Robert Forsyth, CFI, FCGA, MBA, MA & Ralph Palumbo, LL.B.
The ethics of professional advisors have taken on a much higher profile in the wake of auditing scandals (e.g. Enron, Worldcom) in the United States. An issue of particular concern is the apparent conflicts of interest, both for the auditor, and for directors and management. For the Certified Forensic Investigator (CFI), there is often an assumption that their role is carefully enough defined that there can’t be any problems with a ‘conflict of interest’. Unfortunately problems can and do arise.
The notion of a conflict of interest appears often in Codes of Ethics of professional bodies. Lawyers, accountants, and the medical profession all consider this problem. There seem to be two approaches in North America: give very specific guidelines, enumerating prohibited activities (objective definition); or, instead, a very general prohibition (subjective definition). The codes for CFIs, CAs, and CGAs have similar, subjective approaches:
Association of Certified Forensic Investigators of Canada: “Shall hold themselves free of any interest or arrangement which could in fact or appearance impair their professional objectivity or judgement. Members shall inform a client or employer of any business connections, affiliations and interests of which the client or employer might reasonably be expected to be informed and shall not use information relating to their employment or an engagement to either directly or indirectly obtain an advantage or benefit.” (emphasis added)
Canadian Institute of Chartered Accountants: “A member… shall disclose any influence, interest or relationship which, in respect of the engagement, would be seen by a reasonable observer to impair the member’s professional judgement or objectivity…” (emphasis added)
Certified General Accountants of Ontario: “A member shall… be free of any influence, interest or relationship in respect of the client’s affairs, which impairs the member’s professional judgement or objectivity, or which, in the view of a reasonable observer, may have that effect.” Rule 202 (emphasis added)
All of the codes use words indicating that a conflict exists where it appears to exist. It is not simply an objective phenomenon, and this is where most difficulties arise. Further, it may be inferred that, in the course of an assignment, circumstances may change sufficiently that there may now be a conflict — continuous monitoring is necessary! Here are two examples of how perception and changing circumstances can lead to complaints about accountants:
“I was very pleased with the services provided by my accountant in connection with the business that my husband and I operated until separated. Now the accountant appears to be working in my husband’s interest and contrary to mine.”
“Why is it that I cannot obtain any information about the business from my accountant. Even though my partner and I are in the process of winding down the business, surely I am entitled to be treated fairly by our accountant.”
Another example is the Enron problem: the fees for consulting and auditing are so high that it becomes harder and harder to have confidence that the relationship is free of self-interest on the part of the accountants.
The difficulty for the practitioner is that in his/her/their mind(s) there may by absolutely no conflict — they have monitored their activities scrupulously, recording discussions, shredded no files, etc — but to a reasonable observer, there is the appearance of a conflict.
In many assignments undertaken by CFIs, it would appear that a potential adversarial situation exists, there is only one client, and so we assume a conflict of interest can’t happen. Unfortunately, things rarely stay this simple, and more interests appear: the police; the court system; the shareholders/owners (as distinct from management who did the hiring); other clients; and the press. To whom do you owe what duty?
The mid-level manager, who hired your firm, thanks you for your work on establishing the identity of a thief. Six months later you see a notice that the thief has just been promoted, together with the manager, to a better position in the same company.
As a result of your work on files within the Ministry of YYYYY, still ongoing, you were aware of the lawsuit about to be commenced against Anthony Smith alleging fraud committed by him. Now, working for a different Ministry you notice the impending purchase by the government of a piece of property from Anthony Smith, for cash.
While assembling an estimate of the “real” income of a restaurant, for a Family Support Guidelines court application, you become aware that this is the restaurant from which another client buys gift certificates for promotion, in cash.
You are preparing for testimony, and have received a number of “off the record” estimates (from your contacts), very useful to this client’s case. The lawyer points out that this judge is noted as demanding specific corroborative details, including sources. Will you use the “confidential” information, potentially exposing your confidants?
Each of the above exposes you to a conflict, ultimately resolvable, but nonetheless a potential ethical dilemma. We can look to other sections of Rules of Conduct to help us in our struggles when principles conflict. For instance:
Rule 203 – Resolution of Conflict of Interest (CGAO)
A member shall, within 90 days of becoming aware that an appointment contravenes Rule 202(see above), either:
(a) eliminate the circumstances that cause the member to be in contravention; or
(b) resign from the engagement.
Rule 204 – Resolution of Other Conflicts of Interest (CGAO)
(d) A member shall, when rendering advice to two or more clients who are parties to the same transaction, inform each of the clients in writing that the member’s services have been retained by the other parties to the transaction and that the member may derive fees from such parties. Each party to the transaction must also be advised in writing that confidential information obtained may be disclosed to other parties to the transaction. In addition, each party to the transaction must provide written consent to the member acknowledging these terms.
The resolutions above involve either the withdrawal from the conflict or the informed consent of all the parties. What do we do when neither course of action is appropriate? The authors are presently involved in the discipline process for the CGAO (one as committee member, the other as staff counsel) and have suggested in another article:
The real test is: – would a reasonably objective observer be led to suspect your motives or activities? The accountant’s training is to regard the “facts”, but here we must also look at appearances and apparent motivations. To complicate matters further, the consideration of whether there is a conflict must be considered every time one becomes aware of a change in relationships between any of the major parties to the relationship. If a client mentions any difficulty with any partner, of any kind, you should immediately be on guard. At the very least you should discuss the issue, with a partner, lawyer or the Association’s practice advisor, and document the results with a note to your file. A more appropriate reaction would be a discussion with all affected parties, in the same room, at the same time, indicating the existence and nature of a possible conflict. The participants would be encouraged to consider carefully the nature of their relationship to your firm, and the consequences of either retaining you as advisor or changing the relationship. After reflection, and at a subsequent meeting (to reduce the appearance of ‘decision pressure’), the resolution should be documented, usually with a new engagement letter, showing the nature of the potential conflict, the new relationship of your firm to the partners, and evidence of agreement. This would be in the spirit of, and follow the format of, Rule 204.
A consideration that faces the CFI is that often the principles of “confidentiality” or of “integrity of conduct” may lead to different conclusions than those flowing from “conflict of interest”. Members of the other bodies can (and should) consult with practice advisors engaged by their association/institute, however, at present, this is not feasible, directly for the CFI. Perhaps the Association will make provision for a referral process. If used, this service could help us in the uncomfortable situation where a conflict of interest makes its appearance. **
In summary, the practitioner should be actively monitoring for the appearance of a conflict of interest, or the shadow of one on the horizon, even to the extent of documenting this consideration. If in doubt, the practitioner should consult a partner, advisor or (on a confidential basis) a peer, this consultation may save considerable anguish if the situation deteriorates.