Ethical dilemma 5: Keep it in the family

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In 2008, ICAS Research published the report "What do you do now? Ethical Issues Encountered by Chartered Accountants" by Dr David Molyneaux containing 28 true life case studies of ethical dilemmas faced by accountants either in practice or business.
In recognition of this work, in 2009 the ICAS Technical Policy Board then published "Shades of Grey" containing a further series of case studies, one of which is reproduced below.
The views expressed in these respective case studies are those of the Ethics Committee and do not necessarily represent the views of the Council of ICAS.
This case study gives general guidance only and should not be relied on as appropriate or comprehensive in respect of any particular set of circumstances. It is recommended that users consider seeking their own professional advice.
The authors or the publisher can accept no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication.
Scenario
You are a non-executive director and Chairman of the audit committee at Darklightning plc, a major heavy engineering company which is a listed company.
The company has recently been visited by a firm of consultants, Identifyandresolve LLP, at the request of your Chairman, Waylon, who has been reviewing the company's IT systems and procedures with a view to trying to make them more efficient and effective. It is planned that after Identifyandresolve LLP's review, a contract will be awarded to another organisation to take forward the recommendations included in their report.
The Chairman does not believe it would be a good idea to allow the same organisation to undertake the work on which they had reported as this would possibly provide an incentive for them to overstate the level of work required.
You had been instrumental in getting the Chairman to take this project forward based on recent reports given by the external auditors to the audit committee. You had been surprised that the Chairman had readily agreed to the need for such a review without a detailed discussion on the likely cost - the Chairman did not like spending money unless it was absolutely necessary - and had advised you to leave it with him. He had certainly not hung about and Identifyandresolve LLP had been appointed within a few days of your conversation.
Whilst visiting one of the company's factories you bump into Kenny, the company's head of IT. Kenny is not a board member. You get round to discussing the current IT project and are surprised to find out that Kenny is a bit annoyed by the whole process.
You would have thought that he would have been pleased with this review because, if anything, his life will become easier and hopefully his extensive workload will be reduced. You ask him why he is unhappy. He advises you that it is a dead cert that Identifyandresolve LLP will award a company called Extravagant Solutions Ltd the contract.
You ask Kenny how he arrives at this conclusion. He advises you that the Chairman is very friendly with Don, the senior consultant at Identifyandresolve LLP, and that the Chairman's son-in-law is a director of Extravagant Solutions Ltd. Kenny adds that, although they are always very expensive, they do not necessarily represent the best solution.
You thank Kenny for the information and remember to take a mental note to see what develops in the future. It is only natural after all, that management do not like consultants breathing down their necks and this might explain Kenny's unusually sharp comments.
At the next meeting of the board, Don is present and asked to present the findings of Identifyandresolve LLP's review of Darklightning's IT systems and procedures. He is a very experienced presenter and provides a very informative overview of what has been discovered by his staff.
Ultimately, he comes to the recommendations section. He advises that normally his firm would not recommend a specific contractor to undertake the work but merely a list of the work which requires to be undertaken. However, on this occasion he had been specifically asked by the Chairman to recommend the most suitable supplier.
He then advises that Extravagant Solutions Ltd would appear to be the most suitable choice to undertake work of this nature, although he adds the usual legal caveats to his recommendation. Waylon thanks Don for his firm's insightful work and then asks for comments around the table.
You remember Kenny's comments and decide to probe as to whether there are any conflicts of interest/related parties with respect to Extravagant Solutions Ltd. No-one declares an interest. You think to yourself that maybe Kenny was misinformed but he has been right so far. Should you raise this issue at a board meeting with only hearsay as evidence as to the Chairman's link to Extravagant Solutions Ltd?
The Chairman advises that unless anyone says anything to the contrary a motion to award the contract to Extravagant Solutions Ltd will be approved.
What do you do now?
Scenario Analysis
What are the readily identifiable ethical issues for your decision?
For you personally
- Can you raise the issue based on what was said to you by the company's head of IT?
- Kenny was feeling aggrieved and possibly was merely speculating to whom the contract would be awarded. The Chairman never admitted to any conflict when you broached the issue - haven't you done enough already?
- Is there a need to ask for a postponement of the decision to allow you to have a chat with the Chairman and/or the senior non-independent director?
- Is there a need to consult with the auditors/legal advisors re the alleged conflict of interests?
- If the decision is postponed, you could undertake a search at Companies House to determine whether the Chairman's son-in-law is a director of Extravagant Solutions Ltd.
For the Company
- Does the company maintain a register of related parties?
- Are conflicts of interest a standing board agenda item?
- Does the company have a policy of undertaking a competitive tender for any such contracts?
- Who are the key parties who can influence, or will be affected by, your decision?
- You
- The Chairman
- The other directors
- Shareholders
- Employees
- The partners in Identifyandresolve LLP
- The directors and shareholders of Extravagant Solutions Ltd.
What fundamental ethical principles for accountants are most applicable and is there an apparent conflict between them?
Integrity | Is there a need for you to pursue this matter by asking the Chairman directly if he has any connections with Extravagant Solutions Ltd? Could the decision on the contract be postponed to allow you to discuss this matter privately with the Chairman/senior independent director? |
Objectivity | Assumed, but one needs to remain objective and challenge fellow board members as and when appropriate. |
Professional competence and due care | Assumed. |
Confidentiality | Did you receive the information in confidence from the head of IT? If so, there is a potential conflict between integrity/professional behaviour and confidentiality. |
Professional behaviour | As per above, the need to ensure that you satisfy yourself that the process for awarding the IT contract has not been distorted. |
Is there any further information (including legal obligations) or discussion that might be relevant?
As mentioned above, it would be useful to know whether the board has a standing agenda item that requires any conflicts of interest to be disclosed and whether it has a competitive tendering policy. Additionally, seeking feedback from previous customers of Extravagant Solutions Ltd in relation to the quality of their work would be useful.
Is there a conflict between the 'Guardian' and 'Commercial' strands of an accountant's responsibilities?
No
Based on the information available, is there scope for an imaginative solution?
No.
Are there any other comments?
None.