackle a complete restatement of the rules as soon

as the proposed changes now before the committee are
resolved. The rules have developed by evolutionary
process over a period of some forty years. The time
has come when they should be grouped in some logical
order. . . . The suggested revision should present

a good opportunity to Opuglicize them and to emphasize
their importance.

The survey presented in Chapter III presents further
evidence of the possible need for additions to and revision

of the Rules of Professional Conduct, as well as the need

for objective standards and publicity.

 

33Maurice Stans, "How New Standards of Financial
Reporting Grow from Social Responsibility of Accountants,"
Journal of Accountancy, Vol. 86 (August, 1948), . 101,
quoting "The Public Acceptance of the Facts and Figures
of Business Accounting.

 

3LLThomas G. Higgins, "Professional Ethics and Public
Opinion," Journal of Accountancy, Vol. 106 (November, 1958),
p. 39.

CHAPTER II
HISTORY OF INDEPENDENCE

There were many important documents, from the British
Companies Clauses Act-1845 to the first rules of conduct of
the AICPA, and events, from the 1907 meeting of the American

1 to the formation of the

Association of Public Accountants
SEC, that played prominent parts in the evolution of inde-
pendence in the CPA profession. A brief review of these

documents and events is presented here as a background for

the results Of the survey presented in Chapter III.
I. BRITISH COMPANIES ACTS

Companies Clauses Act-1845. The members of the CPA

 

profession owe a great debt to their English brethren.
English accountants, such as Edwin Guthrie and James T.
Anyon, played important parts in the establishment of the

2

accounting profession in the United States, which is struc-

tured after the British profession. It is no wonder,

 

lHereafter referred to as the AAPA.

2American Institute of Accountants, "A History of the
American Institute of Accountants," Fiftieth Anniversary
Celebration 1937 (New York: American Institute of Account-
anEs, I938), p. 3.

 

17

therefore, that the first official reference to the inde-
pendent auditor is tO be found in the British Companies
3

Clauses Act of 1845. The act does not specifically mention
the independent auditor, but it does state:

While no other qualification shall be prescribed

by the special act, every auditor shall have at
least one share in the undertaking; and he shall not
hold any Office in the company, nor be in any other
manner interested in its concerns, except as a
shareholder.

The term auditor referred to in this act did not have
the same connotation as the term auditor is commonly under-
stood to have today. It designated a shareholder appointed
by the directors to examine the books of account on behalf
of all the shareholders. However, the importance of a
degree of independence to such an auditor was recognized,
since he could not be an officer or director, nor have any
other interest in the corporation. Thus, it was felt that
as shareholders, the auditors would have the interest of all
shareholders foremost in mind. This section of the act was
an attempt to assure all the shareholders that their inter-

ests would not be subordinated to any selfish interests of

‘the directors or officers.

3Company Clauses Act-Sec. 102, as reprinted in The
fflgcountants7Diary fOr 1915, The‘ACcountant Office (London:
(Rae and Co., Ltd., 1915), p. 200.

 

 

A
Ibid.

18

Companies Act—1938. At about the same time that inde-
‘pendence was becoming an important issue in the United
States, the British Companies Act of 1938 became law. As
far as public accountants were concerned, the significant
‘portions of this act were parts 1 and 3 of section 112 which

read:

(1) Every company shall at each annual general
meeting appoint an auditor or auditors to hold
office until the next annual general meeting.

(3) A director or officer of the company shall not
be capable of being appointed auditor of the
company.

Unlike the act of 1845, the act of 1908 no longer
required the auditor to be a stockholder of the corporation.
He could be an independent public accountant, similar to
the CPA of today. He still could not be an officer or

director of the corporation under examination.
11. AAPA AND AICPA REGULATIONS

AAPA By-Laws-1897. In.the,United States the first
official rule governing independence can be found in the
1897 by-laws of the AAPA, organized in 1887. Rule 2 stated:

No member shall directly or indirectly pay to any
attorney, broker, or agent, any portion of his pro-
fessional charges, nor receive, nor accept any portion
of the fees of any attorney, broker, or agent, who may
be concerned in ang professional work in which such
member is engaged.

5Ibid., p. 204.
6

American Association of Public Accountants, American
Association Of Public Accountants-Constitution and Bylaws,

Wi h Amendments; January 19, 1897 (New York: Press of
rooklyn, 1897), p. 8.

 

I

Cr

I

CU

l9

AAPA By-Laws-l907. No further rules relating to

independence were introduced into the Bylaws until 1907,

‘when an article was devoted specifically to the rules of

This was article VII, the first code

'professional ethics.
7

(Of ethics of the accounting profession in the United States

'Two rules of this article dealt with independence:

2. No member shall directly or indirectly allow or
agree to allow a commission, brokerage, or other
participation by the laity in the fees or profits
of his (the member's) professional work.

3. NO member shall engage in any business or occupa—
tion conjointly with that of a public accountant,
which in the opinion of the board of trgstees is
incompatible or inconsistent therewith.

If a CPA were to become involved in fee splitting with

a member of the laity, the non—CPA could demand a voice in

tshe affairs Of the CPA, thus affecting the CPA's freedom

<>f decision and unbiased attitude. Just as the CPA must be

ffiree from financial dealings with his clients, he must be

fUree of such dealings with third parties where his profes-

Sixonal work is involved. Rule three has a number of

.DLLrposes. One is to prevent the auditor from becoming

1dezolved in any financial activity that might possibly

1impair his independence. For example, a CPA who is also

111xrolved in the financing business might be tempted to

 

 

7American Association of Public Accountants, American
.&§E§cmiation of Public Accountants-Constitution and ByIafisT“

lfiEEzZITNew York: A. H. Kellogg Company, 1908), p. 238.

81bid:

 

23

jprepare a report contrary to fact, for a client to whom he

1138 lent money. The CPA's opinion, which should be unbiased,

Inay be affected in such a situation. Rules two and three

‘were the only rules pertaining to independence in 1907, and

:remained unchanged until 1917.

AIA Rules of Professional Conduct-1917. In 1916 the

AAPA was dissolved and the AIA organized, with all the AAPA

Inembers listed as charter members of the AIA. The name of

the new society was not officially adopted until 1917.
At the regular semi-annual meeting of the council of

the AICPA held on Monday, April 9, 1917, in the office of

20 Vesey Street, New York City, a report of

the Institute,

‘the committee on professional ethics was read. This report

Zlead to the adoption of the rules of professional conduct,

ass a body of rules separate and distinct from the consti-

tlztion and bylaws of the Institute. From 1897 through 1915,

tflue rules of professional conduct were incorporated in the

bsrlaws. In 1916, the rules were completely omitted from

thus bylaws. The code adopted in 1917 was an expansion of

tile: rules found in the 1915 bylaws. The members of the

159137 committee on professional ethics were: Chairman,

(Daerl H. Nau; J. D. M. Crockett; J. Porter Joplin;

 

 

9"AIA Council Meeting," Journal of Accountancy, Vol.
23 (May, 1917), p. 374.

21

IIerbert G. Stockwell; and Ralph D. Webb.1° The 1917 rules
(pf professional conduct included the following rules on
:Lndependence:

2. The preparation and certification of exhibits,
statements, schedules, or other forms of accounting
work, containing an essential mis-statement of fact,
or omission therefrom, of such a fact as would
amount to an essential mis—statement, shall be
ipso facto, cause for expulsion or for such other
discipline as the council may impose, upon proper
presentation of proof that such mis-statement
was either wilful or was the result of such gross
negligence as to be inexcusable.

4. No member shall directly or indirectly allow or
agree to allow a commission, brokerage, or other
participation by the laity in the fees or profits
of his professional work; nor shall he accept
directly or indirectly from the laity any commis-
sion, brokerage, or other participation for profes—
sional or commercial business turned over to others
as an incident of his services to clients.

5. No member shall engage in any business or occupation

conjointly with that of a public accountant, which

in the opinion of the board of trustees is incom-
patible or inconsistent therewith.

11. No member shall render professional service, the
anticipated fee for which shall be contingent
upon the results or findings thereof.1
The new rules were two and eleven. Rule two was
IIPcibably the most significant of the four rules. It put all

CI’Aus and the public in general, on notice that the Institute

 

 

13American Institute of Accountants, American Insti-
ELEESE of Accountants Yearbook-1916 (New York: The Ronald

Press Company, 19177, p. 56.

11Rules Of Professional Conduct, as reproduced in the
Arneer'ican InSfitute of Accountants*Yearbook-1919 (New York:
WT“I?“Hewitt Press, 1919), p. 139..

 

22

would stand for no unscrupulous members, no shirkers, or

no members who were unwilling to disclose all that was nec-
essary to make the financial report valuable. Rule two
Incant that a CPA was duty bound to disclose all the essential
facts, regardless of the consequences, and in the face of
the possible loss of a client.

Rule eleven was adopted to prevent the promise of
financial reward from acting as a pitfall in the road that
leads the CPA to the fulfillment of his obligations to his
jprofession, the public, and his clients. The rule also
jprevented situations which might give the appearance of a
lack of independence. If the CPA‘S fee is dependent upon
his findings and the outcome of his work, he may possibly
prepare a.report which brings him the greatest financial
:reward, even if such a report is not justified.

In 1919 an amendment was added to rule eleven, stating
'that the rule only applied to situations where the accoun-
tnant's expert opinion might be influenced by considerations
01? personal gain.12 In 1936 this amendment was changed to
e){e1ude from the contingent fee rule those fees which were
ccnutingent upon the findings of the tax or similar auth-

l3

OIfiities. The belief was that in situations where the

 

 

12Ibid.

13Rules of Professional Conduct, as reproduced in
fifigggucan Institute of Accountants Yearbook-1936 (New York:~
AITIéErican Institute of Accountants, 1937): p. 504.

23

contingent fee did not depend upon the CPA'S results, there
‘were no temptations created by such fees, since the CPA

could not influence them.

1934 Resolution. The rules of professional conduct

 

remained unchanged from 1920 to 1934, when the following

:resolution was adopted:

Resolved that no member or association shall certify
the financial statements of any enterprise financed in
whole or part by the public distribution of securities,
if he is himself the actual or beneficial owner of a
substantial financial interest in the enterprisibr or
if he is committed to acquire such an interest.

This rule, like the contingent fee rule, was enacted

'to prevent the CPA from encountering a situation where he
could foster his own financial interests to the possible
(detriment of the public, his profession, and his clients.
fTules such as these are necessary even if only a mere handful
()f CPAS place monetary reward above all else. These rules
zalso prevent the appearance of a lack of independence.

In 1940, the committee on professional conduct recom-

menided a general revision of the rules of professional con-
dLuct. The revised rules were officially adopted on January-6,

19%414 The rules pertaining to independence were substan—

tiailly the same as today's rules, which are presented in.

Appendix A.

 

 

Mn 14Rules of Professional Conduct, as reproduced in
__;§3:ican Institute of Accountants Yearbook-1935 (New York:
elsican Institute of Accountants, I936), p.9354.

