Accountants, ethics and whistleblowing
This submission looks at the role and ability of accountants, whether employed or in public practice, in deterring and acting on financial wrongdoing. In case you are not aware of this organisation, I start by explaining our own position.
Public Concern at Work
Public Concern at Work (PCaW) is an independent charity and was launched in 1993. We have four main activities:
- Providing free confidential help to people who are unsure whether or how to raise a concern about wrongdoing in the workplace;
- Training and supporting organisations on whistleblowing and accountability;
- Educating the public that there are safe alternatives to silence; and
- Informing public policy in areas of governance and regulation.
Within two years of our launch, our approach to whistleblowing (set out in the enclosed review) had been endorsed by the Committee on Standards in Public Life and by the Audit Commission. In 1995 and 1996, MPs asked us to prepare and promote draft legislation on whistleblowing, which was strongly supported by the then opposition. In its White Paper The Governance of Public Bodies, the last Conservative Government described us as ‘the leading organisation in this field’.
In 1997, the new Labour Government asked us to assist it and Richard Shepherd MP in formulating, consulting on and promoting the Bill which became the Public Interest Disclosure Act (PIDA). While technically a piece of employment law, this legislation was and remains supported by the CBI, IoD and TUC. For our work on PIDA, Lord Nolan commended us in Parliament ‘for so skilfully achieving the essential but delicate balance between the public interest and the interests of employers’. The Government has restated its strong support for PIDA in the current session of Parliament and amended both the Employment Act and the Police Reform Act in consequence. Earlier this year the Financial Services Authority launched an initiative on whistleblowing which drew heavily on PIDA and referred to our own work.
Since our launch we have dealt with over 2000 whistleblowing concerns on our helpline - a handful of which have come from accountants. We spend an equal amount of our time providing professional services to employers, regulators and other organisations - some of this work has involved accountancy firms and their clients and we also work closely with accountancy bodies (in particular CIPFA). The practical utility of these services was recognised a month ago by the Court of Appeal at the start of its first judgement on PIDA when it referred to our “valuable activities… in providing assistance both to employers and employees”.
In this letter we send you our initial comments on the public interest, the ethical framework for accountants and on their role in whistleblowing.
The public interest, ethics and accountants
The public interest is made up of many different criteria, some of which will - in any given circumstance - conflict with one another. We do not think the public interest is something which can be defined in a prescriptive way for this reason, and also because the criteria and their balance develops over time.
The law accepts that there is a public interest in upholding obligations of confidentiality and that this applies in the relationship between accountants and their clients. It also accepts that the duty of confidentiality is not - and should not be - absolute, in that it can be trumped by the public interest that one should not engage in, assist or facilitate crime or wrongdoing (known as disclosure in the public interest or whistleblowing).
Outside of express statutory duties on accountants to report crime or wrongdoing, we think it worthy of note that there is not a general legal duty to disclose in the public interest - only a power. This power has the effect of providing the discloser with a defence to an action for breach of confidence (or where he is victimised as a result and PIDA applies, a claim for compensation).
It is true that some people may elect not to make a public interest disclosure because they think it will not be in their own interests (be it, in the accountancy field, the loss of further business or concern for their professional reputation). A countervailing force to such pressure is the fact that, if a disclosure is not made and the wrongdoing damages others, the accountant may be sued. In the most serious cases, as Enron and Andersen graphically demonstrate, additional consequences can be the collapse of the firm, criminal proceedings and public humiliation.
Our view is that one should recognise the practical dilemma of an accountant faced with these two competing interests. Ideally the preferred outcome will be if the two competing public interests are respected and the professional accountant operates as an honest broker between them. One way in which this can be facilitated is if the accountant's hand is strengthened so that he feels - and is - better able to encourage the client to desist from or remedy the wrongdoing itself. If this is achieved then the position of the accountant as a source of independent, professional advice is reasserted, while any perception that he is merely a hired gun is countered.
For the reasons given below, we believe public interest whistleblowing - as it is now understood and applied and may be developed - can help achieve this.
The ethical framework
In question 2, you ask whether the ethical standards for accountants should be based on a system of rules or principles.
We do not think this is a simple choice of one or the other and that as a matter of practice there will be a combination of both. This is because some standards are so important that they will be a legal requirement and there is an ethical obligation to comply with the law.
