Conflicts of Interest

Most of these conflicts are not new, and relatively few have illicit or improper purposes – instead, they generally have come into existence as a result of structural and strategic changes that were (and in most cases still are) viewed as positive for investors and shareholders. Nevertheless, conflicts of interest remain a lightning-rod. Firms risk regulatory scrutiny for failing to examine and address conflicts as they arise. Given all this, how should regulated entities, including public companies and financial services firms, think about and manage those conflicts to assure investors and the regulators of the basic integrity of the financial markets?

First, some background. On 1 May 1975, often called “May Day,” the US Securities and Exchange Commission deregulated commissions for stock trading. Previously, commission percentages were not only fixed, but decreased as purchase size increased, making stock trading profitable for securities firms and mostly accessible to large institutions and wealthy individuals. Deregulation left fees free to fall as low as market competition would dictate, benefiting smaller investors. Affordable stock trading allowed for the development of a new type of investor – what we today think of as the “retail” investor. The emergence of discount brokerage and the internet made the market even more accessible, so that by the 1990s, market demographics had changed significantly and retail investors accounted for a large portion of the investing population. Thus, more and more of the general population called themselves “investors” and participated in markets, particularly the equities markets. The “investor class” was born as the United States was on its way to becoming a nation not of savers, but of investors.

Not surprisingly, as the investing population grew it developed a voracious appetite for information about investing, a demand met by newspapers, the Internet, and cable television with its proliferation of financial and market pundits. This rising public dialogue about investing started to shed light on previously unexamined Wall Street practices.

May Day also began another trend – one arguably at odds with these now-populist markets. While trading opened up to individual investors, securities firms did not – and probably could not – serve only this group. As an example, before deregulation, trading commissions funded stock research, a key aspect of providing professional advice for investors. With transaction fees falling after May Day, however, securities firms had to turn to other revenue streams to fund their research operations. Firms that had investment banking businesses were able to use the revenues that came from distributing issuer stocks to investors to fund the research they supplied to investors. This change contributed to the trend toward a more vertically integrated business model.

In the financial services industry vertical integration created new efficiencies, new opportunities and new revenue streams for securities firms. Firms benefited from managing assets and processing stock trades for smaller investors while also catering to large corporations through various forms of capital raising and advice. In its most basic form, the vertically integrated financial services firm oversees production and distribution of securities. So, for example, the investment banking arm allows for companies to raise capital, including going public through IPOs and offering additional stock in secondary offerings; while the retail brokerage arm of the firm provides capital to investment banking clients in the form of stock or bond purchases. Retail investors are the natural consumers of the products generated through the investment bank and are ready lenders to its issuer clientele. This integration of clients gives a firm access to investors or lenders who, in turn, help the firm’s investment banking clients. The markets also benefit as capital can be directed toward longer-term, qualified investors, promoting market stability.

With the repeal of Glass-Steagall some securities firms have combined commercial banking with investment services so that they can pursue additional benefits of integration and encourage clients, particularly older investors, to house all of their assets in one place. The integration of multiple financial services within a single securities firm thus can be traced to the same change (commission deregulation) that opened the door for the general public to trade. Significantly, the trend to vertical integration brought with it a new set of conflicts for the financial services industry.

Enough has been written elsewhere about the period of market euphoria that characterised the late 1990s, and the collapse of the “tech bubble” that ended that euphoria. The litany of major companies that collapsed or were embroiled in financial scandals in this period is well known. Each successive collapse revealed another apparent financial success that was not all it appeared to be; investors – including a large portion of the general public – expressed feelings of betrayal, distrust and anger.

