THE PUBLIC INTEREST is a curious concept. By definition, working in the public interest is something that benefits everyone in the long-term. But few can define it. A recent FRC case has, however, transported this vague, theoretical debate into the real world for accountants.
In 2013, the accounting watchdog found Deloitte had contravened its fundamental principles when advising the owners of MG Rover in the early 2000s. Part of the charge was that the Big Four firm had failed to take into account its duty to work in the public interest.
But in January an appeals tribunal – led by Sir Stanley Burnton – overturned eight of the 13 charges levelled against the firm, including that it had acted against the public interest and went on to label the ICAEW’s guidance on what constitutes the public interest – cited by the original ruling – as ‘vague and unhelpful’. In response, the institute has already taken steps to review its guidance through a consultation.
All this comes at the same time that tax avoidance has been thrust onto the front pages, with accountancy firms accused of helping high net worth individuals and major companies avoid tax on an ‘industrial scale’.
But what duty – if any – do firms have to uphold this nebulous ‘public interest’? And, more importantly, what practical implications do such duties have on the day-to-day business of accountancy firms?
MG Rover, Deloitte and the public interest
The case of Deloitte and MG Rover has thrown the issue of the public interest into the limelight.
It revolved around a consortium owned by the so-called Phoenix Four – John Towers, Nick Stephenson, John Edwards and Peter Bealer – which bought the iconic car company for £10 from BMW, making statements that their stewardship of MG Rover would be for the public good.
The four took ‘unreasonably large financial rewards totalling tens of millions of pounds’ before MG Rover collapsed, according to a government-commissioned report in 2009.
The original FRC tribunal found that, among other charges, Deloitte and its now retired partner Maghsoud Einollahi ‘failed to adequately consider the public interest’ when giving advice to the Phoenix Four. Einollahi was subsequently cleared of all charges against him in the appeal hearing.
But the public interest responsibility is controversial. Accountants – like all professionals – have a duty to act with integrity, honesty, objectivity and competence, and very few would argue that this is inappropriate.
However, the ICAEW code of ethics “imposes a public interest responsibility on the profession”, which should be a consideration “in deciding whether to accept or continue with an engagement or appointment”. This public interest responsibility involves “having regard to the legitimate interests of clients, government, financial institutions, employers, employees, investors, the business and financial community”.
No legal duty
On a superficial level, this might seem reasonable. But, as Sir Stanley points out, it has ramifications in real life that can be seen as “absurd”.
He gives the example of a predatory foreign company looking to take over a factory, which could lead to the loss of jobs and is looking for accountants and lawyers to help it in purchasing the factory.
It could be argued that such a takeover would be against the wider public interest – the company might benefit, but the workers, the surrounding business community and investors will almost certainly not. But, as Sir Stanley said in his ruling in the MG Rover tribunal: “We regard the suggestion, if it be made, that the accountants are not free to accept the engagement without considering the vague question whether the takeover is in the public interest as absurd.”
Applying such logic to the case, Burnton found that Maghsoud was not being inappropriate in advising clients on how to act in their own best interests rather than in the best interests of the public in the form of the continuation of MG Rover
Bree Taylor, a partner at law firm Memery Crystal, tells Accountancy Age that “accountants can sigh with relief” after the ruling. “The appeal tribunal has been very clear: there is no legal duty to consider the public interest when accepting new engagements,” she explains.
“Their professional obligations do not include assuming a regulatory or judicial role in relation to the proposed transactions of their clients. Assuming the transaction is lawful and the accountant’s instructions involve no dishonesty or lack of integrity, accountants have no obligation to consider the vague question of whether a transaction is in the public interest before deciding to accept a new engagement.”
Contrary to the wording of the ICAEW code, the ‘ethical obligation’ does not involve
“turning away work in relation to perfectly lawful transactions”, she adds.
The case for a public interest responsibility
But this ruling has not killed the debate around the public interest responsibility completely. The FRC says it is not the responsibility per se that the appeals panel had problems with – it is the ICAEW’s current definition that caused problems.
“The appeal tribunal underlined that accountants must act in the public interest in all of their work, including corporate advice. The issue identified by the tribunal was that the ICAEW guidance on public interest was unclear how accountants should do that in practice,” the FRC spokesperson says.
Unclear the guidance may be, but professions have traditionally regarded acting in the public interest as “part of the purpose” of being a profession, says Tony Bromell, head of integrity and markets at the ICAEW.
“It is why the public is able to place trust in them, and part of serving that trust,” he says.
CIMA agrees that upholding the public interest is a “fundamental obligation” for a chartered body. This principally applies to the institute itself, a CIMA spokesperson says. However, they add: “Professional accountants themselves must also accept responsibility, for their role in society as trusted experts, and towards all who rely on them for their objectivity and professionalism.
“Professional accountancy organisations have an obligation and duty to support them in this by setting and maintaining high standards and by promoting public trust in the profession as a whole.”
The institutes and the FRC will begin consultation in the summer for a new public interest responsibility, they say. It will not be easy to come up with a definition. In the ICAEW’s 2012 report ‘Acting in the public interest: A framework for analysis’, it admitted it cannot seek to provide a “detailed definition of the public interest” as “there is an infinitely wide set of individual circumstances, which detailed definitions are unlikely to be able to cope with without unintended consequences”.
The case against
The current definition is certainly not fit for purpose. Sir Stanley said it was ‘vague and unhelpful’. But his other criticism of the definition gets to the crux of the debate of what the public interest responsibility should mean in practical terms.
