Public Accounting and Financing Terrorist Organizations and Activities.pdf

Financing terrorist organizations and activities must be fought on at least four fronts within public accounting in the United States: the SEC Audit Requirements, PCAOB Auditing Standards, the AICPA Code of Professional Conduct, and state licensing statutes. This article examines the ethical and legal obligations the public accounting profession face presented by these three domains. We argue first that CPAs have an ethical obligation to report to appropriate authorities evidence of financing terrorist organizations and activities discovered during the course of providing professional services which are not recognized by the SEC Audit Requirements, PCAOB Auditing Standards, the AICPA Code of Professional Conduct, or state licensing statutes, and second that the SEC Audit Requirements, the PCAOB Auditing Public accounting and financing terrorist organizations and activities 60 Standards, the AICPA Code of Professional Conduct, and state licensing statutes should be revised to explicitly recognize such ethical obligations and create legal obligations to report to appropriate authorities evidence of financing terrorist organizations and activities discovered during the course of providing professional services. INTRODUCTION There are difficulties in measuring the amount of funds channeled into financing terrorist organizations and activities worldwide. Various sources estimate this funding to be between $590 billion and $1.5 trillion (Baradaran, Findley, Nielson, & Sharman, 2014), $150 billion (Compin, 2011), and £500 billion (Mitchell, Sikka, & Willmott, 1998) through money laundering. However, financing terrorist organizations and activities is not necessarily the result of money laundering. Financing terrorist organizations and activities may be accomplished by reverse money laundering, or “money dirtying” (Compin, 2011), which may make financing terrorist organizations and activities even more difficult to estimate. The goal of money-launderers is, like that of a corporate enterprise, to maximize profits and reduce risk (Compin, 2011). The goal of terrorists, on the other hand, is to further a political agenda or ideology, or to destroy or kill with no regard to profits and with little regard for risk (Compin, 2011). The major difference between terrorism and crime is that terrorism is based on ideology. Terrorists operate to advance “higher ideals” which may not align to outright criminal activity. (Mulig & Smith, 2004). However, whether furthering a criminal enterprise such as organized crime or a drug cartel or advancing the agenda of a terrorist organization, and whether money laundering or reverse money laundering is used by such organizations, the services of Journal of Accounting, Ethics & Public Policy Volume 18, No. 1 (2017) 61 public accountants and accounting firms are considered to be indispensable at least for certain types of money laundering and reverse money laundering strategies (Compin, 2011). In addition, evidence of financing terrorist organizations and activities may be discovered in the course of providing professional services such as an audit engagement. The purpose of this article is to explore the ethical and legal obligations of CPAs in detecting and reporting the financing of terrorist organizations and activities. The SEC Audit Requirements, the PCAOB auditing standards, the AICPA Code of Professional Conduct, and state licensing statutes related to combatting financing terrorist organizations and activities are examined to determine what ethical and legal obligations these documents recognize or fail to recognize. We argue first that CPAs have an ethical obligation to report to appropriate authorities any evidence of financing terrorist organizations and activities discovered during the course of providing services that are not necessarily recognized by the SEC Audit Requirements, PCAOB auditing standards, the AICPA Code of Professional Conduct pertaining to professional services and auditing not-for-profit organizations, or state licensing statutes. We also argue that SEC Audit Requirements, PCAOB auditing standards, the AICPA Code of Professional Conduct, and state licensing statutes should be revised to explicitly recognize such ethical obligations and create legal obligations to report to appropriate authorities evidence of financing terrorist organizations and activities discovered during the course of providing professional services. The remainder of the paper is organized as follows. The next section discusses the importance and contribution of the paper. The third section reviews statutory definitions of terrorism including the statutes pertaining to financing terrorist organizations and activities. Next is a review of methods of financing terrorist organizations and activities. Fifth, a review of CPA’s legal and ethical obligations is discussed including SEC Audit Requirements Public accounting and financing terrorist organizations