At the same time as these collapses were grabbing headlines, New York State Attorney-General Eliot Spitzer touched off an industry-wide focus on conflicts of interests in the financial services industry. In a succession of three cases, Spitzer together with the SEC, exposed conduct which grew out of conflicts of interest: research analysts publishing research at odds with their actual views (as reflected in graphic internal emails) to please investment banking clients; asset managers giving “free looks” to some investors or permitting some investors to engage in late trading in exchange for “sticky assets”; and apparent bid rigging to direct insurance business toward favorable revenue-sharing arrangements. The initial cases in these areas involved conduct that, in addition to violating existing rules, appeared to violate standards of fair play. The embedded conflicts that led to the violative conduct became unacceptable to regulators, leading to industry-wide settlements, structural changes, and new legislation. In addition, each of these cases captured the public attention because it appeared that the interests of retail or smaller investors were compromised by trusted intermediaries or fiduciaries. The same structure that gave rise to efficiencies, or synergies, was suddenly viewed as having pitted the interests of individual investors – the “little guy” – against institutional investors, and in some cases, the firm itself. In the perception of the investing public, echoed in the press and by regulators, permitting these conflicts to exist – whether they constituted technical rule violations or not – failed basic notions of “fair play”.

Regulators increasingly talked about investors’ right to high standards of ethics in the markets. Enforcement cases and public comments by regulators made clear that there was a paradigm shift. Compliance with the spirit of the rules was becoming as important as compliance with the letter of the law. This shift created the unwelcome possibility that firms could face enforcement action for violating nebulous and subjective concepts of fair play and full disclosure.

So what is a financial services firm to do? And how should public companies react, beyond trying to comply with the raft of new legislation caused by the spectacular collapses of Enron and the like? The solution is of course to manage intelligently this new flavour of risk; the past few years of dialogue in the industry (and this book itself) accordingly have focused on just that challenge. But what have we learned about how to manage these risks? Are some conflicts now patently unacceptable, no matter how well managed? Can firms develop an internal, independent voice to help them identify embedded conflicts of interest? The remainder of this volume will address these questions, but it is useful to consider briefly the dialogue that has gone on over the past several years, which almost certainly informs the advice provided in this volume.

On 9 September 2003 (in what may be remembered as the most influential speech ever given by a member of the Commission staff), Steven Cutler called upon every firm to “undertake a top-to-bottom review of its business operations with the goal of addressing conflicts of interest of every kind”. He advised them that: “just because the industry has always done something ‘that way,’ don’t assume it’s acceptable. It won’t be acceptable to your customers when they come to understand the conflicts involved, and it will not be acceptable to regulators either.” It was Cutler’s invitation during this speech to securities firms to self-report violations that touched off an unprecedented interchange between industry and the SEC on conflicts.

More than two years after Cutler’s speech, industry and regulators have found new ways to talk to one another and, ultimately, learn from one another. Indeed, each of the regulators has established risk assessment units that report into the highest levels of their respective organisations. The purpose of these units is to facilitate ahead-of-the-curve thinking by both regulators and the regulated community. The result of this dialogue is an evolving business environment with renewed focus on managing conflicts – whether through disclosure, mitigation or elimination – in a way that not only complies with the rules but also considers the principles underlying those rules.

Ultimately, in this new era of market populism and principles-based enforcement, all of our fates are linked. When conflicts are permitted to flourish without continued, unbiased examination there is a risk that investors will suffer harm and regulators will react with fury. In these circumstances, there is no winner. The industry, the investor and the regulator all suffer losses, whether financial or reputational. Conversely, if the industry and the regulators can find ways to share information about conflicts and manage them before they take root then we will encourage stronger institutions, satisfied investors and efficient regulators. The book you are holding is a unique resource for practitioners as they navigate the difficult landscape of conflicts management.

Conflicts of interest: a guide for banks, auditors and law firms

Formerly Chairman and Chief Executive of the Financial Service Authority Sir Howard Davies

Those of us who are still bold enough to be prepared to serve on the board of a listed company in the US will be aware of the extent of the disclosures now required by the SEC. Some of these disclosures are clearly to be expected: the other directorships you may hold, and major shareholdings in the company or its suppliers. But one relatively new question invites the applicant to disclose the financial sum which represents 1% of the income of any charitable organisation of which he or she is a director or trustee.

