How to handle a conflict of interest

Belinda Zohrab:
What underpins conflict of interest is a potential bias. The concern is that you either may have a degree of bias or there may be an appearance of a degree of bias. So sometimes even though the right safeguards are put in place and disclosure is made and the relevant parties involved are all fully informed and even consent, there may still be that appearance which may have negative consequences too. So there are sometimes circumstances when you just have to potentially walk away, recuse yourself or suggest perhaps a client if you're the advisor to find another advisor.

Tahn Sharpe:
Welcome to "INTHEBLACK," a CPA Australia podcast. I'm Tahn Sharpe, editor of "INTHEBLACK" and host of this episode. Now, today's topic is one that is fundamental to accounting and finance and also increasingly complex. I'm talking about conflicts of interest, which are rarely straightforward, but how they are managed can often define trust, credibility and organisational culture.

Now with me today, I have Dr. Michelle Cull, FCPA, who is the associate professor of accounting and financial planning, as well as head of discipline at Western Sydney University. My old alumni, welcome, Michelle.

Michelle Cull:
Thank you very much for having me on this episode, Tahn.

Tahn Sharpe:
And we also have Belinda Zohrab, regulations and professional standards lead at CPA Australia. Thanks for joining us, Belinda.

Belinda Zohrab:
Thanks, Tahn.

Tahn Sharpe:
All right, now over the past few years, we've had many discussions on conflicts of interest at "INTHEBLACK," and mostly through our everyday ethics series of articles and you've both been a big part of that. I thank you for that. And we've been exploring how grey areas are becoming more common in the business environment.

The question is no longer really whether conflicts of interest exist but how effectively professionals manage them. So I wanna start on that point there with a bit of a qualifying question, Michelle. Would you agree with the statement that conflicts of interest are unavoidable in financing accounting?

Michelle Cull:
Well, I wish that it was a different answer, but no. With the reality of life, we cannot avoid all conflicts of interest. And you know, there's inevitably going to be times when there is a crossover between personal and professional relationships, or there's going to be some other type of conflict that can pop up that you may not be expecting, but we have to be on the lookout for it. And although we are going to talk a lot today about avoiding conflicts of interest, in some cases, it is impossible to avoid them and we need to manage them.

Tahn Sharpe:
And Belinda, would I get the same response if I ask the same question of you? And perhaps you can extend on the answer and and maybe touch on why conflicts of interest are so prevalent.

Belinda Zohrab:
Yes, I completely agree with Michelle. They are unavoidable, but that doesn't mean they can't necessarily be managed. In some circumstance, they may not be manageable, but in other circumstance, they can be just quite an anticipated and expected part of doing business. And this is particularly so when you're working in a particularly niche area, maybe you've got a particular specialty, and perhaps you're one of only few people providing that particular service. And nevertheless, it might be a demanded service or a service which is perhaps a regulatory requirement. And so whatever happens, you're going to find yourself in demand and there's only one of you, so that can often happen.

Tahn Sharpe:
Belinda, you speak to members quite regularly I imagine as part of your role. Do you get a sense of what the most common types of conflicts accountants and finance professionals encounter?

Belinda Zohrab:
Yes, I think there's two major ones. One is where there's a potential conflict and the audit space. And that often happens because there are four, some would say six, very large accounting firms providing audit services to the big companies.

So the big end of town companies. And that's most appropriate because they have the skills to provide that high level of audit service. But there are only four to six of those firms. And we have independence rules which require rotation and moving from firm to firm. But as I said, the market is small, so that's one area.

But the other one in the smaller end of town might be where as a practitioner, you might have a particular specialty. You might provide a lot of services to people perhaps in the trading industry or in maybe health services industry. And as you become specialised in niche, what you'll find is you may have clients who not only compete with each other, but they might actually look to merge, or one might look to purchase the other.

And when you have these long form relationships with each other, it's going to be difficult to have a conversation saying, much as I like you and we like each other doing work together, I can't provide you service because you're looking to merge with my other client and there is a conflict here. So that second one in particular is the most common we've heard.