 

 

24

III. EARLY LITERATURE AND PROMINENT FIGURES

"Editorial," Journal of Accountancy, 1905. While the
rule dealing with contingent fees was not adopted until 1917,
and the rule dealing with stock ownership was not adopted
until 1934, the Journal 93 Accountangy of 1905 contained an
editorial dealing with these subjects. It states:

The attorney whose duty it is to protect and

advance the interests of his clients by every lawful
method may undertake work for a contingent fee; whereas
’the accountant whose reputation does not depend upon
winning a case, but upon the truthfulness of his
reports, must not allow his professional integrity to
be impugned by becoming a participant in the profit

of any cause or undertaking whose accounts are brought
under his investigation.1

St. Paul AAPA Convention-1907. The bylaws and rules
of professional conduct discussed in previous sections were
the results of the efforts of many public accountants.
Perhaps the two men who were most influential in bring
about an awareness of the importance of a code of ethics,

were Joseph E. Sterrett, who campaigned in the east, and

John A. Cooper, who campaigned in the Midwest for such a

16

code.

At the annual meeting of the Association held in

St. Paul, Minnesota, in 1907, these two men, together with

g

l5"Codification of Accounting Ethics," Journal of
_§ccountancy, Vol. 1 (December, 1905), pp. 139-131.

 

16Ernest Reckitt, "Professional Ethics," Journal of
_Accountancy, V61. 17 (August, 1926), pp. 188-196.

 

25

Robert H. Montgomery and Franklin Allen, were the leading
speakers at a special session devoted to the study of

ethics.17

Mr. Sterrett was the first speaker and his speech
has come to be regarded as a classic in the field of ethics
of accountants. Therefore, various segments of this speech
will be quoted.

Mr. Sterrett touched upon a point that is often over-
looked. An independent attitude is a duty of the CPA to
his clients. One of the CPA's most important services is
the expression of an opinion as to the credibility of his
clients' financial statements. If the CPA is not recognized
as being independent by stockholders, creditors and pros-
pective creditors, government agencies, and the public in
general, his opinion is worthless.

It is also the duty of a CPA to speak up when his
client embarks on some tainted activity. As Mr. Sterrett
states:

The third duty toward the client, which I would

suggest, is courage. If our client is in the wrong,
it is certainly our duty to disclose to him his false
position. He may be determined upon a course of
action which we do not approve, and from which it
Often times becomes our duty to dissuade him. In an
active practice, matters are constantly arising which
involve differences of views, that are sometimes of a
very serious nature, and under these circumstances it
is likely to become our duty, and it may be a very

unpleasant duty, to endeavor to guide our client énto
lines consistent with sound principles of right.1

l7Ibid.

 

18Joseph E. Sterrett, "Professional Ethics," The
fgcountant, Vol. 5 (November 16, 1907), p. 620.

 

26

(Although a CPA does perform management services he must
not participate in the final decisions Of management.)

The CPA who has the internal strength to speak up
when he believes his client to be wrong does both his client
and himself a great service. Neither of them can long
benefit from an association with a tainted activity, be it
deliberate and unprincipled, or merely an honest mistake.

As early as 1907, Mr. Sterrett realized that an inde-
pendent attitude is a duty of the CPA to the public, as well
as to his clients. The creditors, government, and investing
public rely on his statements and make his existence neces-
sary. As Mr. Sterrett so aptly states:

In many instances the accountant's real client is

the public. For example, an accountant is appointed
auditor of a company, the appointment being made

solely by the board of directors, who are the owners

of a majority of the stock. It is only human nature

that the accountant should desire to retain the good-
will of these directors, but he has a duty towards

the minority stockholders not represented on the

board; and this requires that he shall guard their
interests as zealously as he does those of the majority;9

In order to guard the affairs of all interested parties,
the CPA must be absolutely impartial. The CPA who has a
financial interest in his clients' affairs, may be sorely
tempted to act in a partial manner. Mr. Sterrett recognized
‘this, and his following comment on contingent fees must

crertainly have influenced the committee that formulated the

Isules of professional conduct in 1917. He said, when

19Ibid., p. 621.

27

referring to the various functions of a CPA:

In order that he may assume this impartial attitude,
it is perhaps unnecessary to observe that he should
not in any way be an interested party. If his fee is
contingent upon the successful flotation of an issue
of securities, or upon the completion of a proposed
consolidation, it will not be strange if he is
desirous to see the transaction consumated. In cases
of this character, the magnitude of the amount involved
renders it imperative that the accountant should allow
nothing to befog his vision, and it is in just such
matters that the temptation to yield 58 the lure of
contingent gain is especially strong.

The meeting in St. Paul took place almost fifty-two
years ago. Yet, the speech by Joseph E. Sterrett could be
made today, and appear appropriate. Its content would
follow present day thinking very closely. It is no wonder
that this speech is considered a classic.

Neither Mr. Allen nor Mr. Montgomery referred to
independence in their speeches. Mr. Coopen however, formu-
lated certain principles of ethics, among which were the
following:

1. To perform accounting work, payment for which is
by arrangement upon the contingency of the result
of litigation or other form of adjustment is un—
professional.

2. The acceptance Of any part Of the fees of a lawyer
or any commercial brokerage, bonus, or commission
as an incident arising out of a practitioners
service is wrong.

3. The practitioner should whenever possible avoid
acting as a trustee of special funds or pools as
an incident of his calling.

4. A practitioner should avoid serving as a director
in corporations in which he is professionally
employedfil

20Ibid., p. 621.

 

21John A. Cooper, "Professional Ethics," Journal of
Efgaguntancy, Vol. 5 (December, 1907), p. 84.

 

28

The material presented at the 1907 meeting on professional
ethics provided the foundation for the later rules of pro-

fessional conduct.

1907-1917. From 1907 until 1917 there were no out-

 

standing developments in the field of accountants' ethics.
However, there were many individuals who took an active
interest in this problem. Among these people were J. Porter
Joplin and William Whitfield. Both these men explored the
necessity for independence. Joplin, who was president of
the AAPA from 1914 through 1916, wrote:

Aside from the responsibility of the accountant to
his client, there is his relation to the general
public to be considered, and it should be remembered
here that his duty to the public is perhaps even
greater, if possible, then to the client, when
certifying to the accounts of a company under exam-
ination.2

Whitfield, writing on another need, said:

The main underlying principle of ethics is the
engendering of a feeling of confidence in the
accountant--both as to his moral integrity and his
ability--in every possible direction; this should
be encoura ed, as its dissemination can never be
too great.

As far back as 1914, these men recognized the essential

Iieed for independence and a code of ethics. Joplin realized

22J. Porter Joplin, "The Ethics of Accountancy,"
.gpurnal of Accountancy, Vol. 17 (March, 1914), p_ 365,

23William Whitfield, "Ethics," Journal of Accountancy,
'Vol. 17 (May, 1914), p. 187.

 

29

that the CPA is professionally obligated to the public
which relies on the certified statement. To meet this
obligation the CPA has to be completely independent. Whit-
field understood that a primary purpose Of the professional
code of ethics is to build and maintain confidence in the
CPA profession, which is essential if the public is to rely

on certified reports.
IV. THE SEC AND INDEPENDENCE

Early Government--CPA cooperation. During the early

 

period of the accounting profession, the AAPA and later the
AICPA actively cooperated with various government bodies,
and this cooperation has continued to the present. Various
Institute committees have been assigned to work closely with
governmental agencies. The first of these committees was
the 1907 committee on departmental methods of the government
which the Secretary of the Treasury consulted on many topics
including cost keeping in the government service, auditing
disbursing officers' accounts, and Treasury bookkeeping.24
In 1917 the Federal Trade Commission requested the

Iklstitute to prepare a memorandum on balance sheet audits.
finals memorandum was published in the April, 1917, issue Of

tflie Federal Reserve Bulletin. In 1918, it was printed as

2L‘Andrew Stewart, "Accounting and Regulatory Bodies
in the United States," Fiftieth Anniversary Celebration 1937
(New York: American Institute of Accountants, 1938f: p. 135.

33

a pamphlet entitled "Approved Methods for the Preparation
25

of Balance Sheet Statements." Thus, began the tremen-
dously fruitful cooperation between the Institute, the

Federal Trade Commission, and later the SEC.

SEC--AICPA cooperation. In 1933, the Securities Act was
passed,and in 1934 the Securities Exchange Act was passed and
the SEC was organized. The two acts required all listed corp-
orations and all registrants to submit statements certified by
an independent public or certified public accountant. Rather
than causing joy among CPAS, these laws caused a great deal
of consternation. The profession was dismayed at the
tremendous powers conferred upon the SEC. The fears of the
profession were allayed, however, when the SEC asked the
Institute to appoint a committee for cooperation with the
commission. Since then the Institute and the SEC have

worked together quite harmoniously.26

Rule 2-01 of Regulation S-X. Regulation S-X of the
SEC was the first attempt, by any organized body in the
‘United States, to set some criteria by which independence
H I!

<30u1d be measured. Rule 2—01, subsections "b" and c read

as follows:

25Generally Accepted Auditing Standards, Their Sig-
:Llficance and Scope, op. cit., p.97.

26Stewart, op. cit., pp. 136-137.

LU
H

b. The commission will not recognize any certified
accountant or public accountant as independent
who is not in fact independent. For example, an
accountant will not be considered independent
with respect to any person in whom he has any
substantial interest, direct or indirect, or with
whom he is, or was during the period of report,
connected as a promoter, underwriter, voting
trustee, director, or employee.

c. In determining whether an accountant is in fact
independent with respect to a particular registrant,
the Commission will give appropriate consideration
to all relevant circumstances, including evidence
bearing on all relationships between the accountant
and that registrant, and will not confine itself
to the relationships existing in connection with
the filing of reports with the commission.2

It remained for a governmental body to attempt to
officially define independence objectively. Would it not
have been better for the profession itself to set objective
criteria for independence? There might then have been no
need for the government to give the SEC such sweeping powers.

In 1950, Rule 2-01, subsection "b" was amended to
state that an accountant will not be regarded as independent
if he has ggy financial interest in the registrant. The
parallel Institute ruling states that a CPA shall have no

_§Ebstantial interest in a client. Only the State Society

 

of‘Illinois has adopted the SEC ruling.28 In 1959 the SEC
rnodified their amendment somewhat by stating that a CPA may

flave an indirect interest if it is not substantial. Any

27United States Securities Exchange Commission,
Fhsgulation S-X, Form and Content of Financial Statements
Iifiashington,D. C.: U. S. Government Printing Office,
1954). p. 3.

28

 

Carey, op. cit., p. 37.

LA)
[U

direct interest is still prohibited.29

Subsection "b" also states that an auditor can not be
an officer or director of a corporation upon whose financial
statements he expresses an opinion. The Institute does not
have a similar rule in its Rules of Professional Conduct,
although the Institute's committee on professional ethics
has expressed the opinion that an auditor should not be an
officer or director of a client corporation.33 The New York
State Society of CPAS has adopted a rule that states if a
member of a CPA firm serves as an officer or director of a

firm, such fact must be disclosed in the CPA'S report.31

Accountinngeries Release #81. The SEC has followed
the policy of publishing a series of opinions on accounting
principles and standards, to supplement Regulation S-X, and
to help foster the development of uniform accounting stan-

dards.