There are some in the US who think this is an example of bureaucracy and regulation taken to extremes. But, in fact, for trustees of UK charities, there is now a reciprocal declaration required, to smoke out their connections with any company which might be a significant contributor. Such a declaration is required, for example, at the Tate Gallery in London where I am a trustee.

Both of these requirements are manifestations of a new or at least intensified focus on potential personal conflicts of interest. Some may indeed think that it has gone too far, and that some of the supposed conflicts identified by the regulators are imagined, not real. Restrictions on what spouses of audit partners can do, for example, may be hard to justify in a world of dual career couples.

But it is hard to deny that legislators and regulators have been provoked into action by some egregious behaviour in the private sector. There have been uncomfortable examples, on both sides of the Atlantic, of what we might call “compensation loops”, whereby interlocking boards and compensation committee memberships create the impression of an excessively cosy mutual admiration society. J K Galbraith once argued that it was useless to look for logic in the sums paid to corporate CEOs in the US. Their compensation, he argued, was largely “a warm gesture of appreciation from the Chief Executive to himself”. Moving from there to a situation in which compensation is a warm gesture of appreciation from someone whose pay you also determine, is not a great step forward.

And we have seen some well-publicised cases where research ratings or business decisions appear to have been influenced by quite extraneous factors such as donations to sought-after private schools. In these circumstances, we cannot be surprised that the official sector’s focus on conflicts and the way they are managed has intensified. But to find an appropriate resting place, and to re-centre the debate after the scandals of the turn of the millennium, is not straightforward. That is one reason why this volume, which represents an attempt to think through the causes and consequences of conflicts of interest in financial firms in particular, is so welcome.

The most important and difficult questions in this area relate to the structures of markets and firms. Some of the issues related to the behaviour of individuals, while they make good press copy, are far easier to handle at least at the level of principle. Of course it is wrong to allow one’s personal judgment to be influenced by a kickback or a charitable donation. There may be difficulties in identifying these conflicts, and publicising them, but few of us would find it hard to say which behaviours were acceptable, and which not.

In the case of firm structure, however, the answers are far more complex. Do particular structures of firms create conflicts which, in themselves, represent opportunities for corruption, or at least the temptation to modify objective judgments, in a way which may not always be obvious to the people involved? Have we developed a set of markets, and firms, in which conflicts are so inevitable, and unmanageable, that we need to consider wholesale restructuring, perhaps mandated by regulators?

There are four main areas in which commentators have pointed to the existence of irreconcilable conflicts:

                        +              The major global accounting firms, in which the auditing function sits alongside a range of consultancy activities, which are typically more profitable, and which in the past have generally been carried out for the firm’s audit clients, creating at least the appearance that the auditors may be influenced in their judgments by the commercial need not to antagonise the executives who supply them with other types of work.

                        +              Investment banks, in which the activities of principal trader, broker/agent on behalf of other investors, research analyst and corporate advisor are brigaded in the same entity. Is it possible to devise “Chinese walls” which are robust enough to prevent these different activities corrupting each other?

                        +              Universal banks, which incorporate a different combination of financial functions, with similar opportunities for conflict.

                        +              Rating agencies, which purport to offer objective and independent assessments of companies and their financial viability, yet to receivepayment from those same companies for the ratings they produce. In each of these areas, there are now significant currents of opinion arguing that far tighter rules policing these conflicts of interest are necessary, for example, mandating that an accounting firm should not undertake consultancy work for an audit client, or even that legislators should require the break-up of these firms.

It is tempting to think that there might be a once and for all legislative solution to these problems. My suspicion, however, is that we will not find solutions in each case, except at unacceptable cost. That cost will of course be borne by the ultimate consumers of the financial services provided by these firms. We have to accept that strong arguments of commercial and economic logic have led to the construction of multifunctional financial firms. There are significant informational advantages, for example, within accounting firms who carry out consultancy work for their clients. They may be able to do so more effectively and more cheaply, building on the knowledge of the firm they have acquired in the course of their audit work. Similarly, investment banks trading on their own account may have a better understanding of the dynamics of market prices, and therefore be better able to advise their clients, than if they were prohibited from so doing. There are other arguments based on transactions costs. It would be cleaner were rating agencies to be financed by payments from investors, rather than from the companies they rate. But how can they capture the benefits to investors of their ratings? It is not obvious how one would devise an appropriate charging mechanism to levy costs on all those invested in a particular security.

