In some circles, CPAs occupy a place of trust alongside used-car salespeople and lawyers. But this doesn’t need to be true in every group. CPA ethics have come a long way in the last generation. Spurred in part by high-profile criminal actions by top executives at Enron, today’s CPAs follow ethical practices. Doing otherwise leads them open to audits that force accountability.
For the sake of versatility, today’s accountants must earn the “trusted advisor role” with actions that help businesses grow. Then, as a financial advisor, a business owner is more likely to trust you the next time he needs CPA advice. Trust comes from people knowing you practice accountability and always being accountable for your actions.
Where Does Trust Come From?
Admittedly, CPAs can get lost in the numbers and the details of their work. However, today’s CPAs should get to know their client’s needs, and then use their professional knowledge to provide a client with services. This is a level of intimacy many CPAs might not fully understand. However, at Peter B. Scala, CPA, we not only understand client needs, but we also provide sound financial services you can trust.
At the AICPA and CIMA ENGAGE 2021 Conference, one speaker put trust into an equation: Trust = credibility + intimacy + reliability divided by CPA self-interest. Indeed this is a detailed way to give credence to the point that CPAs should put their client’s interests first. The speaker goes on to recommend that CPAs take a thoughtful look at each part of the equation. This equation facilitates the thinking on how a CPA wants their peers and their community to view their work.
CPAs must go beyond doing what their clients want. They must also be the ethical compass for their clients, so they aren’t tempted to break any laws. For example, things like financial reports need to be authentic. If you recall, it was Enron’s accountant that turned a blind eye to fixing their books. How does a CPA become a trusted advisor while still being a moral compass for clients? CPAs use Generally Accepted Accounting Practices (GAAP) as a way to guide their work and gain trust.
The World According to GAAP
GAAP traces its roots back to the stock market crash in late 1929. It is believed that over-speculation in the stock market arose because businesses were not keeping very good financial records. Then as part of the New Deal, the government started passing laws that standardized accounting practices. GAAP has evolved and broadened with the times.
GAAP is a collection of ten Principles that, if followed, will guide the CPA’s work and help establish meaningful and effective working relationships with clients. The Ten Principles are:
Principle of Consistency—CPAs are duty-bound to always do their work the same way each time. This way, they can be held accountable for how they do their work and not just the work product they produce.
Principle of Regularity—The CPA agrees to follow GAAP as a collection of necessary standards. This might seem redundant. However, when combined with consistency, you really see how regularity becomes a function of consistency.
Principle of Sincerity—An accountant must be impartial and provide unbiased advice.
The Permanence of Methods—This is a record-keeping function. If a CPA puts out a company’s financial statement, they need to show what they did is a permanent record. One way to think about this is the scientific method, which is based on being able to get repeatable results from the same experiment done at different times.
Principle of Prudence—Of the Ten Principles, prudence is probably the most difficult to grasp. When CPAs use prudence, they are doing their work without giving financial advice. The goal is the presentation of fact-based information stakeholders can use.
Principle of Continuity—Accountants always work under the impression that a business or similar entity will continue running.
Principle of Periodicity—Timely financial information released at regular intervals that everyone can count on is a CPAs duty under GAAP.
Principle of Materiality—This can be a grey area when it comes to financial reporting. Basically, the Principle of materiality gives the accountant discretion about when something needs to be corrected. In other words, the error cannot affect the whole. If it does the accountant must report it.
Utmost Good Faith—This Principle states that accountants will always be honest in everything they do.
Bringing it All Together
The Ten GAAP Principles have become institutionalized at the federal government level. The Securities and Exchange Commission (SEC) requires that if a company’s stocks are publicly traded, the company needs to supply regular GAAP statements to the SEC.
Granted, most small businesses and most of the work a contract CPA does will not require SEC compliance. However, knowing how The Principles interact with each other as a CPA does their work could help clients develop trusting relationships with their accountants.
This is where Peter B. Scala, CPA, can help. We adhere to accounting ethics and what GAAP represents. You can trust us to always provide financial services with a sound moral compass. Let us work to gain your trust.
When you call Peter B. Scala, CPA, and team, you’ll be reaching out to dedicated CPAs that care about their clients’ financial records. This care means we’ll put in that extra bit of effort required to be an ethical accountant.
The ideal situation for a CPA is a working trust relationship. When applied collectively, GAAP becomes an ethical compass. An accountant cannot get excited and give clients speculative financial advice because they are sincere about what they do. Likewise, accountants cannot ignore errors that influence the bigger picture. This is only a fraction of how GAAP works together to guide a moral compass. The magic happens when an accountant uses these Ten Principles to develop trust with clients. This GAAP-developed trust means the client will see the accountant as a trusted advisor.