A number of these releases deal with independence.

32
They are Nos. 2, 22, 28, 37, 44, 47, 48, 68, 79, and 81.33

h

29"News Report' " Journal of Accountancy, Vol. 107
(January, 1959) , p. 8

 

3OHigginS, op. cit., p. 25.

31New York State Society of Certified Public Account-
E1nts--By- Laws, as amended 6/51,ArtIc1e 18, Rule 7.

32Securities Exchange Commission, Accounting Series
ILeleases #1- 77 (Washington, D. C. U. S. Government
Printing Office, 1956

 

 

 

 

33Securities Exchange Commission, Accounting Series
Release #81 (Washington, D.C.: U. S. GovernmentIPrinting
Office, 1958).

 

33

Release #81 issued on December 11, 1958, summarizes a number
of findings under Rule 2—01. These decisions present speci—
fic situations which have been deemed to be indicative of a
lack of independence, or which have been deemed not to be
indicative of a lack of independence.3u Here is another
instance where the Institute could have taken the initiative,
and built up its own file of case situations to aid CPAS in
staying on the right side of the tenuous line between inde-
pendence and lack of independence. Some of the situations

presented in Release #81 follow:

Situations Where The CPA Was Not Independent.

 

A. Financial Interest.

1. An accountant took an option for shares of his
clients common stock in settlement of his fee. The
option subsequently appreciated in value. The ques-
tion of independence arose in connection with a proposed
merger and application for listing on a national exchange.

2. Using their own funds, the wives of partners in
an accounting firm purchased stock in a client of the
firm immediately prior to registration.

B. Director, Officer, Employee.

1. A partner in an accounting firm acted as a
controller and exercised some supervisory powers with
respect to the proposed registrant's accounting pro-
cedures.

C. Other Relationships.

1. Two Of the partners of the accounting firm
certifying the financial statements of a registrant
were also partners of a law firm engaged by the
registrant to pass upon the legality of the securities
which were being registered.

Situations Where The CPA Was Considered Independent.

 

A. Financial Interest.
1. Members of an accounting firm acquired shares
Of stock of a company controlled by one of their

3“Ibid.

34

clients, an individual. The accounting firm had never
done work for the company. Upon being engaged to
certify financial statements of the company in connec-
tion with a proposed registration, they immediately

sold their holdings.
B. Director, Officer, Employee.

1. A partner of an accounting firm was a director
and member of the executive committee of a company for
six years. In the year following his resignation the
firm was engaged to certify the company's financial
statement, but the audit did not cover any of the time
during which the accountant served as a director.

C. Other Relationships.

1. Due to the unexpected resignation of registrant's
comptroller at the end of the year, the accountant was
called upon to provide assistance in closing the books
for the year. The work performed did not involve making
decisions on a managerial level.35

Like a tree on a great open expanse, a specific

situation can act as a frame of reference in the field of

independence.
V. SUMMARY

In the field of accounting, as in many other fields,
the United States owes a great debt to England. In its
eearly stages the accounting profession made its greatest
Eitrides in Great Britain. The first reference to indepen-
<fl<snce can be found in the British Companies Acts. It was
‘tfie English accountants who helped create the AAPA. As

€351r1y as 1897 this organization included certain rules in

11138 bylaws which pertained to ethics and independence.

 

 

35Ibid., pp. 4-9.

35

It was not until 1917, however, after the AAPA had
become the AIA, that the first Rules of Professional Conduct
were issued as a separate body of rules. From then until
1941, changes and additions were made in these rules. The
rules relating to independence adopted in 1941 were sub-
stantially the same as the rules relating to independence
today.

There were many men who played important parts in the
development of the ethics of the accounting profession.
Perhaps, the most influential of these men were Joseph E.
Sterrett and John A. Cooper. The speech delivered by Mr.
Sterrett at the annual meeting of the AAPA, held in St. Paul,
in 1907, has come to be regarded as a classic.

Another very influential force in the field of pro-
fessional ethics is the SEC, which was organized in 1934.
This commission took the initiative in a number of areas
Ivhere the Institute should have been the spearhead, rather
'than the consultant. Regulation S-X and the Accounting

fSerdes Releases contain many decisions on the independence
cxf the CPA. The profession can not afford to become com-
IDJ.acent. It must continually strive for higher ethical

Sisandards.

CHAPTER III

QUESTIONNAIRE RESULTS

This chapter contains the results of a survey con-

ducted to obtain the answers of CPAS, banks, and industrial

corporations to the following questions:

1.

How aware are these groups of the tremendous
importance of independence to the CPA?

What is considered to be the most important
quality of the CPA?

Are more Objective standards considered necessary?
Do banks and CPAS know what the present AICPA
rules on independence are?

Is there a distinction made between the CPA with
the large practice and the CPA with the small

practice?

ZLf'the business world and the public in general are not

fhllly cognizant of the independent position of the CPA, then

tflue CPA cannot utilize his other attributes with optimum

e ffectiveness.

I. BACKGROUND

Response. One hundred questionnaires were sent to

eEichof the following groups: CPAS, banks, industrial

37

corporations. The questionnaire sent to each group varied
slightly from those sent to the other groups. The ques-

tionnaires are reproduced in Appendix B.

A total of 126 replies were received. The majority

came from the large banks and corporations.

Limitation. The survey is limited by the smallness

 

of the sample. Although no definite, statistically valid

conclusions can be drawn from the small sample taken, many

significant facts were discovered. The list of banks and

corporations was chosen from Moody's Industrial Manual--

American and Foreign1 and the list of CPA firms was chosen

from the AICPA Membership List.2

Subgroups. In the survey, CPA firms are classified

into national and local firms. The local firms are further

categorized by number of employed persons including partners.
:Such a classification was considered adequate and appro-
IDriate because of the different problems encountered by

CiPAs and the different situations CPAS are in because of

tune size of their firms and the nature and extent of their

Clientele.

1John S. Porter (ed.), Mobdy's Industrial Manual--
Anderican and Foreign (New York: FMOOdy's Investment Service,

195m.

2American Institute Of Accountants, American Insti-
‘tllte of Accountants Officers and Committees, Membership
t3:st, Reports, and By-Laws‘INew YOrk: American Institute

<3f‘ Accountants, 1955).

Banks are classified into four subgroups according
to their gross assets. Industrial corporations are classi-
fied into four subgroups according to their gross sales.
The class limitations employed in both cases were deemed
adequate because each subgroup can be expected to face
slightly different problems and demands and to have differ-

ent relationships and degrees of contact with CPAS.

Answers. All of the respondents did not answer all
of the questions and some respondents gave more complete
answers than others. Some of the questions required more
than a "yes" or "no" answer in order to clarify the responses
and to permit the respondents to express their opinions and
to qualify their answers. The comments included by a good
many of the respondents proved to be quite engrossing and
illuminating. Some of these comments are included in this
chapter.

Industrial corporations provided the greatest response,
:followed by banks and then CPA firms. A classification by
ijhe major groups and subgroups is presented in Table I.

Tflqe majority of the replies were received from the econ-

Cnnically larger firms of each major group.
II. INDUSTRIAL CORPORATION RESPONSE

Size of respondents. From the one hundred question-

 

rlaires sent out, forty-nine replies were received..vThirty-

efiight replies were received from industrial corporations

TABLE I

NUMBER OF REPLIES FROM SUBGROUPS
OF EACH MAJOR GROUP SURVEYED

 

 

 

Number of Number of % of
Replies Replies Subgroup
Subgroups Major Group Subgroup Respondents
CPAS 30
National firm 6 23
Local firm
23 or more employed 7 23
11 - 23 employed 6 20
6 - 10 employed 5 17
5 or less employed 6 23
INDUSTRIALS 49
Gross revenue
over $7,003,003 38 78
$2,530,000-7,333,333 6 l2
500,000-2,533,000 5 10
under $530,330 3 0
BANKS 47
Gross assets
over $130,330,333 23 43
$50,003,033-133,303,333 15 32
25,300,033-53,333,333 5 13
under $25,333,333 7 15
TOTAL 126 126

vvith gross revenue of over seven million dollars,3 six from
ilqdustrial corporations with gross revenue of $2,530,330--
3Y7,333,330, inclusive,“ and five from industrial corporations

vrith gross revenue of $533,330 to $2,533,333.5

3Hereafter referred to as Subgroup I industrials.

”Hereafter referred to as Subgroup II industrials.

5Hereafter referred to as Subgroup III industrials.

43

Uses made of certified statements. Every respondent

 

said that at least once a year they prepared financial
statements upon which a CPA expressed his written opinion.
These statements were most often used by Subgroups I and II
industrials for:' (1) presentation to the SEC and the
various security exchanges, (2) stockholders reports, (3)
obtaining bank loans, (4) Obtaining credit. Subgroup III
industrials used certified statements most often for: (l)
obtaining bank loans; (2) presentation to the SEC, stock-
holders reports, and obtaining credit. Table 11 presents
a complete list of the uses made of certified reports.

The figures presented in Table II indicate that a
great many groups use the certified statement to furnish

them with the information necessary for decision making.

Reasons for such use. The answers to the question

 

"Why do you feel certified statements are required or BEES
for the above purposes?" (SEC reports, obtain credit, et
cetera), substantiate the contention that the CPA's opinion
is relied upon because of his independent position. For
example, one Subgroup 1 industrial respondent replied,
"Certification provides added assurance of integrity and
consideration of the interests of readers of the statements."
Another respondent familiar with accounting terminology said
certified statements were employed "to obtain an independent
opinion that the financial statements are presented in

accordance with generally accepted accounting principles."

41

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42

A third respondent presented a very pragmatic reason for
the use of certified statements when he answered, "Indepen—
dent opinions as tO a corporation's financial condition are
more readily accepted than are the opinions of persons
closely connected with the business." A CPA's existence
can be justified because his independent position facili—
tates the dispensing of vital information.

All the respondents, however, did not consider an
independent attitude to be the reason for the use of certi-
fied reports. One reply stated simply, "Business Practice."
The same respondent understood independence to mean, "NO
affiliation with a nationally known accounting firm." The
tone of this respondent's answers made it apparent that he
was not familiar with the concept of the independent CPA as
defined in Chapter I.

A pragmatic view of the reason for the use of certi-
fied statements was expressed by another respondent who
said, "Initially required by the SEC. Used for other
reporting purposes since it provides uniform report releases
and eliminates the need for lengthy explanations, qualifi-
cations, and reconciliations that might otherwise be nec-
essary!‘

Of the thirty-eight respondents in Subgroup 1, nine-
teen made some reference to the CPA's independent position
being responsible for the utilization of certified state—

ments for the many uses presented in Table 11, page 41.

43

Twelve respondents felt certified statements are used
because they are required. Only one respondent in Subgroups
II and III referred to the CPA's independent position as

the underlying reason for the widespread use of certified
statements. Four members felt certified statements are

used because they are required. Due to the small number

of respondents no conclusion can be drawn from the discre—
pancy in replies between Subgroup I industrials and Subgroup
II and III industrials, although it is interesting to note

this discrepancy.

