Ethical Practices

By Darlene Janulis

In the increasingly conscience-focused 21^st century, the demand for ethical business practices (known as "Ethicism") is increasing. There is simultaneous pressure to improve business ethics through new public initiatives and laws. Historically, interest in business ethics accelerated dramatically during the 1980s and 1990s in major corporations and academia. The recent downfall of major corporations due to unethical practices has increased the focus on this issue more than ever before.

Philosophers and others disagree about the purpose of business in society, which poses an ethical dilemma in itself. Some suggest that the principal purpose of a business is to maximize returns to its owners, or in the case of a publicly traded concern, its shareholders. Other theorists contend that a business has moral duties extending well beyond serving the interests of owners or stockholders, and these duties consist of more than simply obeying the law. They believe that business has a moral responsibility to so-called stakeholders, people who have an interest in the conduct of the business, including employees, customers, vendors, the local community or even society as a whole.  Each shareholder category may have its own perspective on business ethics.

A conflict of interest arises when someone in a position of trust - a lawyer, financial advisor, politician or executive - has competing interests. Competing interests can make it difficult to fulfill one's duties impartially, posing an ethical dilemma. A conflict of interest exists even if no unethical or improper act results from it. Just the appearance of impropriety can undermine confidence in the person or profession.

When choosing a professional service for your district, understand the firm, the services they provide and how their advice to you might benefit them. Does their licensing provide insight into ethical practices that would avoid conflict of interest? Do they abide by the rules of their professional organization? Who guides their moral compass?

The best way to handle any conflict of interest is to avoid it entirely. That way you can be sure the professional you have hired is not tempted to act to their advantage. From a policy prospective, districts may wish to avoid even the perception of conflicts of interest. Although the law does not expressly prohibit or address every possibility of dual roles to your district, decision makers should be wary of members of your professional team who act in dual capacities. Dual roles not expressly prohibited by law are: Financial Advisors and/or Underwriters; Investment Advisor and/or Custodian Bank; Investment Advisor and/or Financial Advisor. Any firm that provides dual services and is permitted to analyze bids and recommend contract awards, selectively distribute requests for proposals or answer questions of prospective bidders has roles that could raise concerns. Districts can only be assured they are getting the best value when a vendor does not have conflicting roles.

Short of avoiding conflicts of interest, next best way to handle conflict situations is to employ one or more of the following mitigation measures:

·         Disclosure – Certain professionals are required either by statute or rules related to their professional organization to disclose an actual or potential conflict of interest. In some cases, failure to provide full disclosure is a crime.

·         Recusal – Those with conflicts of interest are expected to abstain from decisions where a conflict exists. The imperative for recusal varies depending upon the circumstances, profession, either by common sense ethics, codified ethics or by statute.

·         Third-party evaluations – This creates an arms-length evaluation and can be used as proof that the transaction was fair and beneficial to the client.

·         Codes of ethics – Codes of ethics can spell out which conflicts must be avoided and what the parties should do where conflicts are permitted by code. Your code of ethics can be part of your professional services selection process. In this way, professionals cannot claim that they were unaware that their improper behavior was unethical.

Whether a conflict of interest exists, or will potentially exist, is often a case-by-case determination and consultation with legal counsel may be warranted. In Umbaugh's 50+ years of practice as a CPA firm providing independent financial advisory services to school districts and other governmental units, we have focused on this issue many times. If we can provide any additional information, please contact us at footnotes@umbaugh.com.