Ethics and governance in the European Financial centers

Transparency International (TI) has submitted a follow-up letter to the Secretary General of the Organisation for Economic Cooperation and Development (OECD) calling for specific action to be taken on the UK government’s decision to terminate the investigation of allegations of bribery by BAE Systems Plc (BAeS) in the UK-Saudi Arabia Al Yamamah defence contract. BAeS, Britain’s largest defence contractor, has throughout denied any wrongdoing.

The letter is the latest contribution by the TI secretariat and TI’s national chapter in the UK to efforts by a large coalition of civil society organisations to press the OECD to persuade the UK government to undo the damage caused by the termination of the investigation.

TI asks that the OECD urge the UK government to promptly undertake the following:

- Reinstate the investigation and move ahead with prosecutions in foreign bribery cases where justified by evidence, without further delays.
- Encourage BAeS to make a public statement making clear that it is following a strict anti-bribery policy, backed up by a rigorous compliance programme, consistent with the best practices of leading MNCs. Provision should be made for independent verification of BAeS compliance programme.
The letter goes on to say that TI believes that the UK government’s assertion that national security interests justify the termination of the Al Yamamah investigation violates Article 5 of the Convention. A recent brief from Yale University Law School indicates that a party to the OECD Convention cannot claim a national security exception simply by asserting that national security interests would be damaged by proceeding with a foreign bribery investigation or prosecution. The brief, which was sent to the OECD on 7 March 2007, can be read in full in the attachment below.

The timing of the letter precedes the OECD’s Working Group on Bribery, which meets tomorrow to review the UK government’s response to the March 2005 OECD Phase 2 Report and the Japanese government’s response to the June 2006 Phase 2 bis Report. The Al Yamamah issue also is on the agenda of the meeting.

Both the UK and Japanese governments have performed poorly on enforcement of the OECD Convention and are under scrutiny by the OECD Working Group on Bribery. Their poor performance also was noted in the 2006 TI Progress Report on the OECD Convention’s Enforcement.

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The IRE (Institut des Réviseurs d'Entreprise), which is the regulatory body for external auditors in Luxembourg, is currently reviewing its quality control process.
One must underline the transparency of this review with a public consultation that is evidence of a will to be credible.

A first draft was proposed last fall; contribution received were commented and integrated when estimated relevant.

A new draft was released last Friday. A couple of weaknesses remain in the new version that is anyway better than the first one:
- The text doest not seem to take into account the international role of Luxembourg : when assessing breaches in Luxembourg auditors should not define a national view but integrate foreign fiscal doctrines and judicial cases involving auditors;
- Disciplinary cases should be communicated without the name to demonstrate that the disciplinary matter is actually working and provide with accurate information on the disciplinary doctrine;
- Files that are disregarded due to a judiciary procedure should be kept in mind by the committee to be examined when the judiciary procedure is completed for debrief.

In a nutshell because Luxembourg is a small country where everybody knows everyone and where tolerated dysfunctions may be traced in public and official sources, the jurisdiction cannot transpose minimum requirements from directive or international texts (IFAC, FATF...). Such texts are designed by and for bigger jurisdictions that do not have the stake of financial center that cannot afford standardised negligence.

Know more (IRE Website)

Every Big Four firm has a strict code of ethics. KPMG and E&Y use a similar portal to report unethical situations. Anyway, after the collapse of Arthur Andersen, auditors’ credibility and strict behaviour is critical to the reputation of business. Lesser issues must not be ignored, since they make unethical behaviour an everyday matter, which becomes almost normal and invisible and in this context the ethical speech may turn out to be charade.
More especially Big Four firms that dominate the market must be an example.

The following template was sent to:
- The International Federation of Accountants
- The European Commission
- The ethics teams of the Big Four

Let me ask you a couple questions in order to prepare a course for a Master's degree and a conference this spring. The same questionnaire will be sent to your competitors and has been sent to the IFAC and the European Commission.
In the framework of initiatives from the US Senate against tax havens, auditors’ behaviour in financial centres is critical to the reputation and the credibility of auditors and of the financial community worldwide

1. Can Big Four firms promote knowingly (the fiscal doctrine is perfectly known) tax evasion in their brochure for advisory services (Cf. AOL case)?
2. Can Big Four firms and auditors certify without reserves accounts of companies that built litigious tax organisation (Cf. AOL case…)?
3. Can Big Four firms and auditors be reliable when they condone or deny even public and official dysfunctions and/or repudiate those who point out these dysfunctions (as far as SOX is concerned the institution of whistleblowing is not credible when there is a silence and/or repudiation of those who point out such issues)?
4. Can Big Four firms and auditors be reliable when public and official facts are not compatible with their ethical speech?
5. Can Big Four firms be member of professional associations that consider officially (in their annual report for instance) that offences like forgery, use of forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property are vague and ambiguous?
6. Should Big Four firms repudiate the statement that offences like forgery, use of forgery, false balance sheets, use of false balance sheets or unauthorised use of corporate property are vague and ambiguous (how can they audit seriously such clients with the business stake)?
7. Can management of a Big Four firm participate to an action relating to Corporate Social Responsibility with management of a company that did not tell the truth at the tribunal about its shareholders, supported knowingly a dishonest CFO and is involved in many trials with stakeholders (employees, suppliers…)?
8. Can Big Four firms that are audited in the framework of the quality control by a colleague request that files they “consider as litigious” should be removed from the list of controlled files?
9. Is your brand credible in Ethics when supporting such jurisdictions especially small ones where everybody knows everyone which increases the risk of conflict of interest and corruption?

Is there a reputational risk with such standardised public and official negligence that has definitely replaced pragmatism in some jurisdictions?

Sources about auditors' ethics

Ernst & Young
KPMG
PwC
Deloitte
IFAC (Credibility Task Force)
European Commission