Most important quality of a CPA. Each respondent was

 

asked to list and define the quality or trait he deemed most
important for the CPA to possess. The purpose of this ques-
tion was to determine how many corporations considered
independence to be the most important quality of a CPA,

with all other qualities secondary.

The respondents were asked to define the quality they
deemed most important, so that every listed quality which
encompassed the concept of independence as defined in
Chapter I would be properly classified. Almost all the
respondents who employed the terms honesty and integrity
defined them with the characteristics of independence. In
every case where honesty and integrity were so defined they
are included with independence in Table III which presents

the results of the question discussed in this section.

44

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45

Independence was mentioned by slightly over one-half
of the respondents as the most important quality or one of
the two most important qualities of the CPA. Technical
ability was considered to be the most important quality or
one of the two most important qualities by Slightly over
two-fifths of the respondents. Over one-fourth of the
respondents considered independence and technical ability
to be equally important. All other qualities lagged far
behind these two. I

The Subgroups I and III industrials placed indepen-
dence first in importance for CPAs, while the Subgroup 11

industrials placed technical ability first.

Concepts and comments regarding the most important

 

quality. ‘After listing the most important attribute of the
CPA, the respondents were asked to comment upOn or define
that quality. The typical concept of integrity was the
"determination to render an honest opinion even when such
opinion displeased the client." One respondent felt that
.without independence "the CPA's certificate is worthless."
Another respondent felt that if the CPA was not independent
"you might as well not employ him." These comments can be
contrasted with the approximately forty per cent of the
industrial respondents who did not list independence as

the most important quality.

46

Concepts of independence. The respondents were next
asked to present their concepts of the independent CPA.

Over eighty-five per cent of the industrial corporations
listed one or more of the characteristics of independence.
Virtually all the respondents comprising this eighty-five
per cent said the CPA should not subordinate his opinion

to that of his client. Slightly over one-half of the
respondents made no mention of the fact that the CPA should
have no substantial financial or personal interest in his
clients.

Of the thirty—eight Subgroup I industrials, thirty-
three listed one or more characteristics of the independent
CPA, four did not answer the question, and one felt that
the independent CPA had no affiliation with a national firm.
Four Subgroup II industrials listed one or more character-
istics of the independent CPA and two respondents of this
£Subgroup did not answer the question. The corresponding
:figures for Subgroup III were three and one. The fifth

:nuember of this subgroup considered the independent CPA to
IJe one who is not associated with a CPA firm.

The concepts of the independent CPA varied somewhat
reunong the respondents. One group of respondents character-
?1JZed the independent CPA as one who is fair to all interests
Eirud is not influenced by pressure from the client. This
<3<1ncept can be summed up by the reply of the respondent

VVFHD said, the CPA must show "an unqualified willingness to

A7

incur the displeasure of a client in the event a decision
is reached adverse to the apparent interests of the client."

A second group of respondents felt the independent
CPA should have no financial or personal interest, or no
substantial financial or personal interest in his clients.
Typical of the replies Of this group is, ”The CPA should
be without personal or financial interest of any kind, in
the organization being audited."

To a third group of respondents independence was
displayed by "reporting in accordance with generally
accepted accounting principles." It was evident from the
answers to this and other questions that the great majority

of the respondents grasped the concept of independence.

Importance of independence. The next step, after

 

ascertaining that most of the respondents had a fair grasp
of the concept of independence, was to learn whether or not
:independence was deemed to be an important quality of the
(IPA. Forty-seven respondents answered the question, ”Do
370u.consider independence to be an important quality of
ishe CPA?” All but one considered independence to be im-
Ilortant. This one respondent understood independence to
ITNsan no affiliation with a national firm.
Some of the respondents were quite emphatic about

‘blleir answers. Comments ranged from, "his independence is

1111s only excuse for being," to "very definitely, otherwise

a lack of independence would tend to destroy the willingness
of public to accept their opinion." There were also such
comments as, "without independence, a CPA's opinion would

be worthless," and "it is the essence of his professional
worth." It is quite apparent that most industrial corpor-

ations consider independence to be an essential attribute

of the CPA.

Objective standards. Independence is a subjective
quality.6 However, there are objective manifestations of this
subjective quality. Rules have been adopted by the AICPA,7
the various state societies,8 and the SEC,9 which incorpor-
ate these objective manifestations. Such rules deal with
financial interests, contingent fees, presentation of all
rnaterial facts, participation in management, and personal
:relationships. These rules are necessary for three basic
IDurposes: (l) to insure compliance with the concept of
izhe independent CPA, (2) to provide guideposts for the CPA

to follow in living up to his obligations, and (3) to ‘
IDlsovide evaluative criteria for the public to determine how

Vveell the CPA has lived up to his obligation.

\

6Higgins, op. cit., p. 36.

7Bylaws and Rules of Professional Conduct, 1958, 3p.
Lu,, pp- 14-15

E) 8Bylaws of the New York State Society of Certified

.5lfififilic Accountants, as amefided to June, 1951, Article 18,
cIt

‘9~E~L_—~9Regulation S -X, Form and Content of Financial State-

‘LeLts 195Aw.p. 3.

 

 

49

A question was directed at the industrial corporations
to determine if they felt more objective standards were
advisable, to better serve each of the latter two purposes.
The results are presented in Table IV.

Subgroup I industrials felt there should not be more
objective standards either to provide guideposts for the
CPA or to provide evaluative criteria for the public. The
other two subgroups' members felt there should be more
objective standards for both purposes.

Percentagewise, Subgroup I industrials felt more
objective standards were not needed by the small margins
of fourteen per cent and five per cent. On an over-all
basis the three subgroups felt there need be no more
Objective standards to guide CPAs, but there should be more
objective standards to provide evaluative criteria for the
public.

In neither case was there a preponderance of opinion
for the majority. However, the strong minority in favor
of more objective standards to guide CPAS and the slight
majority in favor of more objective standards to provide
evaluative criteria for the public should definitely be
given consideration. Any possibility of improving the
status of the profession by either strengthening its inde-
pendent nature, Or increasing public awareness of the
independent position of the CPA, must be explored. The

replies to this question indicate the area of objective

.53

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51

standards is worthy of study to ascertain if more objective
standards are feasible and whether they will bring about

one or both of these possibilities.

General comments. Some of the respondents indicated

 

procedures by which they felt the independent nature of

the CPA could be strengthened, while others volunteered
additional comments. One suggestion is to educate the
business world to the need for the CPA and the function he
can serve if his independence is not impaired. One respon-
dent phrased the suggestion in the following manner, ”The
CPA should personally resist any attempt to prostitute his
profession, and a program should be instituted to educate
all segments of business to refrain from exerting pressure
of any kind on any question." A second reply in the same
vein, but with a slightly different emphasis said, "Raising
the standards of the profession, and educating the public
to the need and usability of the CPA, is the best way to
insure the CPA's independence."

Another plan which is neither feasible nor desirable
at the present time was made by another respondent. This
plan does, however, deserve mention and consideration. The
suggestion states, "Where the accountant's fee is paid by
the company being audited, the accountant has a financial
interest in that company, especially if the fee represents
a large percentage of the accountant's income. Perhaps all
companies should be audited by CPAS who are hired by the

government."

52

A third suggestion proffered is to enforce strong
punitive measures such as revoking the certificate in case
of an infraction.

Two respondents felt that no additional measures are
needed to safeguard the CPA's independent position. One
said, "In our opinion, and from our experience the CPA's
independence is unquestionable." The other respondent was
not as emphatic. He replied, "Believe the concept of inde-
pendence is pretty well defined and accepted in both busi-
ness and professional circles. This is true for the larger
firms of CPAS who handle the larger accounts. There may be
differences of opinion in the case of the small business
and the small practitioner. The small practioner will
generally be under greater pressure to relax his standards.
The better men won't do it." This respondent made a dis-
tinction between the CPA with the large practice and the
CPA with the small practice (which Should not be overlooked
whether or not it is warranted). This distinction will be

explored later in this chapter.

Summary. Replies were received from forty-nine
industrial corporations, thirty-eight of whom had gross
revenue of over seven million dollars. The certified reports
of these companies were most often used for: (1) presen-
tation to the SEC, and (2) stockholders reports. Over one-

half the respondents considered independence to be the most

53

important quality of the CPA. Many felt technical ability
was most important, while some respondents considered inde-
pendence and technical ability to be equally important.

Over eighty-five per cent of the respondents exhibited
at least a partial understanding of the concept of the
independent CPA. Forty-six of the forty-nine respondents
considered independence to be an important quality of the
CPA. Two respondents expressed no opinion on this question.

A slight majority of the respondents felt that no more
objective standards were needed to guide CPAs in living up
to their duty of maintaining an independent position, while
a slight majority felt that more objective standards are
necessary for use as evaluative criteria by the public to
judge a CPAs independence. There were enough respondents
in favor of objective standards for both purposes to warrant
further study.

Some respondents felt that the profession should in—
corporate strong punitive measures in its code of ethics.
Other respondents felt that the public should be educated
in the great service the CPA can perform if his independence

is not impaired.

Conclusions. Two conclusions appear to be warranted

 

from the replies of the industrial group. First, measures
must be taken to increase public awareness of the importance

of independence to the CPA. The public must be informed of

54

the great service the CPA can perform if he is able to
maintain his independent position. The dissemination of
this information can very likely lead to an increase in
stature for the profession. If the public is fully cogni—
zant of the CPA's position and what he can accomplish if
this position is maintained, respect for the profession
will increase, and cooperation between the CPA and the
public may improve.

The possibility of establishing new objective stan-
dards to guide CPAS in living up to their obligation of
independence and to act as evaluative criteria for the
public should definitely be studied. The possibility of
using these standards as a means of appraisal is most
important. If the public has such criteria to follow they
are more apt to satisfy themselves that the CPA is truly
independent (providing, of course, that the CPA is able

to meet the test of these criteria).

III. BANK RESPONSE

Size of respondents. From the one hundred question-

 

naires mailed, forty-seven replies were received. There
were twenty replies from banks with over one hundred million

8
dollars gross assets, fifteen replies from banks with

 

8

Hereafter referred to as Subgroup 1 banks.

\n
KIT

gross assets Of $53,333,333 to $133,003,333, inclusive,9

five replies from banks with gross assets of $25,000,003
10

to $53,330,003, and seven replies from banks with gross

3.11

assets under $25,333,33 A complete classification of

respondents can be found in Table 1, page 39.

Certified or noncertified statements. As a prelim—

 

inary question the banks were asked for what purposes they
required the presentation of financial statements. Common
responses were, for loans above a certain amount, for
mortgage loans, from guarantors, and to assist in reaching
decisions on the extension of credit. Next, the bankers
were asked what type of statements they considered to be
most reliable for the above purposes. The results are
presented in Table V.

The respondents almost unanimously considered the
certified statement to be most reliable. Only one respon-
dent considered a statement prepared by the prospective
borrower to be most reliable. This respondent was a Sub-
group IV bank. Forty-four respondents considered the
certified statement to be most reliable. One respondent
considered the certified statement and the statement pre-
pared by the accountant who is not a CPA to be equally

reliable.