Tahn Sharpe:
Right, does that scan with you Michelle? Is that something that sort of anecdotally you would hear about as well?

Michelle Cull:
Absolutely, I think in the accounting space in particular, that is something that's very prevalent. And especially in smaller towns as well, you can often find that there's more likely that conflicts are going to appear in those situations. But when you're looking at say, financial advice, which is an area that I've spent a lot of time in, sometimes the conflicts are a little bit different but can be similar conflicts.

But also there's other conflicts that can arise because financial advisors are usually dealing with an individual rather than a firm. So there's other conflicts that could arise maybe if say, for example, the advisor has a couple as their client and often we do hear that there are situations that advisors find themselves in where, for example, one member of the couple may disclose to the advisor that in fact look, hey, I'm going to be leaving my partner. I would like you to stay on as my advisor, but please don't tell them about it. So that puts them in a very awkward situation around whether there is a conflict and you know, a whole range of other office space ethical principles that arise from that situation.

And we have heard a lot in the past around advisors providing recommendations for different types of products. Since we now have changes where advisors are not able to receive commissions that has reduced substantially the conflicts that exist but not all of the conflicts. So there are still sometimes situations where financial advisors are recommending products and they have to be very careful that there are no conflicts there, whether they actually have shares in those products, for example, or whether their licensee is offering those particular products. So they have to be able to provide reasonable basis as to why they would recommend those products and that they must be in the best interest, of course, of their client and not based on any other circumstances.

Tahn Sharpe:
Sure, and I've actually had the good fortune of interviewing you a number of times over the years, Michelle, and I'm aware that you do a lot of analysis on the financial planning side. And you've kind of outlined a few of the differences that advisors would face in terms of the conflicts that may present themselves to them. Are there any other ways that advisors and accountants look at conflicts, sort of through a different lens?

Michelle Cull:
It's a really tricky question because I think both accountants and advisors, well, they both have their professional obligations and they have their professional judgement. And they also must provide advice that's in the best interest of their client. But for advisors, they have, I suppose, more strict obligations in one way because the best interest duty is stated in the corporation's law, but also through the standards in the code of ethics that's also enshrined in legislation. Whereas ethics, for most other professional bodies, including accountants, are not part of the corporations act. They stand over, you know, I suppose it's a self-regulated profession. So that's a little bit different.

And I think too, accountants often are seen as having to be independent and objective, but it's in a very different way when you're looking at dealing with firms, for example, rather than the more subjective area of dealing with individuals and relationships. And I think that there's a little bit of a difference there, although, you know, accountants also do have individual clients as well, but it's just that financial advisors must also advise their clients in a way that considers not just their current circumstances but also their longer-term circumstances. So it can be a lot more subjective when you're looking at both actual conflicts of interest and perceived conflicts of interest. And I think we'll probably touch more on that as we move on through the episode today.

Tahn Sharpe:
Yeah, it's fascinating. I think because you've got quite often people as opposed to corporates, you do need that objective view sometimes and you need to sort of look through a different kind of angle. Disclosure has often been sort of put forward as not a panacea, but a way to help alleviate or mitigate conflicts of interest. But we've explored in our everyday ethics articles that the idea that disclosure isn't always enough. Belinda, can you maybe explain when you think disclosure falls short?

Belinda Zohrab:
Yes, yes, so disclosure really requires full disclosure. So part of that is when you're disclosing to a client, or it might be in a circumstance where maybe a board member is disclosing an interest they might have in something which has been considered or a particular product or a business that's been considered for the business of which they're a board member, they need to explain exactly what the conflict is, what the consequence might be and what the risk is.

And the risk is generally 'cause what underpins conflict of interest is a potential bias. And the bias is that you're not gonna maintain that objectivity that Michelle referred to which is fundamental to both financial planners and accountants and people in these roles of governance.

So the concern is that you either may have a degree of bias or there may be appearance of a degree of bias. So even with fully informed disclosure and with the circumstances understanding potential consequences, including likelihoods, there might still nevertheless be a perception if something was to come out publicly or reported or something that there might be a perception of bias.

