The current round of congressional hearings involving the secretarial appointments to the Trump administration appear to be raising numerous questions about conflicts of interest and as well as instances involving possible self-interested stock trading on the part of several of the wealthy candidates. Issues involving self-interest are no less important for assurance professionals like CFE’s, auditors and public accountants than they are for presidential appointees.
The misuse of information for personal interest by an assurance professional can be detrimental to other stakeholders of the client or company involved. For example, the use of information by any professional before others have the right to use such information is unfair and considered unethical. This is the basic problem for anyone who is privy to inside information about a company by virtue of being its auditor or an employee, that is, an insider, to use that information personally or indirectly for any self-interested purpose. To ensure the basic fairness of stock markets so that the public and other non-insiders will wish to enter the market, regulatory bodies like the SEC require management insiders to wait until the information is released to the public before allowing insiders to trade, and then they must disclose these trades so the public will know what’s happened.
The prospect of a rigged game, in which insiders have an unfair advantage, would not be in the public interest or in the interest of the corporations using the market for fund raising in the long run. Insider trading rules also apply to the families of the insider, extending even to those who are not part of the immediate family but for or over whom the insider has an obvious ability to exert influence or extract gain. Some individuals with high-profile jobs in the public service go even further to avoid such conflicts of interest. To be entirely ethical, some politicians have placed their holdings, and those of their dependents, in so-called blind trusts, which are managed by someone else with instructions not to discuss trades or holdings with the politician. The situation for we auditors is somewhat different in that the ownership of shares or financial instruments of a client is forbidden based on the real or potential conflict of interest that would be created. Most auditing firms extend this ban in two ways. First, the ban is applied to the auditor’s family and to persons who would be considered significant dependents or subject to influence. Second, the ban may also apply to any client of the firm, even if that client is serviced through a wholly separate office (for international firms, even in another country) with which the individual professional does not have contact on a normally occurring basis.
Where the ban is relaxed on trading in shares of the firm’s clients for employees not directly involved in the client’s affairs, extreme care is taken through information barriers/firewalls and reporting/scrutiny mechanisms to manage the conflict of interest created. The extent of attention paid to the prevention of insider trading and even to the perception of it is indicative of the alarm with which most firms view its prospect. Confidentiality is the term used to describe keeping confidential information that is proprietary to a client or employer. The release of such information to the public, or to competitors, would have a detrimental effect on the interests of the client, and it would be contrary to the expectations of trust of any fiduciary relationship.
In the case of a fraud examiner, this expectation of trust and privacy is vital to the client’s willingness to discuss difficult issues, which are quite germane to the investigation, to get the opinion of the examiner on how they might be dealt with in court proceedings and even, eventually, in the public eye. In the case of auditors, how frank would the discussion of a contentious contingent liability be if there were a possibility the auditor would reveal the confidence? How could a contentious tax treatment be discussed thoroughly if there was the possibility of a voluntary or involuntary disclosure to the tax collection authorities? It’s therefore argued by the ACFE, the AICPA and others that the maintenance of client confidences is essential to the proper exercise of the audit function, and to the provision of the best advice based on full discussion of possibilities.
There are, however, limits to privacy that some professions have enshrined in their codes of conduct, or where these limits are spelled out in regulatory frameworks. Engineers, for example, must disclose to appropriate public officials when they believe a structure or mechanism is likely to be harmful to the users, as in the potential collapse of a building due to violations of the building code. In most western countries, money laundering for drugs and terrorism must be reported to financial authorities by banking professionals. For auditors as well there appears to be an increasing focus on their public responsibility and an increasing expectation of action rather than silence. This trade-off between the interests of client, management, public, regulators, the profession, and management promises to be an ever growing conundrum for all professionals in the future. One issue that is not as well understood as is often thought is the consequence of a professional accountant observing strict confidentiality about the malfeasance of his or her employer, and being directed by the professional code to resign if the employer cannot be convinced to change their behavior. This would follow from the codes of conduct that require no disclosure of client/employer confidences except in a court of law or subject to a disciplinary hearing, and at the same time requiring resignation to avoid association with a misrepresentation. In the event of a resignation in silence, the ethical misdeed goes unrecognized by all stakeholders except the perpetrators and the silent professional. How does this protect the interests of the public, the shareholders, or the profession?
It has been suggested, as a topic for discussion, that strict confidentiality codes be modified to allow for the introduction of the possibility of consultation on such matters with officials of the professional’s certifying institute. Perhaps through such confidential dialogue, a means could be found to better judge what needs to be kept confidential, when and how disclosure ought to be made, and how the professional’s and the public’s interests can be protected. For an auditor, the situation is different. When an auditor is discharged, or replaced, the incoming auditor has the right to ask the outgoing auditor (and the client) what the circumstances were that led to the dismissal or resignation. In some jurisdictions, the removed auditor even has the right to address the shareholders at their annual meeting, or by mail, at the expense of the corporation involved.
CFE’s and other assurance professionals of all types are sophisticated enough to know that our professional codes don’t cover every ethical challenge and that investigations and engagements involving potential or suspected insider trading and conflicts of interest are no exception. We must all, therefore, continue to develop judgement, values and character traits that embrace the public expectations inherent in emerging stakeholder oriented accountability and governance frameworks.