and activities 62 and PCAOB Auditing Standards, the AICPA Code of Professional Conduct, and state public accounting licensing statutes relevant to the funding of terrorist organizations and activities. The paper concludes with discussion and recommendations. IMPORTANCE AND CONTRIBUTION In the Foreword to EY’s 14th Global Fraud Survey, Corporate Misconduct – Individual Consequences, EY states “governments around the world are under increased pressure to face up to the immense global challenges of terrorist financing, migration, and corruption. ” (EY, 2016) Yet little has been written about the ethical or legal obligations of CPAs concerning evidence of financing of terrorist organizations and activities discovered during the course of providing professional services. CPAs have received no guidance of their ethical and legal obligations. Therefore, the ethical and legal obligations of CPAs concerning the financing of terrorist organizations and activities is not well defined or understood. The important contribution of this article is that it calls attention to CPAs’ ethical and legal obligations with respect to the financing of terrorist organizations and activities and makes realistic recommendations for addressing the absence of ethical guidance and legal obligations. We do not discuss methods for obtaining evidence of financing terrorist organizations and activities. Such methods are covered in any standard auditing or forensic accounting textbook. Nor do we consider criminal money laundering, except as related to financing terrorist organizations and activities. TERRORISM In order to understand the ethical and legal obligations of CPAs concerning financing terrorist organizations and activities one must first understand the definitions of terrorism and the statutes addressing terrorism and financing terrorist organizations and activities. The United States Code provides a comprehensive Journal of Accounting, Ethics & Public Policy Volume 18, No. 1 (2017) 63 definition of a terrorist and terrorist activities.1 A terrorist is one who, either in an individual capacity or as a member of an organization, not only engages in an activity to commit or to incite to commit, under circumstances indicating an intention to cause death or serious bodily injury, a terrorist activity, but who either prepares or plans a terrorist activity, gathers information on potential targets for terrorist activity, recruits members of a terrorist organization, or solicits other to engage in terrorist activities.2 The United States Code distinguishes between domestic acts of terrorism and international acts of terrorism. Domestic acts of terrorism are acts that occur primarily within the territorial jurisdiction of the United States and involve acts dangerous to human life that are a violation of the criminal laws of the United States or of any State, and which appear to be intended to intimidate or coerce a civilian population, influence the policy of a government by intimidation or coercion, or affect the conduct of a government by mass destruction, assassination, or kidnapping. International acts of terrorism are basically the same as domestic acts, but which occur beyond the territorial jurisdiction of the United States.3 The section of the United States Code that defines a terrorist includes in the definition anyone who solicits funds or other things of value for a terrorist activity or organization, who commits an act that the actor knows, or reasonably should know, affords material support, including a safe house, transportation, 1 Although every country naturally has its own definitions of terrorism and laws to combat financing terrorist organizations and activities, this paper is limited to United States statutes. 2 UNITING AND STRENGTHENING AMERICA BY PROVIDING APPROPRIATE TOOLS REQUIRED TO INTERCEPT AND OBSTRUCT TERRORISM (USA PATRIOT ACT) ACT OF 2001. 115 STAT. 272. TITLE IV—Subtitle B—Enhanced Immigration Provisions SEC. 411. DEFINITIONS RELATING TO TERRORISM (iv) ENGAGE IN TERRORIST ACTIVITY DEFINED. 3 18 U.S. Code § 2331 Public accounting and financing terrorist organizations and activities 64 communications, funds, transfer of funds or other material financial benefit for the commission of a terrorist activity.4 The operative term is “material support. ” Title 18 U.S. Code § 2339B(a)(1) provides that “Whoever knowingly provides material support or resources to a foreign terrorist organization, or attempts or conspires to do so, shall be fined under this title or imprisoned not more than 15 years, or both, and, if the death of any person results, shall be imprisoned for any term of years or for life. ” Material support is defined as “(1). any property, tangible or intangible, or service, including currency or monetary instruments or financial securities, financial services, lodging, training, expert advice or assistance, safehouses, false documentation or identification, communications equipment, facilities, weapons, lethal substances, explosives, personne