Ethical Standards or a Standard for Mankind?
Earlier this month, the Chicago Tribune wrote about the case of Thomas Flanagan, a former Deloitte vice chairman, being litigated by his old employer, Deloitte.
The case is fascinating as he is alleged to have traded in the stocks of companies that Deloitte audits but even more interesting is that Mr. Flanagan had access to inside knowledge that he used for his benefit. Deloitte is seeking restitution. A Delaware state judge ruled this month that Mr. Flanagan had concealed his trading activity from Deloitte and had violated the firm’s rules for trading in client stocks.
In November 2008, The Huffington Post wrote about the original court filing. Take a moment and read this piece.
The original court filing can be found here.
When I was with Arthur Andersen/Andersen Consulting, we had considerable restrictions on what we could/could not invest in and these were tightly monitored. I checked with a colleague who has worked with two other Big 4/5/8 firms and she confirmed almost identical rules in place at these firms, too.
In essence, employees at these tax & auditing firms are not allowed to invest in the securities of attest clients. Attest clients are firms that have engaged the service firm for audit, tax or other specialty services. This prohibition applies to all attest clients no matter if the audit or tax professional is not involved in this client or works in an office that has no contact with this client. Investments in attest clients are forbidden.
Beyond this rule, there were other key pieces to the enforcement of these rules. Specifically, employees had to provide periodic reports listing all (not some) of the securities that they held. I had to liquidate a position in a firm once it became a tax client. These reports are what triggered the notice I got when this firm became a client.
As a partner, I had to have my tax return prepared by someone in the firm. Even if I prepared my own return, it still had to be reviewed by the firm’s tax expert. One of the reasons for this review was to ensure that my reported capital gains/losses or trading income transactions was not due to trades in attest client securities.
These bans are intended to prevent auditors or other third parties from acting on inside information. Deloitte alleges Flanagan did just that.
My ethical standards training (which was continual not one-time) taught me that adherence to these rules would prevent ‘even the appearance of impropriety’ from reaching the firm. The reputation of a service firm is often its most important asset.
The Flanagan case reminds me though that no matter how well designed a process is, someone will try to circumvent it or believe these rules do not apply to them.
People are not, no matter how much you want to argue to the contrary, logical and rational. If we were, we’d all look and sound like Star Trek’s Mr. Spock. No, we are fallible. Some of us are incredibly narcissistic. Some believe in their own superiority. You get the point. We’re always going to have folks like Mr. Flanagan pop up from time to time. How we find them and how soon we find them is the real challenge for business leaders.
We need better HR systems to spot folks with potentially bad pathologies. Better still, we need to find out who these people are before they ever get placed in positions of great responsibility (e.g., a Vice Chairman’s role). Can we get an HR software vendor to do this or will they stay content to just automate payroll and benefits deductions?