We have to recognise, therefore, that the search for a “silver bullet” solution is likely to be vain. And we have to acknowledge that there will always be conflicts of interest in professional firms: those conflicts simply have to be managed as well as possible. They are not unique to financial markets. Many of us are dimly aware, for example, that the surgeon to whom we look for advice has a financial interest in performing operations. Indeed there is persuasive statistical evidence to suggest that the more surgeons there are in a particular state or country, the more operations are performed, and the evidence for a health benefit from this enhanced activity is weak to non-existent. We know that estate agents are acting on behalf of the seller, even though they try hard in their presentations to behave as if they were working for us. In these areas, just as in financial markets, we can take second opinions, if we wish. But we do not always do so, largely on the grounds of cost. Also, I think, because most of us know perfectly well that these conflicts exist, and therefore “aim off” to some extent for the advice we receive.

That leads me to the provisional conclusion that transparency is likely to be the most effective general response to conflicts of interest in financial markets. One problem hitherto has been that investors and customers have not been as fully aware as they could or should be of the nature of those conflicts. In wholesale markets, if they are not so aware, then we might argue that they have only themselves to blame. In the retail sector, however, it is not always easy for individual customers to know how their salesman, broker or advisor is remunerated, and what their incentives are. Some of the mechanisms for commission payments to brokers or life insurance salesmen are highly complex, and opaque to investors.

In general, the changes made to the regulatory environment in recent years have been helpful in promoting greater transparency. In the UK, salesmen have been obliged to explain their basis of numeration to their customers. In the US, investment banks have been required to explain the nature of their relationship with different clients and customers and, for example, to explain that they may do business with companies which they research.

These enhanced disclosures ought to make a difference. But they will only do so if clients and customers react appropriately when they see evidence of advice which lacks objectivity, or which clearly advances the financial interests of the firm more effectively then those of its clients. The single most powerful constraint on firms acting against the interests of their clients must surely be the impact on repeat business. In most walks of economic life, the factor which prevents an expert firm exploiting its information advantage over a client is the fear that that client will become aware of that exploitation, and will not come back for more. Unfortunately, in some parts of the financial markets, that discipline does not apply as strongly as it should, either because there is little opportunity for repeat business (once you have taken up a long-term pension contract, you may not be aware of the poor advice you may have been given for many years, and may well never take out another one) or because the impact of the conflict of interest may be obscured for a number of years. That may be so, for example, in the case of an audit firm whose economic interests are so bound up with those of its clients that it is prepared to connive at the presentation of misleading financial results for an extended period. In these circumstances, there is little that investors can do by way of withholding their business, and, by the time the effect of this conflict is evident, it is likely to be too late for investors to act.

So my own instincts are, first, to recognise that we cannot hope to remove all conflicts of interest with the stroke of the regulator’s pen, or at least if we could, we would impose such high costs on financial markets, that we would soon come to regret our actions. Second, that the most effective regulatory response is likely to involve enhanced transparency and disclosure, with the hope of making market disciplines, and particularly the discipline of withdrawal of business, more effective. Only where these responses seem likely to be inadequate, should one consider going further, and imposing legislated restrictions.

Have the official sector responses over the last five years been appropriate, against that template, and have firms understood that it is in their own enlightened self-interest to find ways of managing conflicts more effectively? The jury must be out on both points, particularly the second. On the first, my own instincts are to think that even tighter rules on the work auditors can do for their clients might well be justified, even though there may be resulting information costs. The importance of a high-quality and objective audit seems to me to be so high that some additional costs may be justified if they improve our chances of delivering one. The argument advanced by the accounting firms to the effect that audit work is so boring that they would not retain good people to do it unless they are allowed to do consultancy projects too, seems a weak one. In the first place, they can undertake consultancy for non-audit clients. In the second place, it is rather as if the local chief of police said he needed to allow his men to do some breaking and entering on a Friday, because the policing they did during the week was simply too dull.

