Ethics and governance in the European Financial centers

KPMG Luxembourg has just co-published with the Luxemburger Wort an interesting study about the banking sector in Luxembourg: Luxembourg Banks Insights 2009.

I will analyse the brochure by the end of the week to provide my feeling on it.

But there is something that is worrying for auditors.

The first page of the brochure is an actual Ad for BGL, which is a KPMG client (see BGL reports). Another big bank – Dexia – advertises as well but its auditor is Deloitte and the issue is less important than the case of the audited that advertises in its auditor’s publication.

BGL should not have advertised in this brochure and KPMG should not have published such Ad.

In my opinion, an auditor is not supposed to publish an Ad for its audited as this is a support to the marketing and sales of its client, which is definitely not the auditor’s role: such situation may impair the auditor’s independent opinion.

But is is true that this story occurs in Luxembourg, the small place where everybody knows everyone and where auditors have a Code of Ethics that states something that means that Luxembourg law and regulation may bypass the auditors’ ethical rules: If a professional is prohibited from complying with certain parts of this Code of Ethics (volume 1 & 2) by law or regulation, they should comply with all other parts of this Code of Ethics. In such case, departure from the Code of Ethics shall be properly documented in the engagement file.

This situation is actually allowed by the IFAC: its Code of Ethics for Professional Accountants (version 2005 and 2009) specifies that if a member body or firm is prohibited from complying with certain parts of this Code by law or regulation, they should comply with all other parts of this Code. To be honest the Code of Ethics as adopted in Luxembourg adds that departure from the Code of Ethics shall be properly documented in the engagement file, which is a good thing.

But such flexibility is dangerous in a small jurisdiction like Luxembourg where there is a strong influence of the business on law and regulation and where there are many conflicts of interest because of the small size.

There are actually two situations that can be met in the Luxembourg legal and regulatory framework

        1. Law or regulation may allow situations that do not comply with the Code of Ethics (e.g. conflicts of interests) and auditors do not have to abide by the code because of this law or regulation.

        2. Law or regulation may allow exemptions for the auditors not to abide by their Code of Ethics.