Editor’s note: The two essays you are about to read were sent to us by J. Edward Ketz, Associate Professor of Accounting at Penn State. In the first, he explains why he is quitting the American Accounting Association (AAA). The second essay — “Ernst & Young in an Ethics Scandal: Ho-Hum” — is the opinion piece he wrote for the AAA to meet their request for a piece that would “provoke thought on an important contemporary issue.” The AAA chose not to publish it in Accounting Education News and so we are instead. The Maurice Moonitz essay referenced by the author is included at the bottom of the post as a large majority of Going Concern readers were not born when it was first published in 1979.
The below essays reflect the author’s opinion not necessarily the opinion of The Pennsylvania State University nor that of Going Concern.
Why I Am Quitting the AAA
by J. Edward Ketz
The American Accounting Association (AAA) is the organization for accounting professors not only in the U.S. but throughout the world. It is a prestigious group for advancing accounting thought, developing improved teaching methods and materials, improving the public’s understanding of financial reports and the tax system, and enhancing ethics and the public trust. Unfortunately, the latter function is broken.
The AAA approached me in July of 2022, asking me to write an opinion piece “to provoke thought on an important contemporary issue,” similar to an essay penned by Maurice Moonitz in January 1979. I agreed and soon sent the accompanying essay about E&Y personnel caught cheating on an ethics exam and the SEC’s claim about the firm’s interfering with its investigation of the incident. Initially I was congratulated about discussing a topic on many minds. Shortly thereafter I was told that some in the organization wanted a temporary halt to the publication and wanted to study the “process” of putting opinion pieces into its publications. I was reassured that it was only a matter of time before the piece could see the light of day.
During the past year, there has been a snail-like pace by the Board and then by Management of the AAA. Nobody wanted to reject the paper but neither did anybody want to accept it. I have been put off for a year with no resolution in sight. So now I seek an alternative publication space.
Admittedly the story is a year old, but the questions are not resolved. The issue remains whether the profession wants to get serious about ethics.
In the meantime it appears that the AAA is not serious. Therefore I am saying good-bye to the AAA.
Ernst & Young in an Ethics Scandal: Ho-Hum
By J. Edward Ketz
Written for Accounting Education News, not published.
On June 28 of this year the SEC announced its largest penalty ever levied against a large accounting firm because E&Y had many of its audit professionals cheating on ethics exams. (How deliciously ironic when one cheats on an ethics exam!) Says the SEC, the firm “hindered our investigation” by “withholding evidence of this misconduct.” E&Y, in the end, agreed to pay a fine of $100 million to settle the matter, which follows similar incidents by PwC Canada earlier this year and by KPMG in 2019.
When this announcement was made public by the SEC, news agencies, blogs, and twitter feeds exploded with tsking, booing, alas-ing, and pshaw-ing. There was shock and dismay—how could they do this? There was surprise and bewilderment—what is going on with those entrusted to ensure financial integrity? And, of course, there was condemnation and finger pointing.
Going Concern, for example, says that “there’s a serious ethics problem at large firms that clearly isn’t being addressed.” Michael Shaub says he felt anger at first, now replaced by sorrow. He asks why the public trusts us with audits of corporate reports. They show outrage at this lapse of professional ethics, and I agree that such episodes are repugnant, but let’s shift attention to the question of who is surprised by the incident. Given the many ethical lapses of the last (say) 25 years, why does anybody express astonishment?
Instead of our collective chest thumping about how independent auditors are paragons of integrity, we should examine humbly the human situation. In The Cheating Culture David Callahan asserts that the U.S. society is seeing an ever-increasing amount of cheating, and “everybody does it.” Temptations abound, which are dangerous with America’s winner-take-all attitude and the rewards for success bigger than ever. Dan Ariely contributes to this discussion in his The (Honest) Truth about Dishonesty. He claims people desire to view themselves as honest individuals, but cheat because they gain many benefits from duplicity. He advances the fudge factor theory to account for both tendencies. What is most interesting about this theory is that Ariely practices what he preaches. In an expose by Alexander Danvers, Ariely was found faking data in a 2012 honesty study!
If Callahan and Ariely are correct, one wonders how humans, free moral agents, have devolved to this nadir. Gary Becker assists this understanding by postulating an economic model of crime in which rational beings will commit crime if the rewards are sufficiently high, the odds of getting caught sufficiently low, and the punishments if caught sufficiently low. Ariely claims that this model is not quite correct because, wanting to be seen as “good,” humans typically will commit crime only to a point. Callahan does not address these economic accounts, resting instead on social forces.
Regarding E&Y, there are plenty of examples that are congruent with Callahan, Ariely, and Becker and beg the question why anybody is surprised at what transpired. One recalls the egregious tax shelter set up by E&Y to benefit Sprint and its top executives. Another incident involved an E&Y auditor and her romantic entanglement with the CFO of the firm being audited. There was also a case that involved an E&Y auditor’s spending a fortune on football and hockey games and vacations with the CFO of the firm for which he was the audit partner in charge. Another demonstration focused on auditor independence when the independent E&Y auditors interfered with a firm’s auditor proposal process. And let us not forget the sad and ineffective audit at Wirecard; it was not the profession’s finest hour. I should add that there exists a plethora of similar episodes at the other large accounting firms. (Also see my essay “The Myth of Auditor Independence.”)
Researchers should find fertile territory to study. What is the cost-benefit calculus that auditors employ when deciding to cheat on ethics exams? What social factors and historical antecedents explain the behavior of the accounting industry? How are juniors socialized in the practices of their chosen profession and to what are they socialized?
These incidents also impact our teaching mission. How are we to teach professional ethics and tenets like independence—are they desired ideals or mere myths?
These situations do not occur every day, so many conclude that these events merely prove that there are some bad apples in the profession. In this case, “over 200 EY audit professionals” cheated. How many ethical lapses does one need to see a cultural paradigm rather than isolated incidents? It is no longer meaningful to deny the obvious.
Having auditing professionals cheat on ethics exams is tragic, sad, appalling, and confusing. But surprising? Hardly.
About the author: J. Edward Ketz is Associate Professor of Accounting at Penn State and has been a member of the faculty since 1981. Ed has authored and edited 17 books as well as numerous articles. He has been cited often in the popular and business press; he also has appeared as an accounting commentator on radio and television. Besides teaching and writing, he serves as an accounting expert witness from time to time.