What should be clear to everyone is that the bar has been raised in the last few years. The unfortunate abuses of the “go-go years” around the turn of the millennium have done us a service in exposing the potential risks of some conflicts which have been perhaps too dimly understood before. Firms must understand that some of the old ways of doing things will not stand up to enhanced scrutiny. But we now need a period of reflection, while firms and regulators monitor the impact the changes that have been made. This book will, I believe, help market participants think through the potential conflicts which may influence the way their services are perceived, and find appropriate ways of removing, mitigating or managing them.

Conflicts of interest: how accountants have risen to the challenge

President, International Federation of Accountants Graham Ward CBE MA FCA

If there is anything that the accountancy profession has learned in recent years, it is that good intentions are not enough. In an increasingly competitive global landscape, professional accountants here and around the world face almost daily decisions on how to carry out their public interest responsibilities effectively and, at the same time, how to manage their firms and the pressures that go hand in hand with operating a for-profit company. While in most cases these responsibilities are not in conflict, there are times when conflicts of interest do arise and they can affect professional accountants at all levels in all areas of employment and in firms and companies of all sizes. Ethical guidance developed by professional accountancy bodies and regulators provides the best advice for professional accountants on how to manage potential conflicts of interest.

There has been a heightened awareness of auditor conflicts of interest and corporate governance issues in the light of the spate of corporate and accounting failures that occurred in the late 1990s and the turn of the century. This situation is not one that arose suddenly. One needs to look back at the changes in the profession and in the business environment in the latter part of the twentieth century to understand how legislation, which one might assume would serve as a hindrance to egregious behaviour, actually may have facilitated it.

One of these changes was in regard to professional advertising. In the early 1980s three influential organisations – the UK Monopolies and Mergers Commission (MMC; now the Competition Commission), the UK Office of Fair Trading, and even the Organization for Economic Co-operation and Development – supported competition among accounting firms through advertising, pointing out that advertising was beneficial to consumers as it kept them more informed about accounting services. The MMC also asserted that the profession’s ban on advertising was a restrictive practice that impeded competition and contributed to artificially high fees.

The MMC’s views were not widely supported throughout Europe and thus much debate ensued regarding the pros and cons of advertising. Those opposed to advertising felt that it compromised the integrity of the firm, while those in favour of it saw it as a necessary component of cross-border trading. Looking back now, this debate also occurred within an environment in which companies were considering audits as a compliance activity. Directors and managers saw audits as necessary to comply with legislation, not a provider of value to the company in their own right.

Looking back with 20/20 hindsight, we now see that when the UK agencies – as well as other similar agencies around the world – argued for a lifting of the ban on advertising, they also assisted in changing the concept of an audit from a valued, public interest service to a commodity.

While advertising can help to keep consumers informed about the profession and its scope of services and responsibilities, during the 1980s the removal of bans on advertising, in an environment where there was a compliance mentality amongst the companies required to be audited, contributed to price competition among audit firms and fundamentally changed the auditor-director relationship. Before removal of the restriction, a change of auditor was viewed as reflecting badly on the company. After the removal of the advertising restriction, a change in auditors was presented by directors as a positive move – one that was made in order to save the company money because an auditor was charging too much. It was acceptable to save the company money in this way because the audit was seen by directors and other stakeholders as a cost to the company, not as adding value. This put excessive pressure on the auditor to reduce fees and removed the stigma from directors when auditors were changed. Directors, instead, were choosing auditors who offered the best price and often, the most amenable point of view. Thus, audits were compromised – and notably, not as a result of the provision of non-audit services, but because of the compliance mentality amongst directors and managers assisted by an unrestricted advertising market.

