Remember Enron, WorldCom, HIH and Great Southern? All of these gloomy stories (and many more) have a common feature, namely, accountants behaving badly. The sometimes uncomfortable history of the accounting profession over the past 40 years offers certain useful parallels and guidance to leaders in the evolving profession of financial planning.
Sadly, during those decades, not all accountants lived up to the highest ethical standards to which the professional accounting bodies claim their members are bound. I’m not just referring to the occasional “bad apple” who’s reprehensible actions may have been the subject of disciplinary or court action. I’m referring to deeper systemic issues, typically involving breaches of basic professional obligations, including the requirement to act without the corrupting influence of conflicts of interest and the obligation to act independently.
These factors have played an important role in many corporate collapses, exposing the professional and personal shortcomings of members of the accounting profession while acting as auditors, directors or senior managers in corporations large and small.
Successive governments (reflecting community pressure) have understandably concluded that the accounting profession could not be trusted to carry out its statutory and professional duties without the imposition of complex and intrusive regulatory interventions by parliament. As a result, the privilege of self-regulation, once an expected “given” in the accounting profession, has been gradually eroded over the decades, reflecting diminishing public trust in the profession’s willingness to act in the public interest.
For example, the profession has lost much of its ability to self-regulate in the areas of auditing and accounting standards. These standards are now under the direction of government boards with input (but not control) from the accounting profession.
Role in education
The accounting bodies still have a significant role in accounting education, although much of that is quite properly delivered through third parties such as universities. However, in order to offer their chosen professional specialisations to the public, accountants are subject to numerous government bodies whose roles are to set educational and technical standards that members of the accounting bodies must possess before they can offer services to the public (for example, registration as a tax agent, company auditor, SMSF auditor or liquidator, not to mention financial planner).
The only area of self-regulation left substantially to the profession, at least for now, is the development and publication of professional and ethical standards. This work is undertaken through an independent non-government body called the Accounting Professional and Ethical Standards Board (APESB) which was established earlier this century by the three principal accounting bodies, partially as a preemptive response to the prospect
of unwelcome government intervention.
Members of the accounting bodies are bound by the APESB’s pronouncements, although in recent years, the smallest of those bodies (the Institute of Public Accountants) has stated that its members are not so bound, at least insofar as financial planning standards are concerned. The IPA’s position is that accountants offering financial planning services should only be required to follow the law of the day and no more.
This argument casts doubt on the traditional view that a true profession (as distinct from a commercial occupation), having undertaken to act in the public interest and consequently having been endowed with the privilege of self-regulation, is morally obliged to adopt the highest ethical standards, not just the minimum standards required by law (in this case, FOFA).
Changing attitudes
The other accounting bodies, Chartered Accountants Australia and New Zealand (CAANZ) and CPA Australia, have also sent mixed messages about the need for their members to adopt the highest ethical standards in financial planning. This became evident when in 2013 those bodies successfully opposed the APESB decision to mandate the avoidance (not just disclose) of all forms of conflicted remuneration, including commissions and asset fees.
This resulted in a standard (APES230) whose centerpiece remains to this day an unprecedented regime of “optional ethics” in which members may choose a high ethical position through avoidance of conflicted remuneration or a low ethical position through its mere disclosure.
Pleasingly, it appears that in 2016 attitudes in the principal accounting bodies may be changing. CPA Australia is now enthusiastically promoting that body’s ethical leadership in establishing an independent (s.923a-compliant) financial planning practice. It has been specifically designed to offer licensing arrangements to the increasing number of CPAs who are willing to adopt the highest ethical standards, especially the removal of all forms of conflicted remuneration.
As for CAANZ, its chief executive officer, Lee White, is to be commended for showing considerable ethical leadership with these words in a recent article (August 2016): “Progress needs to move from disclosure to removal of conflicts of interest … given the recent scandals, (the industry) needs to pick up speed and remove the various forms of remuneration that lead to conflicts and replace them with a flat fee or hourly rate … who knows, it might even restore investor trust in the nation’s financial institutions.”
While these are two different approaches to the same problem, the preferred outcome of both bodies is clear. Hopefully, the APESB will heed the message and move as soon as possible to amend APES230 to reflect the principles publicly announced by it in 2012, prior to the standard’s regrettable dilution.
Ethical leadership
This action has some added urgency, given the imminent establishment by government of an industry-funded education and professional standards body. Its role will be to set minimum education standards (the relatively easy bit) and a mandatory code of ethics for the whole industry (which may prove to be much harder). Given the “broad church” nature of a body such as the one proposed, it is likely that any code of ethics, at least initially, will set minimum standards and principles (possibly even low bars) without venturing into the potentially controversial area of conflicted remuneration.
The point is that whatever the structure and powers of the proposed body, existing industry associations must maintain an important leadership role in setting self-regulated professional and ethical standards at a level above the prescribed minimum (and then enforcing them).
If they fail to do that, they will have an increasingly limited role in the financial planning profession of the future. In fact, in the absence of ethical leadership, one wonders what their future relevance might be. One need only observe the substantial ineffectiveness and irrelevance in the accounting profession of the current diluted version of APES230 to reach that conclusion.
In order to take a position of leadership, the financial planning industry bodies should learn from the experiences of the accounting profession and acknowledge that the word “profession” carries with it certain fundamental ethical obligations that must never be commercially compromised in a vain attempt to keep conflicting vested interests happy.
A good start would be to remove from the profession’s phrase book the expression “balancing stakeholders’ interests.” This has no place whatsoever in a true profession claiming to protect the public interest.