 

9Hereafter referred to as Subgroup 11 banks.

lOHereafter referred to as Subgroup 111 banks.

llHereafter referred to as Subgroup IV banks.

56

 

 

 

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Reasons for faith in reliability of certified state-
ESEEE' When queried as to why they considered the certified
statement to be most reliable, the respondents gave many
different answers. One segment felt that the CPA's indepen-
dent position and technical ability made his opinion most
reliable. Eleven Subgroup 1 banks, three Subgroup 11 banks,
and two Subgroup IV banks composed this segment. Their
view can be summed up by the respondent who said the "Compe-
tence and integrity of the CPA is usually superior. Experi-
ence has shown that reliance can be placed on a CPA's
certificate." Two members of Subgroup 1, four members of
Subgroup 11, three members of Subgroup III, and two members
of Subgroup IV, considered independence alone to be the
factor that made certified statements most reliable. Two
ESubgroup I banks considered technical ability alone to be
‘the reason for placing reliance in certified statements.

Another cluster of banks considered certified reports
130 be most reliable because of the CPA's ability to prepare
vvell structured, properly valued statements. One member
c>f this group felt that "very few applicants, even highly
ssuccessful businessmen know anything about statement struc-
trure and asset appraisal."

One respondent did not consider the certified report
‘C<> be most reliable. He said, ”Having a personal statement
IDJ?epared by other than the customer adds no value since it

3153 always predicated on information furnished by the

58

customer, and might lose some value in the translation."
This respondent seems to have forgotten that the CPA per-
forms the all important function Of expressing his opinion

as to the fairness of the clients figures and report.

Most important quality of a CPA. The banks were
asked what quality they considered to be most important for
a CPA. The results presented in Table VI are similar to
those discussed in the previous section.

Independence was mentioned over three-fourths of the
time as the most important quality or one of the two most
important qualities of the CPA. Technical ability was
listed by almost one-half of the respondents as the most
important quality or one of the two most important qualities
()f the CPA. Every Subgroup 1 bank which listed technical
ability, listed it jointly with independence. Four Subgroup
1L1 banks, two Subgroup 111 banks, and two Subgroup IV banks
£1130 listed the qualities together. Only among Subgroup III
IDanks was technical ability listed as the most important
Cluality by a majority of the respondents. Among the bank
ssubgroups, as among the industrial subgroups, the majority
c>f the members of the smaller economic subgroups considered
tsechnical ability to be more important than or as important
€18 independence.

From the replies presented in this section and the

IDIsevious section it appears as if the full Significance of

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63

independence to the CPA is not recognized. It is true that
over one-half of the respondents mentioned the CPA's inde-
pendent position as one of the factors responsible for the
high degree of reliance placed in certified statements and
over three-fourths of the respondents considered indepen-
dence to be the most important quality or one of the two
most important qualities of the CPA. However, the fact that
approximately one-third of the respondents considered tech—
nical ability to be equally as responsible as independence
for the high degree of reliance placed in certified state-
ments and the fact that almost one—half the respondents
considered technical ability to be the most important or

one of the two most important qualities of the CPA, indicate
the lack of awareness of the full significance of indepen-
dence as the 231mg requisite of the CPA.

A CPA who is a member of the staff of an industrial
firm or the non-certified public accountant may possess the
same ability as the CPA, per se. However, neither is
required to possess the same independent attitude as the
CPA. There are CPAS and competent non-certified accountants
on the staffs of many industrial corporations. But, the

CPA is still retained to render his independent opinion as

 

to the reliability of management's representations.
Possession of a high degree of technical ability plus
independence is necessary before a CPA can certify a state-

ment. The prime distinguishing characteristic between the

61

CPA who is an employee of an industrial firm and the inde-
pendent CPA who is retained by the industrial firm to
certify the financial statements, is the latter's indepen-

dence.

Concepts of independence. Over ninety per cent of

 

the respondents listed one or more of the characteristics

of independence. Three Subgroup 1 banks, three Subgroup 11
banks, and three Subgroup IV banks considered an independent
CPA to be one who is not influenced by his clients. There
were twelve members of Subgroup 1, three members of Subgroup
11, four members of Subgroup III, and three members of
Subgroup IV who felt that an independent CPA did not have
any financial or personal interest in his clients. Three
Subgroup 1 banks and five Subgroup 11 banks felt that the
independent CPA should not be influenced by his clients,

and should have no financial or personal interest in them.

A good impression of the respondents' answers can be
Obtained by quoting a number of them. A respondent, who
felt that the CPA should not subordinate his opinion to that
of his client, felt it is the duty of the CPA "to
present the statement in an objective manner, free from any
influence of the client. The CPA should present things as
he sees them not as he is instructed." The typical response
of those who felt that the absence of a financial or

personal interest in the client is characteristic of the

62

independent CPA, stated the CPA "has no direct financial
interest in the business and is not an Officer or member

of the board of directors. Also, he is not a relative of
the principal." The responses of those who felt the CPA
should not be influenced by his client and should have no
financial or personal interest in his client, are typified
by the following statement: "The accountant has no con-
nection with the company he is auditing either as an
employee, officen or stockholder, nor does he have any
social contact with his clients, and he cannot be influenced
by them." The bank respondents, like the industrial respon-
dents, grasped the concept Of the independent CPA. Therefore,
three of the responses examined in the next section are

surprising.

Importance of independence. Forty-three respondents

 

answered the question, "Do you consider independence to be
significant for the CPA?" The results are presented in
Table VII.

Thirty-nine of the forty-three respondents considered
independence to be significant. However, four respondents
did not consider independence to be an important quality of
the CPA. Two are Subgroup I banks, one is a Subgroup 11
Bank, and one is a Subgroup IV bank. The member of Subgroup
11 did not express his opinion of the independent CPA. The

others expressed their opinions and indicated an

understanding of the concept of independence.

63

Despite this

understanding, these respondents did not consider indepen-

dence to be significant for the CPA.

BANK RESPONDENTS'

TABLE VII

OF INDEPENDENCE FOR THE CPA

OPINIONS AS TO THE SIGNIFICANCE

 

Subgroup

Gross assets
over $100,000,300

Gross assets
$ 50,030,000--
100,000,003

Gross assets
$25,000,000-—
50,000,000

Gross assets
under $25,000,000

ALL SUBGR OUPS

Per

Not

Per

Significant Centl Significant Cent1

18

13

39

9O

87

63

71
83

IO

14

 

 

1Per Cent of total subgroup questionnaire replies

received.

While three out of forty-three is a very small minority,

it is nevertheless notable.

These three respondents, who

understood the concept of independence, did not realize the

primacy of this concept.

As long as this situation exists:

the CPA profession can not be satisfied with its achieve-

ments.

64

Most CPAS are independent. The respondents over-

 

whelmingly felt that independence is important to the CPA.
Therefore, it is imperative that the respondents believe
that the CPA lives up to this concept of independence. The
banks were asked if they believed all, most, or some, CPAS
live up to their concept of independence. The results are
presented in Table VIII.

Three respondents felt that all CPAS are independent
and three respondents felt that some CPAS are independent.
Thirty—six felt that most CPAS are independent. There were
no striking variations in the responses of the various
subgroups.

Significantly, the vast majority of the respondents
felt that most, rather than all CPAS, are independent. The
assumption must not be made that the respondents arrived at
their decisions capriciously, but rather that the decisions
were based on knowledge and experience; experience that has
led the respondents to believe that all CPAS are not inde-
pendent. Thus, further weight is added to the contention
that more objective standards are needed to provide guide—
posts for the CPA to follow in living up to his obligations
and to provide evaluative criteria to enable the public to
determine how well the CPA has lived up to his obligation;
or else the present standards must be more strictly enforced.

The answers to this question also indicate the need for an

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66

investigation into the actual independent position of the
CPA to determine if any shortcomings exist within the

profession.

Economic size of CPA firm and independence. At the

 

time the questionnaire was prepared the writer assumed that
some of the respondents would believe that most, rather
than all, CPAs were independent. Therefore, the respondents
were asked whether they believed the CPA with the large
practice, the medium practice, or the small practice, most
often lived up to the concept of independence. Table IX
presents the results of this query. ‘

A substantial majority of the respondents who answered
the question felt that the CPA with the large practice most
often lives up to the concept of independence. Only in
Subgroup IV was it felt that the CPA’with the medium prac-
tice, rather than the CPA with the large practice, is the
one who most often lives up to the concept of independence.
One Subgroup I banker felt that the CPA with the small prac-
tice is most often independent, and five Subgroup I bankers
felt that all firms are equally independent.

Some of the comments indicated the respondents did not
believe the size of the practice had any bearing on the CPAS
independence. The replies ran from, "we hardly think that

the size has anything to do with independence," to, "size

has nothing to do with the concept of independence." Other

67

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68

comments indicated the respondents held the opposite belief
that the size of the practice has a definite bearing on in-
dependence. Comments ran from, "a person with a small
practice may not want to lose a client, and accordingly cuts
corners," to, "in our area we have seen deviations more from
the so-called one man firms than in any other designated
group."

Again the assumption must be made that the opinions
expressed are based on knowledge and experience. However,even
if there is no objective basis, the opinions cannot be dis-
regarded. These opinions represent integral components of
the beliefs of the respondents and affect the CPA. Action
must be taken to change these convictions if the profession
is to continue its growth and progress.

If these beliefs are based on fact, measures must be
taken to re-educate the.members of the profession, especially
the small practitioner. If the beliefs are not based on
fact, measures must be taken to re-educate the public and
to provide evaluative criteria for the public to determine

how well the CPA has lived up to his obligation.

Objective standards. Many accountants consider inde-
‘ 12

 

dependence to be a state of mind. Therefore, a compre-

hensive compilation of objective standards to measure

 

1
2Higgins, op. cit., p. 36.

69

independence is meaningless and impossible. The bank respon-
dents were asked if they would place more reliance in CPAS

if their independence were readily measured objectively.

The results presented in Table X appear to indicate the need
for a revision in the thinking of a good many CPAs. Every
effort should be made to establish such a set of standards
since they may be instrumental in rectifying the situation

indicated in the previous two sections.

TABLE X

BANK RESPONDENTS' REPLIES TO THE QUESTION "WOULD
YOU PLACE MORE RELIANCE IN CPAs IF THEIR
INDEPENDENCE WERE READILY MEASURED

 

 

 

OBJECTIVELY?"
Subgroup Yes Per Cent1 No Per Cent1
Gross assets
over $100,033,300 13 .65 4 20
Gross assets
$ 50,330,003--
130,300,030 8 53 4 27
Gross assets
$25,000,000--
53,330,000 2 40 1 2O
Gross assets
under $25,000,000 2 29 2 29
ALL SUBGROUPS 25 53 ll 23

_

1Per cent of total subgroup questionnaire replies
received.