The perception of the profession in the 1980s, as the Economist magazine pointed out, was a change from professionalism to commercialism. Audits were viewed as a commodity bought from the lowest bidder rather than a name-branded, professional service.

As we look back with clearer insight into the challenges the profession faced, we also can come to a better understanding of audit firms. As we look ahead, we know with certainty the benefits of both the profession and company directors recommitting to doing the right thing. For the profession, by recommitting to the profession’s core value of integrity – a value that guided the profession since its inception more than one hundred years ago – a value that has become increasingly relevant in the twenty-first century and one that I believe will guide us in shaping a future in which audit firms prosper and, most importantly, the public interest is served.

The long history of the profession in the UK – as a strong and persuasive body of professionals with a tradition of developing its own principles – should not be forgotten. We have a past to be proud of and a future to anticipate with confidence.

The scandals and corporate failures that occurred at the turn of the century have resulted in significant regulatory changes here and around the world. Those changes, while dramatic, have also contributed to increased awareness of the value of the audit. Thus, while 20 years ago, the value of the audit was being questioned by those who needed it most, today it is a foregone conclusion that without high-quality auditing, investors and economies worldwide will suffer.

At the same time, we need to recognise that competitive and other pressures still exist. Auditors and accountants are faced with the ongoing challenges of responding to the increasingly complex needs of businesses, large and small, of operating in a global market, and of facing standards that can be complicated and difficult to implement.

We will never be completely free of challenges nor of the potential for conflicts of interest. It is important, however, to keep in mind that an audit conducted by an independent auditor for the shareholders of a company does not give rise to potential conflicts of interest. As the interests of the shareholders in the audit are the same as those of society as a whole – to ensure that the company accounts are a fair representation of the company’s position – auditing is a public-interest activity. Consistency in audit quality is achieved as audits are carried out in accordance with either international standards, set by the International Auditing and Assurance Standards Board (IAASB), or national standards.

Audit does not involve either advocacy or negotiation for clients and an auditor can work for different clients who may have conflicting interests among themselves. The independence of the auditor may be threatened, however, if there is a commonality of interest between the auditor and the directors of a company they are auditing, as this common interest can give rise to a conflict of interest with shareholders.

Auditing firms do consider situations where there is a potential conflict between the firm’s interests and their clients’ (ie corporate shareholders, as a body) interests, for example, strategic alliances, ongoing business relationships, external appointments and partner secondments, and advocacy. A “threats and safeguards approach” is taken to this, in accordance with professional requirements.

There is strong professional guidance that provides an effective defence of the public interest against even potential conflicts of interest. On a national level, the UK Auditing Practices Board and the US Securities and Exchange Commission and Public Companies Accounting Oversight Board (PCAOB) provide such guidance. On an international level, the Code of Ethics for Professional Accountants, developed by the International Federation of Accountants’ (IFAC) Ethics Committee, provides guiding principles for the world’s accountants. The IFAC Code is the only global code of professional conduct that applies to all accountants, including those in public practice, commerce and government. The Code serves as the basis for many national codes of conduct. In fact, the European Code of Ethics, which auditors and firms in the EU’s 25 member states will be subject to under the Eighth Council Directive on Company Law, is consistent with the IFAC Code.

The IFAC Code was revised in July 2005 to provide updated guidance to professional accountants on how they can maintain professional integrity and independence.

The revised Code establishes five fundamental principles of professional ethics for all professional accountants and provides a conceptual framework for applying the principles. These principles are integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Under the framework, all professional accountants are required to identify threats to these fundamental principles and, if there are threats, to apply safeguards to ensure that the principles are not compromised. The Code is currently being revised to address the roles of the professional accountant working in government as well as in business and industry, specifically, in instances when the professional accountant in business encounters fraud.