So sometimes even though the right safeguards are put in place and disclosure is made and the relevant parties involved are all fully informed and even consent, there may still be that appearance, which may have negative consequences too. So there are sometimes circumstances when you just have to potentially walk away, recuse yourself or suggest perhaps a client, if you're the advisor, to find another advisor.

Tahn Sharpe:
Would you agree, Michelle?

Michelle Cull:
I would absolutely agree with that. And I think too, it's easy to think, oh well, if it's been disclosed, you've ticked that box and you've managed the conflict, but it doesn't really manage the conflict, it's just a disclosure. You actually need to look at how it does affect the behaviour and how it sits among your other professional obligations. You know, when we're looking at integrity, objectivity, competence, due care, because it is all related.

And as Belinda was just mentioning, even if you were in a board meeting for example, and you disclosed a conflict of interest but then you proceeded to also vote on the motion, then that wouldn't align with, yeah, being objective and you know, holding integrity in those decisions that are being made.

When we're looking also at an advisor and a client for example, also providing a blanket disclosure, say, on a document, an information document that goes to a client is also not going to be sufficient, because each individual circumstance, each individual client is very different. And when we're looking at disclosure, it also requires that the other parties understand fully what that disclosure is about.

So it must be fully informed. And sometimes that's just not going to occur by simply putting a statement in a document. So it does need to be really considered in terms of what biases, as Belinda mentioned, it may have by having that particular issue that needs to be disclosed. So we need to go further. Disclosure is the first step, but in many cases, it's not the only step. We need to consider all of the other options.

And in a lot of cases, that may be that we need to actually avoid the conflict. So if we go back to the board situation, it might mean if there's a motion being voted on, you need to excuse yourself from voting on that particular motion.

Tahn Sharpe:
Okay, so disclosure isn't enough and sometimes you need to avoid the conflict altogether. And I remember during the Hayne Royal Commission into misconducting financial services, Hayne said that conflicts are unavoidable but they need to be managed. The question is how do you distinguish between a manageable conflict and one that should be avoided altogether, Michelle?

Michelle Cull:
Well, I think if there's an actual conflict, it's easy to work out a way of avoiding that. If it's a perceived conflict, that's where you can manage it so that it doesn't become an actual conflict. I think that's probably the easiest way of explaining it, and Belinda did touch on some ways that you can actually manage that. But maybe, I'll actually also what I'll mention is, you know, is that reasonable person's test as well, or even the pub test, I think for some people just where they do struggle with exactly how to deal with some of these issues and whether they should avoid a conflict altogether, you know, just think about people talking about it in the pub, or if it was to be on the front page of the newspaper, how would you feel? Would you feel comfortable with the decision that you made with the reasonable person looking at all the facts of the case, think that that was the right thing to do.

Tahn Sharpe:
Belinda, I mean, are there any hard and fast ways to know between a conflict that can be managed and one that should be avoided?

Belinda Zohrab:
I think it is an instinctive thing. I think it's also really good to anticipate conflicts as well, 'cause then you can anticipate the consequences and you can put up guardrails, or perhaps you can manage your practise if you're a practitioner, to reduce the incidents of these conflicts. So for example, if you are providing a niche service, perhaps in a niche industry, get to know your peers so you can make those referrals, which is useful for so many these, it's quite apart from managing conflicts, but to refer clients should that happen.

And also perhaps if you were in the financial advisory space, if you see hot investments coming out and you've got a reasonably good idea that some of your clients might be coming to you looking to invest, that could be something that you need to stay away from. So I think understanding what conflicts could arise and managing them before a conflict could arise could actually save you a lot of time and stress and perhaps loss of some valuable clients.

Tahn Sharpe:
Yeah, we have a lot of everyday ethics articles where we talk about specific ethical issues that professionals face, like commercial pressures and you know, meeting revenue targets and some of those other pressures, like having unconscious bias that comes into things, the less obvious ones, but what practical frameworks or steps can professionals take to identify and assess these conflicts on a day-to-day basis? Belinda, would you be able to start on that?

