Business Essays – Ethics in the profession of consultancy

Ethics in the profession of consultancy

Introduction: There are many reasons why individuals and organisations take the help of a consultant. Organisations resort to this practice regularly since the complexities of doing business are rising with reference to competition, new markets, laws and regulations, technology etc. Sometimes companies have their own consultants or they seek the help of professionals competent in their chosen field. In short a consultant is a person who is qualified to advise anyone who approaches him. This indicates that there should be trust in the client towards his consultant and the consultant on his part should not do anything to misuse it. In other words the consultant is expected to behave ethically toward his client. Ethical behaviour means a code of conduct with the belief that what is done is right with reference to own values, religious beliefs, law and what is generally accepted by the society.

Ethics in the profession of consultancy:

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One of the most respected authorities on ethical consultancy is Peter Block who is a consultant himself. He has authored a number of books including the widely acclaimed ‘Flawless Consulting: A Guide to Getting Your Expertise Used’. Mr. Block has given several guidelines that are expected to be a part of the code of conduct of a consultant. The most essential element according to Mr. Block is of the opinion that the consultant always tells the truth even if it is unpleasant to the client. The trouble with many consultants today is that they force the clients to think in their viewpoint by acting clever. It should be noted that the client may have his own viewpoints which may be relevant and the consultant is expected to review that before advising the client. Such behavior on the part of the client will make him skeptical of the consultant and the level of trust or faith in him will diminish. Clients see right through the fast language and persuasion techniques and, as a result, their level of skepticism rises. Instead, consultants should be who they are and tell the truth in a caring way, which will establish the balance that leads to a trusting, productive relationship with the client (Meet the MasterMinds: Flawless Consulting with Peter Block, Management Consulting News). http://www.managementconsultingnews.com/interviews/block_interview.php. The author is of the opinion that the role of consultancy has changed over the years. Consultancy organizations have grown in size and the role they play is more of a manager than an advisor. They end up taking the responsibility of performing the tasks they advise the clients in the first place. What will happen in this case is that the consultants become a part of the client organization. They loose the freedom that is essential for a consultant because of the policies and organizational politics that exist in the client organization. Mr. Block says that this situation came about not because it is a part of consultancy but because there is money in performing such tasks for the client. Another area of concern regarding ethics is the lack of accountability on the part of the consulting industry. He consultancy firms have their own models and methods which they force it on the clients. There is no negative impact in this industry even if the models do not work. The fact is that the clients themselves have come to accept such a behavior on the part of the consultants. Sometimes the consultant will agree to the client’s point of view totally without voicing any disagreement just to keep the client happy. The consultant may give advice on matters that are beyond their area of expertise. Clients are usually willing to listen to the advice of their consultants totally. This might prompt the latter to overemphasize their point of view, thereby bringing loss to the client. The same situation may also result in a proper study of the issues on the part of the consultant. It could also happen that the client did not disclose all necessary information so that the consultant will offer advice which is acceptable to the client. The consultant may disclose confident information of the client for personal gain. Sometimes the consultant may use the client as a testing ground for some new model or technology that the consultant may have developed or acquired. The consultant may also disclose confidential information given by the head of the client organization to other members of the management in the belief that it will help them to solve a problem. The above information was those given by experts and clients who felt that these are instances of unethical behavior by consultants. It can be seen that such behavior occurs also because of the attitude of the client towards the consultants. Some of the instances occurred because it was the client who made it possible.

Example:

The best example of unethical consulting behavior in the recent past involves Arthur Anderson Consultants and Enron Corporation. The collapse of the multinational giant resulted in huge losses for its average investors and the loss of millions of dollars of pension funds which were very valuable to its employees. Hundreds of people lost their jobs, creditors lost their money and many were affected in other ways. Arthur Anderson Consulting, which was well known throughout the world as practitioners of high ethics lost face and exists only to clear the various litigations against it. This particular situation is a result of greed, non-disclosure of facts by Anderson Consulting for fear of losing the client, in this case Enron Corporation and the consultant moving out of its real area of expertise which was that of accountants. The fact was that Anderson had two previous audit failures prior to Enron. The two companies involved were Waste Management and

Sunbeam. The company had to spend $110 million to cover litigation costs. In the case of Enron, the company had appointed Anderson’s consultancy division for a very large fee. It was due to this that Anderson’s had to go along with the crooked accounting policies of Enron for fear of losing that account. There were also another factor involved. Enron’s impressive growth during its earlier years made them arrogant. This led to a number of growth plans that were not feasible. Enron’s growth plans including its asset light policy did not proceed as expected. The end result was that Enron had stakes in a number of loss making concerns. If the figures were to be disclosed in the company accounts, Enron would have to report a loss and the value of its shares would fall. The company falsified the losses of these companies by saying that they were hedged by another company. The truth was that it was Enron itself that held majority stake in the hedging company. This move resulted in the company showing excess earning of one billion dollars during the period of 2000 to 2001. The company had also misappropriated funds by formation of certain companies like Chewco, LJM1 and LJM2. The formation of such companies resulted in huge illegal financial gains for its former CEO and certain employees of the company. According to the report by the Special Investigation Committee of the company formed immediately after the company filed for bankruptcy, former SEO Andrew Fastow received 30 million dollars from this deal. The company also found other methods to falsify its accounts. For this purpose, Enron created a separate entity called Special Purpose Vehicle or Special Purpose Entity (SPE). Such entities are usually formed for performing certain accounting tasks subject to regulations. Enron could treat the SPE as it were a totally independent company. Two conditions in forming the SPE were met by Enron. They are that an independent investor should invest at least 3% in the assets of the company and that the independent investor should have control over the company. Another investment in a company called JEDI (Joint Energy Development Investment Partnership). To avoid showing the losses of this company in the company accounts, the then Enron CEO Fastow authorized Chewco to invest in a 3% stake in the SPE. The company, when reviewing the situation along with Anderson later in 2001 found that the investment in the SPE did not satisfy the rules. They decided to change the already published figures by incorporating JEDI in Enron accounts which resulted in a massive reduction income and a huge increase in debt.

The question is what role did Anderson have in the whole affair. Reports from the Special Investigation Committee indicate that all the accounting tricks were done on the advice of Anderson. In virtually all of the transactions, Enron’s accounting treatment was determined with extensive participation and structuring advice from Anderson, which Management reported to the Board. Enron’s records show that Anderson billed Enron $5.7 million for advice in connection with LJM and Chewco transactions alone, above and beyond its regular audit fees. (Summary of Findings, William J Powers, Page 5, February 1 2002, Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp). http://files.findlaw.com/news.findlaw.com/hdocs/docs/enron/sicreport/cover.pdf

It can be seen that Anderson had played a part in advising and helping to falsify accounting practices of Enron Corporation. Both its auditing and consultancy divisions were at fault and had behaved in a very unethical manner.