Clients and Conflicts of Interest – Professional Service Firms Divided Loyalties
Professional service firms which represent client interests in deal-making, contracts, and other activities that go beyond the simplicity of historical reporting or other clear cut this-is-the-only-way-to-do-it opportunities often face situations where the interests of one client may intersect with those of another client. These conflicts of interest may be direct. For example, two clients may be interested in entering into a contractual relationship with each other. Or it may be that two clients need the same service; knowledge of the other client’s activities and information, however, could provide “insider” knowledge which impacts the advice being given.
Some professions have clear-cut rules or prohibitions about accepting or maintaining clients who have similar interests, are competitors, or somehow have potential conflicts. At a minimum the conflict may need to be disclosed to both parties. The professional guidelines may require that a signed document acknowledging the disclosure of conflicts and that any “damages” arising from the dual relationship are waived. Other professions may expressly prohibit representing both parties and require the professional firm to withdraw from one (or perhaps both) relationships.
There are other professions which do not have guidelines or requirements but rely on the judgment, professionalism, and ethics of individuals and firms to draw the lines. This self-regulation can lead to significantly different degrees of disclosure and behaviors. For instance, an advertising firm may choose to accept two clients which both sell a breakfast cereal product – internally keeping the two groups providing services separate and distinct – while developing campaigns for each client. The clients may be completely satisfied with the advertising campaigns when delivered. When the results differ – one campaign becomes one of the most successful and acclaimed campaigns in advertising history, the other campaign fizzles – what happens now? Another example would be an accounting firm which provides consulting, tax, and accounting services to a client – keeping each activity separate within the firm. An audit occurs, resulting in the client company being issued an adverse opinion (failure of accounting and financial processes and inaccurate reporting). What happens to the client and the accounting firm when the governmental auditors deem the audit conducted by the accounting firm not to be “independent” because of the “self-interest” of the accounting firm to retain the revenues for all areas of their business AND that auditors from the accounting firm would not be likely to “fail” members of its own firm on tax, consulting, and transactional services provided. After all, that could have a significant impact on the auditors’ professional lives within the accounting firm.
Whether the conflict of interest is arising because of relationships between a firm’s clients or because of the number and type of relationships between a client and the firm itself, professional service firms need to have guidelines and rules for how to avoid, minimize, and mitigate real and potential conflicts of interest – even those of perception. Furthermore, a professional service firm needs to monitor the relationships being created between the firm, its members, its employees, and clients.
These are types of activities and relationships that should be of concern:
- Performing multiple types of services which include fiduciary roles (such as audits, reporting, attestations, financial advising, etc.)
- Having clients who compete
- Identifying employees and principals who have financial or personal interest in client organizations
- Identifying influential relationships with governmental entities, regulators, procurement decision-makers, contractors, etc.
- Getting involved in the development of intellectual property of clients
- Reviewing or having access to confidential materials
- Influencing marketing, investing, or other business activities
Independence and the ability to perform your fiduciary role are critical to many (if not all) professional service firms. Maintaining a reputation for avoiding real and perceived conflicts of interest can be a marketing differentiation which translates directly to the bottom-line profitability of your business.
In the post Enron, WorldCom, and other financial scandals – concerning accounting, compensation, and mismanagement – most people would expect professional service firms and their clients would maintain a higher level of awareness. Publicly traded firms are definitely in a mode of constant monitoring and reporting. Privately traded firms of significant size are more and more pursuing a similar level of diligent oversight on activities and relationships. Smaller and early stage businesses may not be as aware of the potential impact on their businesses of these types of conflicts. The more “personal” nature of relationships between smaller businesses may make independence even more difficult to achieve and maintain.
Small and early stage businesses are even more vulnerable to poor advice and conflicts of interest; because of the size and stage of their businesses they do not have as many resources to invest in monitoring fiduciary roles. Nor do they have the funds to pursue actions when things go wrong.
As a client of a professional service firm, be cautious, be aware, be concerned, and be proactive about the potential for conflicts of interest. Ask key questions of your professional service providers concerning their policies on accepting competing clients, maintaining independence, protecting confidential information, and so on.
If you are a professional services firm, take the time to establish policies and procedures on accepting clients, the type of services to be performed for each client, and identifying activities which can give rise to conflicts between the interests of the firm and a client, the interest of a firm’s principal or employee and a client, or between clients. Take the steps to preserve your professional integrity before it can get called into question.
© Copyright 2006 F.O.C.U.S. Resource, Inc.