In addition to its focus on ethics, IFAC continues to focus on the development of high-quality standards to help accountants deliver quality. The International Auditing and Assurance Standards Board (IAASB), which operates independently, has developed standards on quality control for firms and for engagement teams, a new assurance framework and updated audit risk standards. The IAASB is also focusing on other areas where there is significant public interest, such as audits of related party transactions, group auditors and the use of experts or specialists. Another recent initiative the IAASB has undertaken is improving the clarity of international standards: a key need to facilitate translation and the use of standards by small and medium accounting practices, thereby facilitating high-quality implementation of our standards throughout the world.

IFAC’s auditing and ethics standard-setting activities, together with its education standard setting, have recently been strengthened by the addition of public interest oversight. A new international Public Interest Oversight Board, formed in February 2005 and comprised of nominees of international regulators and organisations, works to ensure that these groups address public interest issues, approves their membership and, where the public interest requires it, adds items to their work agendas.

While credible and high-quality standard setting can do much to help accountants manage and address public expectations and needs, these activities alone cannot restore trust in the profession and in the work of accountants and avoid perceptions of even potential conflicts of interest. Actions must be taken to enhance the responsibility and accountability of all those in the financial reporting supply chain.

The 2003 report of the independent IFAC-commissioned Task Force on Rebuilding Public Confidence in Financial Reporting, which was chaired by John Crow, a former Governor of the Bank of Canada, pointed out that: “Failure to recognize the primacy of integrity has been a major contributor to the financial scandals of recent years.” The task force’s number one recommendation was: “Effective corporate ethics codes need to be in place and actively monitored. We recommend that companies should set out their ethical policies in a code that should be widely distributed within the company and to shareholders.” Thus, it is vital not only for accountants in public practice to follow high ethical standards, it is also the responsibility of those accountants and others holding corporate management responsibilities to encourage a highly ethical “tone at the top”. This is essential to ensuring that individuals and entities not only avoid conflicts of interest, but also act in the best interests of the public and their shareholders.

It is time to ensure that integrity is the common link in the whole financial reporting chain. IFAC and the Fédération des Experts Comptables Européens (FEE), our profession’s European umbrella body, are committed to encouraging that aim to be at the heart of governance policies, standard setting and national regulatory policies.

One of the Crow Report’s key recommendations was that effective corporate ethics codes need to be in place and actively monitored. So often in the past, we have heard that finance directors have in effect acted as the conscience of the board when, of course, without underestimating the importance of the finance director, ethical behaviour should be at the heart of the board as a whole.

So while one cannot over-emphasise that the tone for an organisation needs to be set at the top, there is a key role for all professional accountants in business to help in practical ways to promote ethical values throughout an organisation. Moreover, as preparers of financial information, we are ideally placed to drive ethics through financial reporting from the very start.

IFAC’s Professional Accountants in Business Committee is focusing on corporate codes of ethical conduct. It is currently completing guidance for professional accountants in business on the need for a corporate code of ethical conduct and how to develop and administer such a code. This guidance will complement the Committee’s recent report on enterprise governance, issued in 2004, which emphasises that a virtuous circle of integrity and ethics is fundamental, both to good governance and to business growth. That will be as important in the future as it is now.

In July 2005, IFAC’s Board also approved the launch of a new study to enhance the quality of the financial reporting supply chain. This study will address such issues as corporate management and governance, auditor independence and rotation, and the expectations around the auditor’s responsibility for the detection of fraud. It is expected to make significant inroads both in terms of identifying investor expectations and in increasing awareness of investors and others of how the profession, together with others in the financial reporting supply chain, could and should address issues pertaining to conflicts of interest.

Fundamental to the profession’s ability to carry out its public interest responsibilities and to be seen as independent of conflicts of interest is trust. The best and, indeed, the only way for the profession to earn and retain public trust is to adhere to high ethical standards and to be perceived as adhering to those standards. Indeed, ethical conduct lies at the core of all business and of all public expectations. The more our profession demonstrates its commitment to the highest ethical standards, the more we will be able to demonstrate to the public that we have made the right choice when facing a potential conflict of interest. Our recent actions do demonstrate that we are, indeed, committed to the right path and to serving the public interest.