Resolving Conflicts of Interest in the New Economy

The Challenge

Whether it's analysts touting dubious companies in order to win underwriting business or auditors okaying creative bookkeeping to retain consulting business, the new economy and its new institutions are rife with conflicts of interest. How should we control these conflicts?

What's at Stake

"John and Mary Smith are losing their retirement because we don't want [our investment banking client] to be mad at us." So reads one of the analyst e-mails made public in New York State Attorney General Eliot Spitzer's probe of deception in stock research operations. Too often, according to many observers, Wall Street analysts have allowed their company's interest in investment banking to override their duty to provide independent counsel for investors. Such attempts to please the purse-string holders were also evident in the Enron/Arthur Andersen debacle. Andersen auditors rubberstamped Enron's reporting on questionable spin-off companies, which Andersen consultants had helped to structure. Those audit reports helped Enron camouflage more than $1 billion worth of losses in little more than a year. The rapid development of new kinds of commodities, technologies, and markets has sometimes left ethics behind, especially in analyzing potential conflicts of interest.

Critical Questions

• Who are the stakeholders of each of our new economy and financial institutions? To which of them is a company most beholden? Do these obligations conflict?

• Can a company simultaneously advise investors and executives? Provide auditing and consulting services?

• Given that auditing is not an exact science, what is the most ethical way for auditors to describe a company's profits and losses?

• How can inherent conflicts of interest be managed in large organizations that serve multiple constituencies?

• When an employee's ethical beliefs conflict with loyalty to their organization, should they blow the whistle?

May 21, 2002

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