Ethics and governance in the European Financial centers

If the Corruption Perceptions Index (CPI) issued by Transparency International, was not bad for Luxembourg (12 / 179 countries in 2007), according to the Global Corruption Barometer 2007 issued as well by Transparency International, 6 % of respondents in Luxembourg reported they paid a bribe to obtain a service. To be compared to 1 % of respondents in France or Switzerland, 2 % in the UK or in the Netherlands and 5% European average. Luxembourg is in the third quintile (6 – 18%) with countries like Bulgaria, Croatia, Czech Republic, Malaysia, Panama, Russia, Turkey, Venezuela, and Vietnam.

But this percentage does not take into account influences and friendships to obtain a service in the framework of the local networks. Only paid services are assessed in the survey. But corruption may result of mutual services: I do what my fellow friend wants; he will give me back later the service. This may be definitely as well corruption when the service is for example to hush up an issue with a judiciary impact (money laundering...) for the one who asks for the service or to vote in favor in a competition of tenders . The mutual service may not be needed : once someone has accepted to do something he/she may be "locked" for the future in a kind of blackmail.

Should influences and friendships be taken into account, Luxembourg would definitely move to the first quintile (More than 32%) because of the conflicts of interests that can't help turning into corruption all the more than:

1) professionals are not aware of offences : when the local professionals stated officially that “offences such as forgery, use of forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property should not be included. These are offences with financial connotations which are confused with laundering for the sole purpose of applying exceptional powers to these vague offences” (See for instance the ABBL Annual Report 2003, p. 21), the question is how these people may be aware of what corruption is? Corruption must be as well a vague offence from their point of view. Corruption has actualy become standardised; so are standardised bad management and bad governance, which is not acceptable because everything is clear because of the small size (the networks, the conflict of interests...) .

2) there is no TI chapter in Luxembourg to act as a watchdog (but there is one in the UK or in Switzerland the two other European centers with significant offshore assets).

3) like in many small financial centers, the media are not doing there job to investigate, analyse and inform, with the consequence that the decision making processes in those places are equally shoddy and ill-informed. This is what Richard Murphy explained about the Isle of Mans and this is true as well for Luxembourg.

4) Everyone feels the fear to lose contrats or job should he/she dare to say something to repudiate the "system". That's the reason why, despite actual improvement thanks to the Financial Intelligence Units, negligent people - very often those who corrupt the "system" - are unfortunately neither repudiated nor eliminated.

Press release

Report

Christmas goodies relating to corruption

A guidance paper by the auditor unit of IFAC explores how setting the right tone can positively influence audit quality. The title is Tone at the Top and Audit Quality.

"Leaders of accounting firms have a responsibility to ensure that the commitment to quality is clearly embedded in their organisation’s values, code of conduct, training, and reward policies," David Maxwell, Forum of Firms chairman, said.

IFAC Deputy President Robert Bunting commented on the importance of the tone at the top in finding the right balance between governance, oversight and business growth: “If the CEO’s message is aggressive growth and ‘make the numbers’ first and foremost, then the organization will reflect those priorities. If the CEO emphasizes transparency and integrity, as well as performance, then the organization will respond accordingly.”

The fish rots from the head. If partners a not rigorous and are lax, staff will be lax.

There must be no support for drifts and negligence. But unfortunately, as Francine McKenna explained ,"the firms often have a hard time disciplining their own. They've asked them to join the brotherhood after a long and arduous vetting process. It's hard to admit they made a mistake or let the Peter Principle take hold. Any criticism of any one of them means criticism of the 50-100 partners that sponsored or "gave soundings" (a PwC term) on the guy before electing him to the partnership".

An this is definitely the worst attitude : not facing collectively risks and responsibilities.

Read article from AccountancyAge.com

Read Richard Murphy's comment

Read press realease

The Public Company Accounting Oversight Board (PCAOB) a few days ago voted to issue for public comment a proposed policy statement that identifies the factors relevant to “full reliance” by the Board on the inspections systems of its non-U.S. counterparts that are sufficiently rigorous to meet the level of protection for investors that is required by the Sarbanes-Oxley Act of 2002.

Comments are requested by March 4, 2008. I gonna comment on poorly rigorous behaviours based on public and official sources that are the visible part of the iceberg.

Reliance would be based on the level of independence and rigor demonstrated by those entities.

Five broad principles would allow the assessment:

1. Adequacy and integrity of the oversight system – The Board would weigh whether the non-U.S. system effectively works in the public interest to protect investors by seeking to improve audit quality.
2. Independent operation of the oversight system: The Board would weigh whether the entity and the system within which it operates are free from interference or undue influence by the audit practitioners and/or audit firms under the entity’s supervision.
3. Independence of the system’s source of funding: The Board would weigh whether the non-U.S. system has the ability to obtain and deploy the financial resources necessary to carry out its mandate without interference or undue influence by the audit practitioners and/or audit firms under its supervision.
4. transparency of the system: The Board would weigh the extent to which the entity is accountable for the discharge of its duties through a transparent framework. The Board would review whether the entity publicly discloses information on its structure, governance, policies and operations.
5. System’s historical performance: The Board would weigh whether the non-U.S. oversight entity or the system within which it operates has a record of adequate disciplinary proceedings and appropriate sanctions

Big four entities in the small European financial centers may be upset.


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