73

Thirty-six respondents answered the question sum-
marized in Table X. Twenty-five said they would place more
reliance in CPAs if their (CPAS) independence were readily
measured objectively, and eleven said they would place no
more reliance in CPAS if their independence were readily
measured objectively. This majority of over two to one
indicates that the possibility Of establishing a compre-
hensive set of objective standards warrants further study.
The stature of the CPA profession will increase if banks
are willing to place more reliance in certified statements.

The replies presented in the next section may deter
from the results presented in this section, although not

necessarily.

Knowledge of AICPA position on independence. While
the establishment of a comprehensive set of objective stan-
dards requires future research, planning, and development,
there are, at present, rules of professional conduct relating

13

to independence. Less than one-third of the bank respon-
dents knew what the present position of the AICPA is on
independence. The results of the question pertaining to
this point are presented in Table XI.

Thirteen respondents knew and twenty-seven respond-

ends did not know what is the present position of

3American Institute of Certified Public Accountants,
Bylaws and Rules Of Professional Conduct, 1958, op. cit.,
pp.‘I4-l5.

71

the AICPA on independence. Only in Subgroup I did the
majority of the respondents have such knowledge. Just one
respondent 0f the other three subgroups knew what this
position is. The results of this question appear to indi-
cate the need for the dessemination of information to the

public regarding the AICPA rules.

TABLE XI

BANK RESPONDENTS'KNOWLEDGE OF THE PRESENT AICPA
RULINGS ON INDEPENDENCE

W

 

 

Per 1 Per 1
Subgroup Knew Cent Did Not Know Cent
Gross assets
over $100,000,000 12 60 8 A0
Gross assets
$ 50,000,000--
103,000,000 1 7 9 60
Gross assets
$25,000,000-—
53,330,003 0 0 5 130
Gross assets
under $25,000,000 0 0 5 71
ALL SUBGROUPS 13 28 27 58

 

 

1Per cent of total subgroup questionnaire replies
received.

Rules of professional conduct are necessary for the
proper internal functioning of the profession. These rules
receive their greatest utilization when the public is aware
of them.‘ The rules provide a basis for the public to have

confidence in the CPA.

72

Respondents'suggestions. Suggestions were made as to

 

steps that can be taken to aid CPAS in living up to the
concept of independence. Three suggestions were made by
approximately one-tenth of the respondents. The suggestions
pertain to education, discipline, and the accountant's
report.

The first suggestion can be summarized by the following
reply: "Emphasize responsibility assumed by the CPA when an
independent opinion is expressed, both within the profession
and to others affected thereby." The second suggestion
necessitates "stricter enforcement of the code of ethics
by the accounting societies." The suggestion pertaining
to the accountant's report revolves around the point that
the "CPA could incorporate in the report a statement that
he has no 'interests' in the client whose statement he is

certifying."

Summary. Forty-seven banks replied to the question-
naire. Of these respondents, thirty-five had gross assets
of over $50,330,030. The respondents almost unanimously
considered the certified statement to be more reliable than
any other statement for use in decision making. The CPA's
independent position and technical ability were most often
given as the reasons for the high reliability of certified
statements. Thirty-seven respondents considered indepen-
dence and twenty-two respondents considered technical ability

to be the most important quality or qualities of the CPA.

73

Over ninety per cent of the respondents understood
the concept of the independent CPA. Thirty-nine considered
independence to be an important quality of the CPA, while
four did not. Thirty-six felt that most CPAs are indepen-
dent, and only three felt that all CPAs are independent.

The great majority of the respondents felt that it is the
CPA with the large practice who most often lives up to the
concept of' independence. Slightly OVGP one-half the
respondents said they would place more reliance in CPAs if
their independence were readily measured objectively. Less
than one-third of the respondents knew what the present
position of the AICPA is on independence.

Some respondents felt that a program of education
should be undertaken to increase the awareness of the public
and CPAS of the importance of independence. Others felt
that more stringent enforcement of the rules of professional
conduct is necessary. A third group of respondents felt
that CPAs should state in their reports that they have no

"interests" in their clients.

Conclusions. Certain findings are indicated from the

 

responses. First, it appears that the importance of inde-
pendence t0 the CPA and the public is not as widely recog-
nized as it should be. Second, many banks draw a distinction
between large practice CPAS and small practice CPAS. Whether

or not this distinction is warranted, corrective measures

74

must be taken. Third, it is the overwhelming opinion that
not all CPAS are independent. Fourth, there is a substan-
tial lack of knowledge on the part of banks as to the
position of the AICPA on independence. A knowledge of the
rules of professional conduct can aid in the establishment
of a climate of faith for the CPA.

All of these indications can be summed up by the com—
ment of one respondent, "I do not agree that the CPA has
yet attained the dignity or consistency of either the legal
or medical professions. A CPA must be a competent account-
ant and auditor, and have a high degree of integrity in his
work. Unfortunately the need for income too often causes
him to fall below professional standards."

Three conclusions may be warranted from these indi-
cations. Two are similar to the conclusions drawn from the
industrial questionnaire. Furthermore, an investigation
of the profession may be warranted to determine if the
distinction drawn between the CPA with the small practice
and the CPA with the large practice is justified. If the
distinction is justified the offending members causing
this distinction must be singled out and dealt with as the
Institute sees fit. If the distinction is not justified,
the public must be made aware of the fact that all CPAs

deserve the highest professional regard.

IV. CPA RESPONSE

Size of respondents. From the one hundred question-

 

naires mailed, thirty replies were received. Six were from
national firms,14 seven from local firms employing twenty
or more persons,15 six from local firms employing eleven

16

to twenty persons, five from local firms employing six

17

to ten persons, and six from local firms employing five
persons or less.18 A complete classification of respond-

ents can be found in Table 1, page 39.

Most important quality of a CPA. A CPA, like the

 

industrial corporations and the banks, was asked what
the most important quality of the CPA is. The results
are presented in Table XII.

The great majority of the respondents mentioned in-
dependence as the most important quality or one of the two
most important qualities of the CPA. Two-thirds of the
CPAs mentioned independence. Slightly less than one-half

listed technical ability. Approximately one-sixth listed

 

14Hereafter referred to as Subgroup I CPAS.

I:
1“Hereafter referred to as Subgroup II CPAS.

l6Hereafter referred to as Subgroup III CPAS.

l7Hereafter referred to as Subgroup IV CPAS.

18

Hereafter referred to as Subgroup V CPAS.

76

 

 

 

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77

both independence and technical ability. Due to the
smallness of the sample, the slight variation in replies

among the subgroups is inconclusive.

Concepts of and comments on this quality. The con-
cepts presented by the CPAs are similar to those presented
by the other groups. Therefore, a few examples will suffice.
One respondent felt that independence is exemplified by "an
insistence on the recognition of conclusions reached from
facts evaluated regardless of the consequences, however
unpleasant."

A respondent who considered competence to be the most
important quality of a CPA felt that "all other qualities
are unimportant if professional competence is lacking."

This respondent places independence in a subordinate
position, although it is the one characteristic that dis-
tinguishes the CPA from the non-certified public acCountant,
or the accountant who is an employee of the CPA's client.

The position of this CPA can be contrasted with that of

the CPA who felt that "technical qualifications are presumed,
but personal diligence 'makes' the CPA."

A comment that appears to bear out the distinction
made between the large and small practitioner, by the bank
respondents, was made by a Subgroup IV CPA who said, "We
work for the client. A small practitioner has more trouble
trying to present a statement in which his client has no

say. The client seems to always have a say on what to

78

present and how." While the preceding situation might be
unusual, the facts of the case can not be ignored. From
all the indications of this questionnaire a study of the
relationship between the small practitioner and his client

appears warranted.

Concepts of independence. Three respondents did not

 

express their concept of independence. Every other respond-
ent understood what the independent CPA stands for. The
opinions expressed agreed with those of the industrial and
banking groups.

One comment, however, is definitely worthy of presen-
tation. A Subgroup 1 respondent said, "There is no strictly
independent CPA--a few are relatively independent--many are
not at all independent." This respondent is just one out
of thirty, but his comment should be noted. It may very
well be symptomatic of an underlying defect of the CPA pro-
fession. At any rate, this comment taken in conjunction
with all the other signs brought out by this survey, indi-
cates a need for anexamination into the ethical practices
of the profession. If such an examination discovers only
isolated cases of lack of independence, the examination
will have been justified. A mere handful of malpractices
is sufficient to blight the profession. If the examination
turns up no malpractices, the examination will still be

justified. It will then indicate the need for a program

79

designed to instill a higher regard for confidence in the

profession, aimed at both CPAS and the public.

Objective standards. There are indications in this

 

survey that one component of such a program should be the
establishment of more objective standards. The CPAs were
queried as to whether or not they felt there should be
more objective standards to guide themselves in living up
to their obligations, and to act as evaluative criteria
for the public to determine how well the CPA has lived up
to his obligations. The results are presented in Table
XIII.

Sixty per cent of the respondents felt there should
be more objective standards to act as evaluative criteria
for the public, and forty per cent of the respondents felt
there should be more objective standards to act as guide-
posts for the CPA. There were large variations percentage-
wise in the replies of the subgroups. However, the number
of respondents is so small as to nullify the significance
of these variations. The national firms and the small
local firms favored more objective standards, while the

medium sized local firms did not.

Adequacy of present AICPA rules. Although approxi-

 

mately one-half of the respondents felt there should be
more objective standards pertaining to independence, the

great majority felt the present AICPA rules relating to

80

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81

independence are adequate. Table XIV presents the opinions

of the respondents on this topic.

TABLE XIV

CPAS' OPINIONS AS TO THE ADEQUACY OF PRESENT
AICPA RULES ON INDEPENDENCE

 

 

 

 

 

1 1 Do Not 1
Per Not Per Know Per
Subgroup Adequate Cent Adequate Cent Rules Cent
National firm 3 50 1 17 0 0
Local firm
23 or more
employees 6 86 1 14 O 0
Local firm
11 to 20
employees 4 66 l 17 l 17
Local firm
6 to 10
employees 3 63 O 0 1 20
Local firm
5 or less
employees 6 130 O 0 O 0
ALL SUBGROUPS 22 73 3 10 2 7
1

Per cent of total subgroup questionnaire replies
received.

Ten per cent of the respondents did not consider the
present AICPA rules to be adequate. There appears to be a
discrepancy between the responses presented in Tables XIII
and XIV. However, this discrepancy can be resolved if it

is understood that the objective criteria are supplementary

82

to the rules of professional conduct. The objective stan-
dards should be utilized to aid CPAs in living up to the
rules of professional conduct, and their obligation to
maintain an independent position. The objective standards
are not meant to replace the rules of professional conduct,
but to supplement them.

Although the great majority of the CPA respondents
are satisfied with the present rules of conduct, the results
of the rest of the survey indicate a need to study the
possibility of supplementing the rules with more objective
standards. The fact that two CPAs did not know what the
present AICPA rules on independence are, appears to nec-
essitate an enlightenment program within the profession.
There is no excuse for a CPA to be ignorant of the AICPA

rules of professional conduct.