He says the ICAEW does “not assist in giving guidance as to how the public interest is to be taken into account by the accountant, ie how any decision of his is to be affected, beyond the requirements for him to act with integrity, honesty, objectivity and competence”.
As Taylor at Memery Crystal puts it: “Accountants have clear and well-defined professional obligations to act with objectivity, integrity and competence. This equates to doing a proper job for the client without misleading them or anyone else. That seems to me to be in the public interest.”
This is the case in the law profession: lawyers are under no duty to refuse a client because of the effect the decision will have on the public interest – indeed, their professional obligations bound them to take on clients.
There is an obvious parallel in accountancy in the tax advice given to clients.
Ray McCann, chair of the CIoT Professional Standards Committee and a partner at Pinsent Masons, says it “is plainly in the public interest that taxpayers can obtain high quality advice on their tax affairs since this helps the tax system function as intended… A tax adviser owes a duty of care to his client and at times this may appear or be claimed to be at odds with the broader public interest”.
But, he adds, “it is likely that where an adviser is acting in a way that could be at odds with what the public interest might be, for example he is promoting an aggressive tax scheme that had little chance of working”.
However, when the adviser does promote these schemes, “he would most likely be close to or would have breached ethical guidelines of a professional body or some of the new rules introduced by HMRC such as ‘high risk promoters’,” says McCann.
Of course, as Julie Matheson [see box below] points out, auditors have a duty to not necessarily work in the clients’ best interests, and this is because of the public interest. But they are already bound by such duties to the FRC, without the need for a public interest responsibility.
McCann says there is a “debate is to be had” about introducing similar FRC duties to tax advisers, but he adds: “Given the scale and range of tax advisory services I could see real issues from such a move.”
Instead, he prefers that membership of profesisonal bodies, with “appropriate standards” and other requirements such as PII and CPD should be regarded as the most effective way to ensure that tax advice is offered within a framework that ensures that all advisers operate to a common standard.
“It also means that what that standard is can flex to reflect changes in public attitudes, the law and HMRC practice,” he adds.
And this adherence to the other, more universally recognised professional responsibilities is the course recommended by Sir Stanley.
The ruling concludes:”It is, of course, in the public interest that accountants, like any members of a profession, should act competently, with integrity and honesty, and should make their professional judgments with objectivity.”
He adds: “But what does the requirement to take into account the public interest add to these basic principles?” It is a question the ICAEW might want to take into account when seeking to redefine accountants’ responsibilities.
Julie Matheson, Kingsley Napley, expert opinion
All chartered accountants, regardless of the regulatory body of which they are a member (e.g. ICAEW/ ACCA/ CIMA/ CIPFA etc) must meet certain ethics standards throughout the course of their work, but also in their professional life.
If they do not meet those ethical standards, they could be subject to disciplinary action at the hands of their regulatory body. If found guilty of ‘misconduct’ (for a serious breach of an ethical or technical standard), the accountant could face a number of sanctions, commonly ranging from a warning to being ‘struck off’ or expelled from membership of their regulatory body. That would clearly have significant consequences for their career.
The UK accountancy bodies’ ethical standards are based upon the International Federation of Accountants’ (IFAC) Code of Ethics. The ethical standards for each UK accountancy body are largely similar; most have as a basic principle that chartered accountants are expected to demonstrate the highest standards of professional conduct and to take the public interest into consideration.
Fundamental principles are set out in each body’s ethical code, commonly comprising standards of integrity, objectivity, professional competence, confidentiality and professional behaviour. Adherence to these fundamental principles should mean that chartered accountants meet their public interest responsibility. Accountants must not merely satisfy their own personal interest or their client’s interest if this would be at odds with the wider public interest; doing so would mean that they don’t meet the fundamental principle of objectivity, and possibly integrity. By way of example, an auditor could recommend a technically correct method of accounting to allow a company’s balance sheet to look slightly healthier than it is, thereby pleasing his client.
However, that may have an adverse effect on the markets or shareholders, which would not be in line with the public interest, and may therefore fall foul of his ethical responsibilities. If identified, this could lead to disciplinary action against the individual accountant or his firm. On most occasions, accountants will identify situations in which they can be seen to lack objectivity or integrity, and will steer clear of them. The recent MG Rover case has highlighted, however, that ‘public interest’ considerations can often be difficult to identify or define.
If an accountant has an ethical dilemma, each accountancy regulatory body has an ethical helpline which can be consulted, and will assist with thorny ethical issues; however such ethical helplines cannot provide specific advice, merely guidance. If a chartered accountant has a concern as to whether a course of action would fall foul of the ethical or technical standards under which he operates, he should consider taking legal advice, to allow him to be satisfied that any course of action taken would be justifiable under his professional responsibilities.
Julie Matheson is a partner in the Regulatory and Professional Discipline Team, Kingsley Napley
ICAEW Code of Ethics
‘Acting in the public interest involves having regard to the legitimate interests of clients, government, financial institutions, employers, employees, investors, the business and financial community and others who rely upon the objectivity and integrity of the accounting profession to support the propriety and orderly functioning of commerce.
‘This reliance imposes a public interest responsibility on the profession. Professional accountants shall take into consideration the public interest and reasonable and informed public perception in deciding whether to accept or continue with an engagement or appointment, bearing in mind that the level of the public interest will be greater in larger entities and entities which are in the public eye.’