The Improper CPA

The Securities and Exchange Commission, for the first time, has defined what constitutes "improper professional conduct" by accountants. The new legal definition, established in September, gives the SEC muscle to censure, suspend, and even bar accountants for "reckless" violations or for "highly unreasonable" negligence in auditing public companies.

The SEC's original proposal, designed to protect investors in public companies from inaccurate accounting, has raised fears that the definition could allow the SEC to reprimand accountants on the basis of inadvertent errors, says Thomas Milan, national director of accounting and professional matters at Ernst & Young LLP in Washington, D.C. "The profession was very concerned because it seemed a single mistake would have severe con sequences, Milan says, noting that he supports the spirit of the new rule. "It will all depend on how it is applied," he adds.

When the SEC's definition of professional conduct was first proposed, accountants from across the country engaged in a letter-writing campaign. The SEC subsequently softened its definition to protect accountants from one-time innocent errors. The final definition, however, states that an unreasonably negligent error committed more than once will be considered improper conduct, and could result in censure.

According to Milan, the new rule will not change how conscientious firms and accountants conduct business. Most firms already have internal guidelines similar to, or exceeding, the SEC definition of tolerable behavior.

The American Institute of Certified Public Accountants (AICPA) supports the new rule. Following the release of the final definition in September, the AICPA released a statement that read, in part, "We share [SEC] chairman [Arthur] Levitt's commitment to investor protection, and we will continue to ensure that auditors fulfill their responsibilities. The unparalleled success of U.S. capital markets has been driven by investor confidence. A key component in creating that confidence is the confirming role of audited financial information."

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