CPA recommendations for improvement. The initiation

 

of a series of conferences and articles dealing with inde—
pendence was one of the recommended methods of improving
the profession, suggested by the respondents. Also sug-
gested are more stringent enforcement of the rules of
professional conduct, and more careful selection of future

CPAs.

Summary. Thirty replies were received from CPAs.
Two-thirds of the respondents considered independence to

be the most important quality or one of the two most

83

important qualities of a CPA. Approximately one—half of
the respondents felt that there should be more objective
standards pertaining to independence, while over two-thirds
of the respondents considered the present AICPA rules per-
taining to independence to be adequate. One member of the

profession felt there is no truly independent CPA.

Conclusions. Certain conclusions appear to be

 

warranted from the replies to the CPA questionnaire.
Definite instruction is needed within the profession. The
possibility of establishing more objective standards per-
taining to independence should be explored. These two
conclusions are in accord with the conclusions drawn from
the industrial and bank questionnaires. A third conclusion
warranted from the comments of some of the respondents is
the need for an investigation into the ethical practices

of the profession.

V. COMPARISON OF RESPONSES OF ALL GROUPS

Some of the questions asked of each group of respond-
ents were similar. The more important questions and

answers are examined here.

Most important quality. Each group member was asked

 

his opinion of the most important quality or trait of the

CPA. The replies are presented in Table XV.

84

TABLE XV

ALL MAJOR GROUPS' CHOICES OF THE MOST IMPORTANT
QUALITY OR TRAIT OF THE CPA

 

 

Respondents

 

Quality Total %1 Industrial %1 Bank %1 CPA %1

 

Independence 85 67 28 57 37 78 2O 67
TeCZUIITLy 57 45 22 45 22 46 13 43
Judgment 5 3 5 13
Care 4 3 4 8
Imagination 3 2 3 6
Other 12 13 8 16 2 4 2 7

 

 

1Per cent of total group qUestionnaire replies
received.

Two-thirds of all the respondents considered indepen-
dence to be the most important quality or one of the two
most important qualities of the CPA. A little more than
two-fifths of all the respondents considered technical
ability to be the most important quality or one of the two
most important qualities of the CPA. All other qualities

lagged far behind these two qualities.

Importance of independence. Ninety out of the ninety-
five respondents in the industrial and bank groups answered
the question "Do you or do you not consider independence

to be significant for the CPA?" Only one industrial

85

respondent and four bank respondents felt that independence
was not significant. Three of these five stated that they
were familiar with the concept of the independent CPA. The

results of the question are presented in Table XVI.

TABLE XVI
INDUSTRIAL CORPORATIONS' AND BANK RESPONDENTS'

OPINIONS AS TO THE SIGNIFICANCE OF INDEPENDENCE
FOR THE CPA

Independence Is Independence Is

 

Group Significant Not Significant
Industrial corporations 46 la
Bank 39 4
TOTAL 85 5

 

'7‘
—__

aThis respondent understood indepencence to mean
freedom from partnership in a CPA firm.

Objective standards. The industrial respondents and
the CPAs were asked the same question regarding objective
standards. The results are presented in Table XVII.

One-third of the total respondents felt there should
be more objective standards to provide guideposts for the
CPA, while two-fifths felt there should be no more objective
standards for the same purpose. Forty-seven per cent of
the industrial and CPA respondents favored more objective
standards to provide evaluative criteria for the public,

while twenty-nine per cent were not in favor of objective

86

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87

standards for this purpose. The CPAs were more strongly
in favor of objective standards than the Industrials for
both purposes. The results presented in Tables XV, XVI,
and XVII bear out the conclusions arrived at throughout
the rest of this chapter.

The accounting profession has progressed rapidly
since the formation of the AAPA in 1887. Perhaps it is
now time to investigate the affects of this rapid progress
upon the members of the profession and upon the views of
the public toward the profession, with an eye toward taking

any corrective measures that may be necessary.

CHAPTER IV

SUMMARY AND SUGGESTIONS
I . SUMMARY

Independence is the most important quality of a CPA.
While competence is vitally necessary, independence is the
one quality which enables the CPA to occupy his unique
position in our economy. The certified statement prepared
by the independent CPA is relied upon by banks, governmental
regulatory bodies, investors, potential investors, and
creditors to present credible reports upon which decisions
can be based. Certified repOrts help create an atmosphere
of confidence between the CPA's clients and those who deal
with the clients. The certified report aids in the smooth
functioning of the economic system.

The AICPA and many prominent men in the field of
public accounting have frequently expressed the opinion
that independence is the underlying strength and guiding
light of the profession. The first official reference to
the need for independence can be found in the British
Companies Acts’dating back to 1845. The AICPA adopted
rules pertaining to independence as far back as 1897. Since
then, these rules have been revised and expanded period-

ically.

89

The United States Government, through the SEC has
recognized the important function the CPA can perform if
his independence is maintained. Thus, the cemmission
demands credible reports from all its registrants. To
help safeguard and insure the independence of the CPAs who
certify registrants' reports, the SEC has enacted rules and
published findings under these rules, pertaining to inde-
pendence. Many specific situations are enumerated which
are indicative of a lack of independence. The SEC and the
AICPA have continually consulted each other on matters
relevant to the accounting profession and the SEC.

However, the results of the survey presented in this
thesis indicate the need for further efforts on the part of
the AICPA. Almost one-half of the total respondents con-
sidered technical ability to be the most important or one
of the two most important qualities of the CPA, rather than
considering independence to be the sole most important
quality of the CPA. ,The banks almost unanimously considered
most, rather than all, CPAs to be independent. There was
one CPA who stated that no CPA is independent. There was
also a distinction made between the CPA with the large
practice and the CPA with the small practice. There were
comments made to the effect that it is often very difficult
and sometimes impossible for the CPA with the small practice
to maintain his independent attitude. The great majority

of the banks felt that it is the CPA with the large rather

 

93

than the CPA with the small practice who most often lives
up to his obligation of maintaining an independent attitude
and position.
A A good deal of the accounting literature relating to
independence states that one of the important functions of
the rules of professional conduct is to present some
'criteria upon which the public can base its confidence in
the CPA's independence. Yet, the survey showed that almost
sixty per cent of the bank and seven per cent of the CPA
respondents did not know the current AICPA rulings per-
taining to independence. Ten per cent of the CPAs felt
the present rules are not adequate, while over one-half of
the industrial respondents favored more objective standards
pertaining to independence and over one-half of the banks
would place more reliance upon CPAs if their independence
were readily measured objectively. The results of the
survey show that the business world in general is not suf-
ficiently aware of the importance of independence to the

CPA. (
II. SUGGESTIONS

Education. As a result of this study certain sug-

 

gestions appear to be warranted. First, the importance of
independence to the CPA must be stressed in the colleges,
universities, and business schools. Prospective CPAs must

be impressed with the need for and importance of

91

independence, at the very outset of their education in
accounting and auditing techniques, procedures, and prin-
ciples. Independence should be as much a part of the
students' thinking as are debits and credits. As John L.

Carey said, "A professional attitude must be learned."1

Educate CPAS and public. A program of education

 

should also be undertaken both within and without the pro-
fession. The CPA should be reminded of his obligation to
his clients, the public, and his profession. This is not
to say that if the members of the profession are not con-
stantly reminded of their obligation, they will not meet
it. However, a periodic reminder of the position of faith
and trust occupied by the CPA profession may strengthen
the desire of all CPAs to continually maintain their inde-
pendent position.

The public, including the CPA's clients, should be
educated in the unique service the CPA can efficiently
perform if his independence is not hampered. The entire
business world should be made aware of the benefits of the
independent CPA's certified report to the economy. The
public should also be informed as to the rules of profes-
sional conduct the CPA must comply with. These rules
provide a basis for confidence on the part of the public

in the CPA profession. The public and clients of the CPA

 

1Carey, op. cit., p. 5.

92

should be aware that complete cooperation between the CPA,
his clients, and the public, may easily lead to the sit-
uation where all CPAS will be independent and their state-
ments will be relied upon with the utmost confidence, thus
facilitating the smooth functioning of our credit and

investment economy.

More objective standards. One phase of the education

 

program for prospective CPAs, present CPAs, and the entire
business world could possibly be the adoption by the AICPA
of more objective standards pertaining to independence.
While many CPAs consider independence to be a state of
mind, there are objective manifestations of this state, or
of situations which are conducive to a lack of independence
or the appearance of a lack of independence. Any objective
manifestations, which can be organized into criteria, con-
tribute to the building and maintenance of confidence in
the CPA. Criteria which will help the CPA avoid situations
that may lead to a loss of independence or the appearance
of a loss of independence are indispensible for the main-
tenance of the integrity of the profession and the respect
of the public for the profession.

The CPA profession has progressed rapidly in the
United States since the formation of the AAPA in 1887. It
is striving for acceptance as a profession on the same

professional level with medicine and law. In order to

93

achieve this complete acceptance deserved by the CPA pro-
fession, which occupies such a unique position in the
business world, the CPA, his clients, and the public must
be fully aware of the importance and significance of an

independent position and attitude to the CPA.

BIBLIOGRAPHY

SELECTED BIBLIOGRAPHY
A. BOOKS

Adams, Louis G. (ed.). Webster's New American Dictionary.
New York: Books Inc., 1956.

American Association of Public Accountants. "Bylaws,"
American Association ofPublic Accountants Yearbook,
1907. New York: A. H. Kellog Co., 1908.

American Institute of Accountants. "Rules of Professional
Conduct," American Institute of Accountants Yearbook,
1919. New YOrk: W.7H. Hewitt Press, 1920.

"Rules of Professional Conduct," American Institute
of Accountants Yearbook, 1935. New York: American
Institute of Accountants, 1936.

 

. "Rules of Professional Conduct," American Institute
of Accountants Yearbook, 1936. New York: American
Institute 0? Accountants, 1937.

 

 

. "A History of the American Institute of Accountants,‘
American Institute of Accountants, Fiftieth Anniversary
CéIeration, 1937." New York: American Institute Of
ACcountanfs, 1938.

 

Carey, John L. Professional Ethics of Certified Public
Accountants. New York: American InstItUte of
Accoufitants, 1956.

 

Funk, Charles E. (ed.). New Standard Pocket Dictionary.
Chicago: Wilcox and Follett Co., 1946.

 

Holmes, Arthur W. Auditing Principles and Procedures.
Third edition. Homewood, Illinois: Richard D} Irwin,
Inc., 1952.

Lenhart, Norman J. and Philip L. Defliese. Montgomery's
Auditing. Eighth edition. New York: The Ronald
Press Company, 1957.

May, George 0. Financial Accounting. New York: The
MacMillan Company, 1943.

 

96

Rappaport, Louis H. Securities Exchangg Commission
Accounting Practices and Procedures. New‘YOrk: The
Ronald Press Company, 1956.

 

 

Stewart, Andrew. "Accounting and Regulatory Bodies in the
United States," American Institute of Accountants,
Fiftieth Anniversary Celebration, 1937. New YOFE:
American Institute of Accountants, 1938.

 

 

The Accountant Office. "Companies Clauses Act-1845," and
"Companies Act-1938," The Accountants Diary for 1915.
London: Gee and Co., Ltd., 1915.

