It appears the accounting profession still believes accountants should be considered unique or special.
This attitude was revealed in a December 2018 submission to the Financial Adviser Standards and Ethics Authority by Chartered Accountants Australia New Zealand (CAANZ), in which it was stated: “Our members are concerned at the suggestion that they must undertake a minimum of further study in ethics, as well as studies to complete the proposed FASEA exam.”
The fact that such submissions are made, not to mention actions by the accounting bodies that have watered down the application of timeless ethical principles relating to conflicts of interest, point to a lack of appreciation of the role of a true profession in society and just how far and quickly community expectations have evolved.
Of course, I appreciate the point they are making here and I recognise there’s a lot more to the submission than just that one sentence. In fact, as a chartered accountant myself, I even have some sympathy for their point; however, I respectfully submit that statements of this nature fail to recognise the impact of poor decisions by the profession in recent years.
So how did the accounting profession get to this point and what chance does it have to turn the perception around in the eyes of the community and policymakers?
How did we get here? In a word – pressure (and lots of it). The pressure came from a range of aligned and non-aligned dealer groups and institutions whose commercial interests were not served by the realignment of power and funds under management they calculated would have followed if the foundational principles the Accounting Professional & Ethical Standards Board (APESB) articulated in the original version of APES 230 had remained intact. In caving to this immense lobbying from the financial services industry, the accounting bodies apparently failed to understand the significance of what they were deciding (or perhaps they didn’t care).
When I started out as a young chartered accountant, the core principle for the accounting profession, the keystone if you like, was (and remains) how to deal with conflicts of interest. Originally, the profession expected members to avoid conflicts of any kind but the creation of multidisciplinary accounting/consulting firms caused this principle to become ethically challenging and commercially inconvenient. As a result, conflict avoidance was gradually replaced by the lower standard of conflict disclosure, supported by the building of rather leaky “ethical walls” between service divisions within those firms.
Concurrently, with the worldwide development of securitisation, managed funds and deregulation, the financial planning industry was evolving out of the life insurance industry. The latter, at least in Australia, had suffered a mortal blow with the demise of death duties. So it was an obvious move for many former ‘lifies’ to become financial planners. Naturally enough, the product sales culture of the life insurance industry followed them.
Given the recent, more ethically relaxed, attitude of the accounting profession, it didn’t take long for its practitioners to be seen as centres of influence to facilitate the selling of financial products, often with financial inducements. Some accountants became licensed advisers in their own right. Others formed joint ventures with financial planners to expand their traditional accounting services offering. These developments raised fundamental issues around conflicts of interest and conflicted remuneration. However, the accounting bodies did little of any consequence to self-regulate in this area because they saw it as a minor activity in which few members were involved. And they knew those well-connected members who were involved would not appreciate being told to terminate what had become a lucrative source of (conflicted) income, later famously called “fees for no service”.
After five years of public consultations, hundreds of submissions and two exposure drafts, the APESB issued in 2012 a public statement proposing a new professional and ethical standard, APES 230. The central feature of the standard was a ban (over a five-year transition period ending in 2017) on all forms of commission for accountants offering financial planning services. That included asset fees, life insurance commissions, mortgage broking and real-estate sales commissions, grandfathered payments and any other product sales incentives.
At this point, all hell broke loose. The accounting bodies (the APESB’s shareholders) decided to oppose the APESB’s decision, thereby bringing into question both the independence of the standard-setter and the commitment of the accounting profession to its foundational ethical principles. Nevertheless, within three months, the APESB’s decision had been reversed and replaced by a watered-down regime of “optional ethics” consisting of disclosure of conflicts or avoidance of them at the choice of the accountant financial planner.
Given the immense negative impact on the reputation of the profession that they must have known would follow, why would the leadership of the accounting bodies undermine the independence of its own standard-setter and repudiate the foundational principle of the profession? Why did they go that far?
Down in the weeds
The tarnished reputation of the accounting profession has never recovered. As a result, accountants are seen by many as ‘down in the weeds’ with the rest of the financial services industry. As proof of this, ask yourself whether you would trust a qualified (licensed) accountant to act in your best interests. The answer must be no or at least not sure. That says it all.
It is, therefore, unrealistic and arrogant to persist with the idea that accountants are somehow different and that, unlike dodgy elements within the industry, qualified accountants remain trustworthy, steadfast and pure in the face of conflicts of interest and conflicted remuneration.
Through rose-coloured glasses
I don’t mind admitting that as a young chartered accountant, I was rather proud of what I had achieved. I had worked ridiculously hard throughout my professional year to attain my designation. I had succeeded in my final exams (all four of them). I had received five years of excellent professional training at an international accounting firm. I felt that I had well and truly earned the right and privilege to be a member of an exclusive club we called the profession of accounting. And I was motivated to make a positive difference in the Australian community in the same way that I perceived previous generations within my profession had done.
Over the decades that followed, certain of my colleagues behaved badly, somewhat unsettling my idealistic picture of a profession that I, nevertheless, continued to view through rose-coloured glasses. Looking back over those years (with 20/20 hindsight), I realise now that a slow process was taking place that was gradually undermining the ethical and professional principles (the foundations) on which my profession was built.
Based on the behaviour of many members of the accounting profession in recent years, and the lack of action within the profession to articulate and police unethical practices, it’s eminently reasonable to require accountants to undertake additional training in ethics and relevant studies.
The good news is that a journey down the wayward path can be readily and permanently corrected by accepting that the principal role of a professional body is to protect the public interest. However, this role cannot be fulfilled when compromising the profession’s foundational ethical principles in order to appease a minority of members who appear to believe payment of their membership fees entitles them to have their conflicted commercial interests defended. This process of compromise, often referred to as “balancing of stakeholder interests”, is inimical to the public interest, to the achievement of trust, and to the long-term value of our professional designations.
Whatever the regulatory outcomes of the next two years (and there may be many), one thing is certain: Parliament cannot successfully legislate about how we should think. That’s the role of self-regulation and the professional bodies of which we are members. Regrettably, the recent history of the accounting profession is a case study in how not to self-regulate professional and ethical principles. My hope is that the financial planning industry will learn from the accounting profession’s mistakes.