The case of Bernard Madoff’s former auditor, David Friehling, has cast the ethics of the accounting profession into a harsh light and forced his state CPA society to take action.

The New York State Society of CPAs, like the American Institute of CPAs, ousted Friehling, who pleaded guilty last month to securities fraud, investment advisor fraud, making false filings to the SEC, and obstructing federal tax laws and the IRS (see Madoff Accountant Pleads Guilty). Friehling was a former president of the society’s Rockland chapter, and his entanglement in the Madoff scandal did not do any favors for his fellow members.

William R. Lalli, the tax policy manager at the New York State Society of CPAs, spoke about the Friehling matter on Tuesday while discussing CPA ethics during the society’s corporate tax conference. “Any monkey can do a tax return, but people sought out CPAs to do their tax returns because of the objectivity and integrity that came to be associated with CPAs, until we gave ourselves this black eye,” he said.

Lalli, who used to work for the now-defunct accounting firm Arthur Andersen, which closed in the wake of the Enron and WorldCom financial scandals, acknowledged that every big firm has “black eyes” associated with it. He has to deal with reports of misbehaving CPAs at the society and help determine how the society should respond in accordance with its code of professional conduct.

The code states, “A member shall not commit an act discreditable to the profession.” But deciding whether those acts truly discredit the profession can be a judgment call. In the case of one CPA whose wife brought in a drawing from their child captioned, “Daddy, stop hurting Mommy,” the society determined that it could not be considered an act discreditable to the profession, as heinous as the abuse may have seemed, even in the context of a possible marital dispute. 

However, in another case, the need to discipline the CPA was evident. Lalli once received a phone call about a CPA who was booked on a DUI charge. Not only was the CPA caught behind the wheel in a state of intoxication, but she had been stopped after a police squad car chase. And not only was she booked on DUI charges, but also for assault after slapping the police officer who stopped her, Zsa Zsa Gabor style. “That will affect your standing in the society,” said Lalli, adding, “Losing your membership will be the least of your problems.”

The NYSSCPA’s Professional Ethics Committee has a duty to investigate when a complaint about a CPA comes in, even when the information originates from a newspaper article. Not many complaints are referred to the society for CPAs in industry, as they effectively have only one client: the company where they work. But Lalli warned that could change, as New York State’s recently passed Accountancy Reform Law includes all professional services rendered by CPAs, even those in industry. The society’s ethics code is thus going to become even tougher, and industry members will be subject to stricter ethics rules than they have previously faced. Those who bend the rules can expect ethics complaints to reach the society's ethics committee, just as they do nowadays for CPAs in public accounting firms.

In other words, you don’t have to be a David Friehling to give the CPA profession a black eye.

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