General speaking, however, rules relate to and are designed for specific action, while principles relate to and are designed for individual conduct. For this reason we think that ethics, which to us are best seen primarily as a matter of conduct, can better be advanced by a system of principles than one of rules. A good recent example of principles as a means of explaining and advancing ethical conduct is the Committee on Standards in Public Life Seven Principles of Public Life.
Accountants and whistleblowing
Following the paper's approach, we address the ethical issues facing employed accountants and those in public practice separately.
Employed accountants
Paragraph 20 of the discussion paper states as to employed accountants -
“…when serious ethical issues arise in the course of their work, accountants are often in a weak position to influence their employers. They may voice concerns through the appropriate internal channels, but, if this does not result in the matter being resolved satisfactorily, there will be few other options open to them. Their duty of confidentiality may often prevent them from reporting the matter externally: the only course of action available may be resignation. But an unpublicised resignation will seldom have any influence on the entity and may sometimes involve too high a personal cost to be realistic”.
We consider these remarks are inaccurate and out of date. Employed accountants are protected under PIDA and this provides them (a) with other options if a serious concern is not addressed internally, notwithstanding any duty of confidentiality and (b) with full legal protection against reprisals. Provided that the accountant acts honestly and can show he has reason to believe his concern about financial wrongdoing is valid, the following disclosures are fully protected under PIDA section 43F. These include concerns about a company to the DTI, about a financial firm to the FSA, about a serious fraud to the SFO, about a public body to the NAO or Audit Commission, about a charity to the Charity Commission, about tax to the Revenue or about VAT to Customs. Under PIDA section 43J, any duty of confidence that purports to preclude such a disclosure is void.
This is not to say that PIDA removes any fear or anxiety an accountant may have, but it does provide him with options and protection and thereby strengthens his influence.
Accountancy in public practice
This same protection applies to an accountant who is employed by an accountancy firm in public practice, both as regards any concern about the conduct of his firm or of one of its clients. However no similar protection exists for the firm or its partners as PIDA protects only individual workers, and we turn to their position below.
We believe that one small step could do much to improve the position of accountants in public practice when they are faced with a dilemma of whether or how to handle suspected wrongdoing on the part of a client. This is that the accountant appointed to undertake a statutory audit an organisation should for the purposes of that specific audit work be a prescribed person under section 43F PIDA. The effect of this is that an employee of the audited organisation will be protected if they make a disclosure of financial wrongdoing to his employer's statutory auditor, in the same way that PIDA protection applies to disclosures to regulators.
We consider this proposal is worth developing as it appears to benefit the various individual interests as well as the wider public interest. First, it recognises the role of the auditor and its natural position as a recipient of a worker's concern about financial wrongdoing 1. Secondly, it will provide an external recipient for such concerns which audit clients may find more acceptable than a statutory regulator 2 (though we should emphasise the auditor would only be an alternative to, and not a replacement for, these statutory regulators under section 43F 3). Thirdly, it would allow the accountant / auditor to play the role of honest broker rather than complainant wherever it was reasonably concerned about crime or wrongdoing in or on the part of its client 4. Fourthly, as the accountant would have been made aware of the concern, it would be - and be seen by the client to be - in a position where it would need to consider its own position if the concern were not properly addressed. Fifthly, such a role would assist the accountant to encourage its clients to take practical steps to deter and detect such wrongdoing within their own workplaces. Sixthly, in this way it will help ensure accountants to efficiently perform their statutory duty as they will more likely be informed of any potentially significant financial wrongdoing. As a result, investors will less likely be prejudiced by misleading accounts, accountants will less likely be sued, and the public will have greater confidence both 9in the profession and the accounts its produces.
We are happy to discuss this proposal and any of our above comments with you should you consider that might be helpful.
Yours Faithfully
Guy Dehn
- From our own work we know that concerns of financial misconduct are frequently raised with the auditor
- A number of organisations do already mention the auditor in their own whistleblowing policy.
- Indeed as to local authority work, firms acting as district auditor perform a role under section 43F already.
- This is because when it raised such matters with the client within the confidential relationship, it would be able to point out that, if the issue is not properly addressed, there is a risk that the concern would be raised by an employee of the client with a statutory regulator.