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Enhancing trust in our institutions

Posted by Stephanie Kemp on 5 October 2016

Increasing trust in business dealings

At the International Bar Association conference in Washington DC, we heard Christine Lagarde, Managing Director of the International Monetary Fund (IMF), give the Opening Ceremony address.  She made observations on the need for trust and integrity in government and business that are just as relevant to accountants and auditors as they are to lawyers, if not more so.  This week's parliamentary enquiry into the Big 4 banks reinforces the relevance of her words.  Auditors and accountants have a window into public and private sector business dealings which brings with it certain responsibilities.

Overall the impact of globalisation has been to increase the wealth of developing countries and the people living in them.  However while inequality between countries has fallen in recent times, inequality within countries has risen, with the rich becoming richer and the poor becoming poorer.  Middle income earners in developed economies in particular have seen their share of total income shrink and are losing trust in the institutions that are in charge.  This lack of trust in governments and financial institutions is leading to populist politics (think Pauline Hanson) of the sort that in the UK led to Brexit.

A key factor fuelling this lack of trust is corrupt or unethical behaviour in these institutions, whether actual or perceived.  Regardless of whether it is well founded, the perception of corruption is corrosive to society and fuels populist politics.  It is therefore an area that the IMF is focussing on.  Its target areas are corruption in the public sector and unethical behaviour in the private sector.

Corruption in the public sector has a detrimental effect on society in many ways and disproportionately on the poor. 

  • It weakens fiscal capacity.  If the mega-rich appear not to need to pay tax, the rest of the population is less inclined to pay their share as well.  There is therefore less tax revenue to pay for publicly funded programs.
  • It discourages investment.  It perpetuates inefficiency and uncertainty and acts as an additional, but unpredictable, tax on investment.
  • It entrenches poverty and inequality as there is less money for welfare and social services.  Mme Lagarde quotes child mortality statistics: "By some estimates, child mortality rates are one third higher in countries with high corruption, and infant mortality rates are almost twice as high".

The IMF is seeking to address these issues by strengthening the rule of law and encouraging fiscal transparency and effective anti-money-laundering practices.
Unethical behaviour in the private sector is as harmful as corruption in the public sector.  For every public sector official who takes a bribe, there is a private sector operative who pays it.  Less obviously, but just as corrosively, the high risk behaviour engaged in by financial institutions prior to the 2007 financial crisis, in pursuit of profit and personal gain, destabilised whole economies and led to widespread suffering after the collapse.

The IMF is addressing these issues by supporting better regulation and encouraging better education of professionals.  They want to see a culture of values rather than compliance.  Ethical behaviour means "professionals who take pride in doing the right thing, even when no-one is watching."

Crucial to this is leadership from those at the top and good role models.  A shift in the definition of success from being a big $ bonus to behaving with professionalism and adding value to society is not easy to achieve, but interestingly the Dutch financial industry has this year introduced an Ethics Oath, similar to the Hippocratic Oath taken by doctors.

The issues that Mme Lagarde tackles in her speech resonate with recent consultations in our profession on how to ensure audit quality and the application of integrity and scepticism, but when she takes the argument to its social conclusions in terms of poverty and child mortality, ethical behaviour can be seen as a life or death issue.

I shall quote from her conclusion directly: "The task before us is clear. Enhancing integrity in public and private sector governance is critical in mending the trust divide we see in societies today. Only then can we have enough confidence in the very institutions that are essential for sustained and inclusive growth. Let me close by appealing to the wisdom of a founding father of modern day economics Adam Smith.

"To many of us, Adam Smith is perhaps best known for terms such as "self-interest", "laissez-faire" and the famous "invisible hand." Yet for Smith, the classical discipline of economics was always a branch of moral philosophy. Indeed, for him, the market would only work effectively if it was underpinned by trust: the baker that is featured in the Wealth of Nations would only be able to sell his goods if he or she was trusted".

Auditors and accountants also have a crucial role to play in maintaining and building trust in institutions, both public and private sector.  That role may require standing up for principles and saying No to a client.  Can we rise to the challenge?

The full text of the speech can be found at http://www.ibanet.org/Conferences/washington-oc-christinelagarde.aspx.

Author:Stephanie Kemp

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