If The Public Cannot Trust Accountants To Be Ethical, Who Can They Trust? Answer: Nobody

Let’s begin with a confession and an apology. On June 28, the SEC announced that it had charged Ernst & Young LLP with extensive cheating by its employees on exams required to obtain and maintain Certified Public Accountant (CPA) licenses. Moreover the Big Five firm withheld evidence of this misconduct from the Security and Exchange Commission’s Enforcement Division during the SEC’s investigation. EY admitted the facts leading to the SEC’s charges and agreed to pay a $100 million penalty. [You can read the SEC’s press release here.]

I have no idea how I missed such a major and troubling ethics story. It’s my job to keep up on such matters; I teach accounting ethics, though I haven’t had a training assignment for that profession since the pandemic hit. I apologize profusely. I will work to do better. While the various breaches of government, journalism, legal and business ethics that occupy most of my attention on Ethics Alarms are important, none are more ominous than this story. It really feels like the canary dying in the mine.

Accountants, you see, are the one of the most essential group of genuine professionals whose clients are the public at large. Lawyers represent particular clients; the clergy represents members of their faiths. Politicians and journalists are lost at this point: they cannot plausibly claim to represent the public interest and to be trustworthy, justifiably relied upon to tell the truth and not to act in their own self-interest. The profession of certified public accountancy exists so the public can know the truth about businesses and finance. They are supposed to be our gatekeepers

And now we know that another one of the so called “Big Four” accounting houses is corrupt: a similar scandal erupted at Klynveld Peat Marwick Goerdeler (KPMG) in 2019 (it was “only” fined 50 million by the SEC) and earlier this year, Price Waterhouse Coopers (Canada), was forced to pay $950,000 in penalties in the United States and Canada for widespread cheating among employees taking internal exams.

That leaves Deloitte as the sole member of the elite accounting quartet that hasn’t been exposed as untrustworthy. Yet.

Veteran CPA and accounting teacher Mike Shaub perfectly expresses what this development signifies in a blog post highlighted by Steve Mintz, “The Ethics Sage.” Shaub writes in part,

I am moving past anger into sadness because I know that in some ways, I am part of two institutions that are responsible for these egregious lapses in moral integrity. The EY problem is not just a public accounting issue; many of these people were cheating on ethics exams to become CPAs. They were brand new to the profession. That means they didn’t learn to engage in this behavior from the profession; they learned it in our classrooms.

To be fair, they actually learned it in middle school and high school, and they were rewarded for it with high class rankings and admissions to the best business schools. But the business schools, and the universities themselves, are greenhouses for this kind of cheating….

Some of us object, or push back, or try to institute tight controls to prevent it. But fewer and fewer students prove to be trustworthy, much to my chagrin, and they almost never report it when anyone else engages in dishonest behavior. This was true at EY as well; there is a distressing lack of moral courage in our classrooms and in the profession. The SEC enforcement proceeding commented extensively on the EY professionals who knew about it and did nothing. We have normalized this pattern of moral deviance—cheat, notice, roll your eyes—and its corrosive effect on education and professionalism is rarely discussed seriously in our hallowed halls. But it is moral cowardice.

One of the most degrading experiences of my career was watching my students during COVID taking exams on Zoom as if I was a prison guard monitoring the cameras…. this is what drained away my reserves and diminished my love for the classroom the last few years….

What are we going to do about it at the university level? I can tell you—absolutely nothing. What we are going to do is to deliver education ever more efficiently and let the chips fall where they may when it comes to the accuracy of student performance evaluations. All COVID has done is teach us new ways we can generate revenue from online programs that are bound to proliferate as a result. And if you think you are controlling cheating in these online programs, short of a CPA-exam-type testing environment, you are fooling yourself. Cheating facilitation firms Course Hero and Chegg have market caps of $14.1 billion and $2.3 billion, respectively….

I have no idea why the public would trust us as a profession to handle important integrity issues like auditor independence well when we are willing to compromise our integrity for so little. Twenty years on from Andersen’s collapse after Enron and WorldCom, I would have hoped we would have made a case for why the accounting profession deserved an opportunity at redemption, a second chance to be self-regulating after having learned some hard lessons. Instead, we have done the opposite.

There is no case to be made for self-regulation in the accounting profession. We are technically competent, and we can solve a lot of problems for clients. But the public we are assigned to protect, the shareholders and investors, trust us at their peril….

The only reason that accounting is a profession is because we have assumed the responsibility, the duty, to protect the public. In exchange, we are the only ones who can provide an audit. But we have proven unwilling to even assume the duty to take a simple exam honestly. An ethics exam, for heaven’s sake! How can we be trusted to assume larger duties?

He concludes in what only can be called an expression of despair: “You are watching a profession die.”


14 thoughts on “If The Public Cannot Trust Accountants To Be Ethical, Who Can They Trust? Answer: Nobody

  1. Give me a break. $100 million in fines is parking meter money for Ernst & Young.

    .Publicly, E&Y posted income of $40 billion dollars in 2021. That’s right. Billions.

    A fine of $100 million is chump change for them, and we all know it. Who exactly cut this great deal? No one, not even prosecutors, is that stupid, unless they choose to be.

    I am a nobody and can get the data. Deals made everywhere, and we’re not supposed to figure that out? Hubris will get them, if only eventually.

  2. I think further clarification on the role of accountants is in order.

    I want my accountants to advocate for me, not the public.

    I want them to tell me how to characterize my finances in a way that most benefits me. At the same time, I want them to make sure all of my bad accounting practices are cast in a legal way so that I don’t run afoul of the law. (That is nothing nefarious: my partners and I make certain financial decisions and the accountants come in on the back end to explain how we need characterize things so that we are in compliance with the laws.). Also, most financial processes (loans, etc.) don’t require audited financials; they just require the same information the accountants use for their day-to-day work.

