Objectivity in corporate finance

In the corporate finance arena, I believe that there are practices currently adopted by accounting firms which can give the appearance to clients of lack of objectivity.

This damages the reputation of the profession and therefore reform is necessary.

First, many firms seem happy to act in major roles for two opposing parties to a transaction. Despite Chinese walls, this can give rise to suspicion about how one party or other has received information. Also, advice given may appear to be partial, especially where there is a disparity between the two parties in terms of their importance to the firm.

Second, some firms carry out due diligence on deals while taking a contingent fee for advising in another capacity. There is a clear problem in giving an opinion as to the merit of a company being acquired while benefiting financially from the success of the deal.

No due diligence partner in their right mind would keep quiet about a deal-breaking issue to assist a colleague to get a success fee. But again it is the perception of irresolvable conflict that is the problem.

It is perhaps easier for the likes of the larger mid-tier firms to avoid major conflicts than it is for the Big Four.

These firms are smaller than they are, and situations where they are asked to be main adviser to both sides of a deal are less frequent.

At BDO Stoy Hayward we have had a clear policy for many years not to carry out due diligence work where an advisory success fee is in the offing.

We believe that this policy is the right one and should be adopted by others so that we can be seen to properly deal with potential conflicts of interest.

  • Peter Hemington is a member of the ICAEW corporate finance faculty’s executive committee.

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