Should an accountancy practice turn down work on the grounds that the public interest may be at risk, and can ethical principles guide its judgement of that public interest?
The UK’s Financial Reporting Council recently published the report of the Appeal Tribunal which was considering the earlier judgement against Deloitte and Touche, who were advisers to MG Rover Group which collapsed in 2005.
The background was that BMW, having abandoned hope of turning round the MG Rover Car Group, sold it in 2000 to a group of businessmen who became known as the Phoenix Four, for £10. This team publicly expressed their intention of working in the public interest as part of their successful pitch to beat off a private equity bidder, but subsequently manipulated the deal to enable them to extract over £40m into their private company while Rover steadily collapsed.
Deloitte were MG Rover’s auditor during this period and more importantly, gave financial advice to the Phoenix Four. After the collapse, and the public outcry that ensued, an enquiry was set up which, in 2009, produced a report which was highly critical of all concerned. The Financial Reporting Council, as the regulator responsible for the accounting profession, then conducted its own enquiry which reported in 2013 and found that Deloitte had not complied with its own professional principles and had ignored the public interest in the advice it had given. It found that 13 allegations against Deloitte had been proved, issued a severe reprimand, banned one of the partners from practice for three years and fined the firm £14m.
In January 2015, an Appeals Tribunal reduced the fine to £3m, quashed a number of the charges, overturned the partner’s exclusion, but upheld several findings regarding misconduct and the severe reprimands. It also accepted that Deloitte had not deliberately acted to hurt the public interest but, in turn, criticised the Ethical Guidance of the Institute of Chartered Accountants in England and Wales for giving unhelpful guidance regarding public interest. The FRC picked up this support for its earlier criticism and said: "The Appeal tribunal affirmed the need for accountants to act in the public interest and for accountants to take this into consideration in deciding whether to accept or continue an engagement. However, it identified a lack of clarity in how accountants should discharge these responsibilities. The FRC and the profession are addressing this issue."
Following the publication of the Appeal Tribunal’s findings, the ICAEW acknowledged that it would have to look into its guidance to members in the light of the remarks made in the judgement. In April, however, in Economia, the official publication of the ICAEW, Michael Izza, Chief Executive of the ICAEW, wrote an article addressing the issues arising out of the FRC’s published remarks on the subject of Public Interest. He concluded that the existing guidance would seem to be adequate, given the difficulty of implementing anything more prescriptive in this rather vague area. To quote Mr Izza:
“…in bringing charges against Deloitte, the FRC sought to rely on the preamble to the Ethical Guide to professional ethics, as it was then known, which talks about acting in the public interest. But we don’t think that is tenable – we have certainly never used it as such in bringing charges against our members. Rather, our charges are based on a breach of one of the five fundamental principles, since we regard any chartered accountant meeting all of them in spirit as well as letter, to be acting in the public interest."
This is something Sir Stanley (former Lord Justice of Appeal Sir Stanley Burnton, chairman of the Appeal Tribunal) seemed to confirm when he discussed a hypothetical case involving a takeover and compared the difference between how lawyers and accountants would approach a proffered engagement if the accountant were expected to consider the public interest. “We regard the suggestion …. That accountants are not free to accept the engagement without considering the vague question whether the takeover is in the public interest as absurd”, he said.”
In the Members Handbook, 2001 edition, which would presumably have obtained when Deloitte took on this advisory work, the reference to public interest simply states:
“The public interest should be a factor which all members should bear in mind when accepting any assignment or appointment.”
Most recently, the ICAEW has produced some significant research work in this field entitled Acting in the Public Interest, a Framework for Analysis. The 81 page document provides an interesting historical and philosophical review of the subject, coupled with a seven element framework guiding the user on judging how to act in the public interest. It comprises the following modules
I’m not sure how the Deloitte partner concerned would have applied this highly academic framework in assessing whether on not to accept the invitation to advise the Phoenix Four back in 2000, but I suspect his thinking would have gone more along the following lines:
Ethics and public interest would have been served, at least at the point of commencing the work.
The problem with accepting a slightly questionable relationship, or indeed, when a perfectly satisfactory relationship starts to turn questionable, is that, if things start to get worse it becomes progressively more difficult to disengage. An example here is the relationship of Arthur Andersen with Enron, where fees progressively triumphed over ethical standards, with fatal consequences for the huge and formerly highly respected accountancy firm.
In the case of MG Rover, the Phoenix Four contrived, with the perceived technical help of Deloitte, to extract the readily accessible cash while never ever looking like achieving the promised turn-round. When MG Rover collapsed, it left debts of about £1.3bn and more than 6,000 people lost their job. And this takes no account of the impact on local industry and more distant suppliers. So, inevitably, there was a search for a scapegoat and, apart from the Phoenix Four, the spotlight fell on Deloitte.
Now the trouble with defining public interest is that, like defining ethics, different people have different views. Unless one takes the approach of the US Supreme Court Justice Potter Stewart in the 1964 obscenity trial regarding the definition of pornography – “I know it when I see it” – it behoves us to tread carefully in this area. So when Mr Izza defends the current Ethical Code of the ICAEW, he may feel perfectly justified in standing behind his five principles. There are two problems, however.
The first is that the general public, whose interest is being assessed here, may take a simplistic and very different view about the perceived culpability of the professional firm concerned. As an example, consider how badly the big banks are viewed following the financial collapse of 2008 and subsequent financial scandals, though no board member has been convicted of any indictable offence.
The second problem is that, no matter how tightly the professional accountant has kept to the five ethical principles, if the firm finds itself dealing with a profoundly unethical client, its own reputation is bound to suffer.
This is the problem facing a body like the World Bank when it sets out rules for good corporate governance which its client governments have to sign up to. There is absolutely no guarantee that the rules will actually be complied with once the funds have been received. Similarly, a firm of chartered accountants can set great store by the professional training in ethics that is now part of the examination qualification process that all trainees have to go through. But they have to be sharp enough to spot questionable clients before taking them on, and robust enough to resign if things start to go bad.
With the best will in the world, I cannot see the ICAEW’s public interest framework being of much practical use in the average situation.
However, there is a much more useful technique available.
We at Applied Corporate Governance would agree with Mr Izza that an ethical approach will usually cause an accountancy firm to reject something which looks likely to be against the public interest. But this may not be immediately apparent from discussions with the prospective client and our approach, as described in our Five Golden Rules of Good Corporate Governance, is to use an independent survey to assess the way in which key stakeholders view the client.
In an article last year on whistle-blowing and ethical surveys, we spelled out the stakeholder groups to be surveyed and the issues on which their views should be sought.
The major stakeholder groups which should be surveyed are:
The issues to be covered address whether the organisation is acting properly in three broad areas:
If we consider what the views of the workforce would have been regarding the plans of the Phoenix Four to guarantee themselves huge rewards while leaving the trading business totally exposed, and add to that the views of former work colleagues regarding the abilities of the Four and their chances of turning round a basket case that BMW had abandoned, it’s possible that Deloitte would have declined to get involved. At least they would have been given warning of what was likely to come their way.
by Nigel Kendall
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Photograph by Ken Goddard