Belinda Zohrab:
Again, I think that would be knowing your clients, knowing again, if they're in practise, knowing your client, knowing the industries they're in and like, knowing it well, knowing those industries well and understand what they're facing, what risk they're facing and then reflecting on your own practise and your own personal investments as well.

Tahn Sharpe:
Michelle, would you have anything to add to that?

Michelle Cull:
Yes, well, I think Belinda touched on this earlier where she said to anticipate that these things may occur. I think that's the very first step, being aware and knowing that conflicts are going to arise, and having some sort of system that you can use to ensure that you are constantly making the right decision. And you know, this is something that's ongoing, it's repeated all the time. We need to be having these checks and balances.

And being aware of yourself, what your own biases are, I think, is a good step. But also anticipating that some of these things may happen. I mean, you mentioned commercial pressures like client retention for example, or it could be, you know, the revenue target or something like that. So you know, really looking at practising and rehearsing how you would deal with certain situations, having a script that you could use so you know how to respond to someone if you're put on the spot. Those sorts of things can be really helpful.

And I know that I do push this a lot, but ongoing education is just so important for this reason. That's where we can practise making these decisions so that when they actually do happen, we can first of all identify that there may be an issue so that we're better prepared. But then secondly, we can actually make the right decision and know what we need to do and how we would act, what we might need to say.

In a lot of ethics sorts of dilemmas that we might propose to accountants or financial advisors or other professionals, we may ask them to read through a case and answer some questions. And in a lot of cases, those professionals will be able to identify the issue or the conflict of interest and the correct action to take. But in reality, that is much more difficult because you have people's emotions, you've got relationships involved, there's often a lot more at stake.

So we do need to put ourselves into positions when we're doing that ethical training in what would you do if this was you and what would you say, how exactly would you go about it. So we also need to look at how we undertake that ethics training. So try to get some diverse ways of, I mean, we all have to do the ethics training, it's compulsory for accountants and for advisors, but you know, not just doing the simple training where you can just do some multiple choice questions but actually trying to get a little bit more involved where you are actually doing some role plays or you're pulling apart case studies and applying it.

And I think too, I mean, there's a lot that we can do as educators to help in that space also, but relying on our peers so we can discuss these sorts of issues with our peers and having a sort of a peer-to-peer mentoring framework that you could use where you have someone that you can trust and you can go to and say, "Hey, look, you've got this situation, this is what you're thinking of doing." And sometimes just discussing it with another person can be really helpful as well. But I think first up, it's being self-aware and anticipating those issues.

Can I also say when you're looking at the unconscious bias that even looking at the culture of the institution that you work in can also be something to consider. And you know, if there are any biases that exist in the institution attempting to try to address that or at least being aware that this may cause some issues that you need to address down the track and how would you then deal with them. And we do teach them different frameworks that people can use. I don't know if you're familiar with the PLUS framework, but that's just easy.

There are a lot of other great frameworks, but just where you have a process that you can work through to help you identify some of the actions that you might be able to take or whether you do actually need to take action. So when we talk about the PLUS framework, P stands for policies, L stands for legal, U for universal, S for self. So we look at like what sorts of policies are in place that can help guide our decisions, what legal or what laws are there that state what we must do in certain situations. What are the universal laws, so that's where we are looking at, like the reasonable person tests. And then what about yourself?

If something doesn't sit right, then you need to pay attention. Don't try to sweep it under the carpet and get on with things. It's actually your body is telling you there is something that's not quite right, and so you need to trust your gut sometimes and really think about whether you are making the right decision or whether you need to walk away, and you know, and just agree to not maybe have someone as your client if there are conflicts that cannot be avoided.

Tahn Sharpe:
Yeah, if need be. Yeah, the need for education and that constant sort of working through ethical issues is a great note to finish on. Michelle, Belinda, really interesting and, I think, important discussion. Thanks so much for joining us today.

Michelle Cull:
Thank you, thank you very much for having us.

Belinda Zohrab:
Thank you.

Tahn Sharpe:
For our listeners eager to learn more, check out the show notes for links to additional resources from CPA Australia. And don't forget to subscribe to "INTHEBLACK" and share this episode with your friends and colleagues in the business community. Until next time, thanks for listening.