    What is going on here in this article seems to be a special circumstance. If the SEC is involved, we are talking about audited financials of publicly traded companies. Here, the public needs to be able to rely on the accountants because it is the accountant’s word. The markets and the economy need to be able to rely good information in those circumstances. It is difficult to come up with an analogy to the legal field; it is like a prosecutor, who is supposed to be in a search for objective truth, except that prosecutors deal in an adversarial setting. It is close, but not quite the same.

    Unaudited financials are just the accountant’s recitation of what they are being told. Essentially, it seems to be the distinction between a witness with first-hand knowledge (audited financials) and hearsay (unaudited financials). That is an important distinction.


    • Accountants and auditors have what is called the “inherent conflict”: the people who pay their salaries are not their clients; the public is their client. Thus they are obligated to tell the truth about the numbers even when the truth hurts. Their duty of confidentiality does not extend to keeping secret bad news in the books.

      Accountants have to have ethics credits. Cheating on ethics tests is per se proof of untrustworthiness. Simple, really. No?

      • Yes, that part is mind-blowing. Cheating of any sort is a bad way to begin your way in a profession. They should be tossed out. I have no idea why the Board of Accountancy would not take that step.

        When we started law school, it was made clear from the very beginning that this was the start of our legal career. We had a code of conduct we were expected to follow; it included “ratting” on classmates who cheated.

        Ethics was emphasized from Day 1.


    • Jut’s characterization isn’t too far off, but I’d just emphasize that the vast majority of the Big 4’s client base (at least in their audit/assurance services) is publicly traded companies, so anyone working at EY or any of the other big firms would, for the most part, be playing the role of gatekeeper rather than advocate for their client.

      Where Jut’s characterization falls short is privately held companies. Many, if not most, privately held companies are still audited. There are full-scale audits up to PCAOB standards (what publicly traded companies are held to), there are less stringent AICPA audits, and there is everything else. It depends on what the stakeholders want–some want financial statement reviews rather than full-scale audits, while many don’t have any formal review process by anyone.

      Unaudited financial statements are not just a recitation of what an accountant is told–it simply hasn’t been checked by a second set of (unaffiliated) eyes. There are also no guarantees that financial transactions are being accounted for in the same way; a big one is recognition of revenue. If a large percentage of my revenue is one very large multi-year contract, when I recognize the revenue becomes very important in terms of presenting the financial health of the organization. Do I recognize it pro rata over each year of the contract? Do I recognize it based on percentage of completion of the work performed/product delivered? Do I break out different products/services being offered within the same contract and account for each stream differently?

      However, the Big 4 accounting firms are unquestionably first and foremost auditors, in the true sense of the word. They have a duty to the public, not to the people paying their bills.

  3. This feels like another piece of western society collapsing. Another small chunk of my heart hardened reading this article. After all the covid fiascos, and the political hits against conservatives and any dissenting voices in mainstream media… this on top makes it feel
    like we are at the tail end of a collapse.

    Why, I wonder, is cheating easier? Is this a majority of the students doing the cheating? Is it simply because they can get away with it, generally, and have no personal disgust? Was it their helicopter parents?

    Please help me understand the motivations as you think they might exists.
    I’m dumbfounded.

    • It’s all of a piece with the reason I started writing on line about ethics 20 years ago. The culture has gradually de-emphasized ethics as a societal norm. Bill Clinton started the rot, with his high profiled, #1 role model embrace of getting away with whatever you can in the pursuit of power, success, and personal gratification. The resort to cheating is the reflex to not trusting any institutions or those running them. If the elite cheat, why shouldn’t you?

      In law school, a ridiculous law professor gave us a take-home, open book final that was supposed to be timed on the honor system. Set a clock for three hours, and stop when the alarm goes off. I followed the directions, and didn’t finish the exam. Taking to people in the class, I apparently was the only one who didn’t finish… an extra 10 or 15 minutes was “no big deal”; why was I such a sucker to be strict with myself when I was the only one who would know? And the grade was IMPORTANT–it might determine if I got the cushy law firm job everyone was after.

      I complained to the professor, and told him he was encouraging students to cheat.

      • 20 years ago… wow. Yes, I was a lot more asleep then, living like ethics mattered, embarking on a new chapter of my own life. I understand how I missed you starting this! Lol. The only online activity I had back then was email and job searches!

        Thank you for starting this, and the reminder about Clinton. THEM, the both of them and their cronies. Media failed us then, too.

        • Media especially. It was the fact that none of the commentary or punditry about Clinton during the Lewinsky scandal ever mentioned ethics at all that made me realize that whole subject had virtually vanished from the culture, and with it, functioning ethics alarms. I was just starting my ethics business then. Notable exceptions were Jonathan Turley and, believe it or not, Chris Matthews.

  4. If you want more information on regulation of certain audit firms, check out
    Public Company Audit Oversight Board at https://pcaobus.org/about

    There are non-U.S. organizations in other jurisdictions doing similar things. PCAOB seems to mostly fly under the radar but publishes enforcement information. I think the SEC fine of EY related to a breach of one of PCAOB’s rules.

    Reading bar discipline materials is depressing enough but at least these enforcement matters target individual practitioners. The SEC and PCAOB stuff includes individuals and their firms. It seems you can see some interesting things into audit firm cultures.

  5. I’m surprised that no one has commented on the fact that people cheat on exams because they don’t know the work. Why hire a firm like EY who encourages and supports cheating? You’ll only get substandard work.

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