 

Wilcox, Edward. "Professional Standards," CPA Handbook.
Robert L. Kane, editor. New York: American
Institute of Accountants, 1952.

 

B. PUBLICATIONS OF THE GOVERNMENT AND OTHER
ORGANIZATIONS

American Association of Public Accountants. Constitution
and Bylaws with Amendments, June 19, 1897. New YOrk:
American Association OffiPUblic Accountants, 1897.

 

 

American Institute of Accountants. Codification of State-
ments on Auditing Procedure. New York: American
Institute of Accountants, 1951.

 

 

_. Generally Accepted Auditing Standards, Their
SignifICance and Scope. New YOrk: American Institute
of Accountants,lI954.

 

 

American Institute of Certified Public Accountants. Bylaws,
Rules of Professional Conduct, 1958. New York:
American Institute of CértiIied Public Accountants,

1958.

New York State Society of Certified Public Accountants.
Bylaws of the New York State Society of Certified
Public Accountants as Amended, June, 1951. New York:
New York State Society of Certified Public Accountants,
1951.

United States Securities Exchange Commission. Accounting
Series Releases #1-77. Washington, D.C.: United
Stafgs Government Printing Office, 1956.

 

 

 

 

 

. Accounting Series Release #81. Washington, D.C.:
United States Government Printing Office, 1958.

 

97

United States Securities Exchange Commission. Regulation
S-X, Form and Content of Financial Statements.
Washington, D. C.: United States Government Printing
Office, 1954.

 

 

C. PERIODICALS

"Accent on Auditing,‘ Journal of Accountancy, LXXXII
(December, 1946), pp. 453-454.
"American Institute of Accountants Council Meeting,"

122323;
of Accountancy, XXIII (May, 1917), pp. 374-378.

 

"Another Rule on Independence of Accountants," Journal of
Accountancy, XCVII (June, 1954), pp. 673-674.

 

 

"Codification of Accounting Ethics," Journal of Accountancy,
I (December, 1935), pp. 139-141.

 

Cooper, John A. '"Professional Ethics " Journal of
Accountancy, VI (December, 1907), pp. 8I494.

 

 

Executive Committee of the American Institute of Accountants.
"Independence of the Certified Public Accountant,"
Journal of Accountancy, LXXXIV (January, 1947), pp.

51-53.

Frisbee, Ira N. '"How Personal Attributes of the Auditor
Affect the Application of Auditing Standards,"
Journal of Accountancy, LXXXIX (February, 1950),
pp. I20-I24.

 

 

French, Herbert F. "Professional Ethics," Journal of
Accountancy, XXVI (May, 1923), pp. 81-96.

 

 

Higgins, Thomas G. "Professional Ethics and Public Opinion,"
Journal Of Accountancy, CVI (November, 1958), pp, 34-
39. '

Kelly, Lincoln G. "The Value to the Individual Professional
Man of Strict Adherance to His Code of Ethics,"
Journal of Accountancy, XCVI (November, 1953), pp.
5774551-

 

 

1

Joplin, J. Porter. "The Ethics of Accountancy,‘ Journal
of Accountancy, XVII (March, 1914), pp. 187—196.

 

H

"News Report, Journal of Accountancy, CVII (January, 1959),

pp. 8-14.

 

98

Reckitt, Ernest. "Professional Ethics," Journal of
Accountancy, XIII (August, 1926), pp. 88-967

 

 

Stans, Maurice. "How New Standards of Financial Reporting
Grow from Social Responsibility," Journal of
Accountancy, LXXXVI (August, 1948), pp. 98-104.

 

 

Sterrett, Joseph E. "Professional Ethics," The Accountant,
XXXVII (November 16, 1907), pp. 618-628.

 

Werntz, William w. "What Professional Responsibility of
the Certified Public Accountant Means to the Public,"
Journal of,Accountancy, LXXXVI (October, 1948),
pp. 304-339.

Whitfield, William. "Ethics," Journal of Accountancy,
XVII (May, 1914), pp. 364—366.

 

 

D. UNPUBLISHED MATERIAL

King, Earl C. "What the Securities Exchange Commission
Desires in Financial Statements.” Address before
the Second Annual Institute, The Georgia Society
of Certified Public Accountants and the University
of Georgia, College of Business Administration,
Athens, Georgia, November 9, 1948.

APPENDICES

APPENDIX A

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

RULE NUMBER

RULES OF PROFESSIONAL CONDUCT--1958

PERTAINING TO INDEPENDENCE

 

(3)

Commissions, brokerage, or other partici-
pation in the fees or profits of professional
work shall not be allowed directly or indirectly
to the laity by a member.

Commissions, brokerage, or other partici-
pation in the fees, charges, or profits of work
recommended or turned over to the laity as
incident to services for clients shall not be
accepted directly or indirectly by a member.

A member shall not engage in any business
or occupation conjointly with that of a public
accountant, which is incompatible or inconsistent
therewith.

In expressing an opinion on representations
in financial statements which he has examined, a
member may be held guilty of an act discreditable
to the profession if

(a) he fails to disclose a material fact
known to him which is not disclosed in the finan-
cial statements but disclosure of which is
necessary to make the financial statements not
misleading; or

(b) he fails to report any material misstate-
ment known to him to appear in the financial
statement; or

(0) he is materially negligent in the con—
duct of his examination or in making his report
thereon; or

(d) he fails to acquire sufficient infor-
mation to warrant expression of an opinion, or
his exceptions are sufficiently material to
negative the expression of an opinion; or

131

(e) he fails to direct attention to any
material departure from generally accepted
accounting principles or to disclose any material

omission of generally accepted auditing proce-
dure applicable in the circumstances.

Professional services shall not be rendered
or offered for a fee which shall be contingent
upon the findings or results of such service.
This rule does not apply to cases involving
federal, state, or other taxes, in which the
findings are those of the tax authorities and
not those of the accountant. Fees to be fixed
by courts or other public authorities, which are
therefore of an indeterminate amount at the time
when an engagement is undertaken, are not
regarded as contingent fees within the meaning
of this rule.

A member shall not express his opinion on
financial statements of any enterprise financed
in whole or in part by public distribution of
securities, if he owns or is committed to acquire
a financial interest in the enterprise which is
substantial either in relation to its capital or
to his own personal fortune, or if a member of
his immediate family owns or is committed to
acquire a substantial interest in the enterprise.
A member shall not express his opinion on
financial statements which are used as a basis
of credit.if he owns or is committed to acquire
a financial interest in the enterprise which is
substantial either in relation to its capital
or to his own personal fortune, or if a member
of his immediate family owns or is committed to
acquirezisubstantial interest in the enterprise,
unless in his report he discloses such interest.

APPENDIX B

Industrial Corporation QueStionnaire

Bank Questionnaire

CPA Questionnaire

103

INDUSTRIAL CORPORATION QUESTIONNAIRE

Questions:

2b.

3b.

4aK/What is your concept of this quality?

Is your gross revenue
a) under 500,000 - c) 2,500,000 - 7,000,000

b) 500,000 - 2,500,000__ d) over 7,000,000

Do you have a CPA "certify" your financial statements?

Yes No

 

How often?

 

For what purposes are these certified statements used?

 

 

 

 

a) d)
b) e)
c) f)

 

 

Why do you feel certified statements are required or

used for the above purposes?

 

 

 

The members of the CPA profession, like those of the
legal and medical professions must possess certain
qualities or traits. Which of these qualities do you
consider to be the most important quality of a CPA?

Comment:

 

 

 

 

104

U1

What is your concept of the term ”independence” when

you think of the Independent CPA?

 

 

 

5afi Do you or do you not consider independence to be an

important quality of a CPA? Do. Do Not.

Comment:

 

 

6.~ Do you feel that CPAs should have more objective
standards to
a) guide themselves in living up to your concept of

independence. Yes. No.

 

 

b) guide all those to whom the independence of a CPA
is important in Judging a CPAs independence.
Yes. No.

7. Do you have any such objective standards in mind?

(please list)

 

 

 

8e//What measures can be taken to aid all CPAs in living up

to your concept of independence?

 

 

 

105

BANK QUESTIONNAIRE

 

 

 

 

 

 

 

 

 

Questions:
1. Are your total gross assets
a) under 25 million _____ c) 50-100 million_____
b) 25-50 million_____ d) over 100 million_____
2. For what purposes do you require the presentation of
financial statements?
a) d)
b) e)
c) f)
2b. Which of the following financial statements do you
consider to be most reliable for the above purposes?
(please rate 1, 2, 3, or equal)
a) Statement prepared by the prospective borrower
himself.
b) Statement prepared by an accountant who is not
a CPA.
0) "Certified" statement prepared by a CPA.
20. Why?
2d. Approximately what percentage of the time do you require

these statements to be "certified" financial statements

prepared by a CPA?

 

136

3. The members of the CPA profession, like the members of
the legal and medical professions, must possess certain
qualities or traits. Which of these qualities do you

consider to be the most important quality of a CPA?

 

Comment:

 

 

 

3b. What is your concept of this quality?

 

 

 

 

4. What is your concept of the term "independent" when you

think of the independent CPA?

4_

 

 

 

4bx/Do you, or do you not consider "Independence" to be

 

significant for the CPA? Do. ._____ Do Not.
4cr/Do you feel that, All____, Most____, or Some____ CPAs
live up to your concept of independence?
4d,/Dg you feel that the CPA with the, Large practice____J
Medium practice____, or Small practice____, most often

lives up to your concept of independence? (please rate
1, 2, 3, or equal)

Comment:

 

 

\51

Would you place more reliance in CPAs if their indepen-

dence were readily measured objectively? Yes. No.

107

Have you any standards in mind which will facilitate

such measurement? (please list same)

 

 

 

 

What measures can be taken to aid all CPAs in living up

to your concept of independence?

 

 

 

 

Do you know what the present position of the AICPA is on

independence? Yes. No.

_ _

138

CPA QUESTIONNAIRE

 

Questions:
1. Are you a National Firm or a Local Firm? Firm.
1a. If local is the total number of employed people

mg?

\.)'l

(including partners)?

a) 5 or less 0) 11-20

 

 

b) 6 - 10 d) 20 or more

 

For approximately what percentage of your clients do you

prepare statements upon which you express an opinion?

fix

Why do you feel your clients consider such a statement

significant?

 

 

 

.' What is the most important quality of a CPA?

 

Comment:

 

 

 

What is your concept of this quality?

 

 

 

 

What is your concept of "Independent" when you think of

the Independent CPA?

 

 

 

Q‘\

6a.

109

Do you feel that CPAs should have more objective
standards
a) to guide themselves in living up to your concept of
indepencence?
Yes. No.
b) to guide all those to whom the independence of a CPA
is important in judging a CPA's independence?
Yes. ' No.

Comment:

 

 

What should these standards be?

 

 

 

 

Do you consider the present AICPA rulings on independence
to be adequate?

Yes. No. Don't know.

 

Comment:

 

 

 

What measures can be taken to aid all CPAs in living up

to your concept of independence?

 

 

 

 

'-

 

 

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