Gamblers, strippers, loss aversion and conflicts of interest

What is the most potent type of conflict of interest?  To my mind,  those involving family members – as discussed in this earlier post on nepotism – are generally the strongest of all, given how deeply rooted  our instincts to help our kin are.

But being in another’s debt would seem to be pretty powerful too – because of the control of one’s life that it can place in the hands of others.   Moreover, compared to COIs involving an “upside”  (e.g., moonlighting for one of your employer’s vendors) “debt conflicts” seem  more likely to corrupt behavior – in part because of  the behaviorist phenomenon of  “loss aversion,” which holds that seeking to avoid a loss is generally a more potent force in shaping behavior than is achieving a gain.  Indeed, you don’t need to peer deep beneath the mind’s surface to grasp the power of debt for, as Dickens’ Mister Micawber observed using plain old arithmetic,  the smallest debt can clearly  be the source of large-scale ruin. (“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”) Thus, on various operative levels, a debt-based conflict can be particularly pernicious.

The most interesting recent “debt conflict of interest” case come to us from the U.S. Securities and Exchange  which found that “certified public accountant James T. Adams repeatedly accepted tens of thousands of dollars in casino markers while he was the advisory partner on subsidiary Deloitte & Touche’s audit of a casino gaming corporation.  A marker” –  the SEC pointed out, for those few unfortunate souls who have never seen Guys and Dolls –  “is an instrument utilized by a casino customer to receive gaming chips drawn against the customer’s line of credit at the casino.  Adams opened a line of credit with a casino run by the gaming corporation client and used the casino markers to draw on that line of credit.  Adams concealed his casino markers from Deloitte & Touche and lied to another partner when asked if he had casino markers from audit clients of the firm.”  Based on this obviously egregious behavior (which, I should add, involved far greater sums than those discussed by Mister Micawber), Adams – who ironically had also been Deloitte’s Chief Risk Officer – agreed to be “suspended for at least two years from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.”

This was as clear a debt conflict case as one might hope to find (meaning, of course, hope never to find again).  But debt also comes in less obvious shapes too.

Consider this recent story from a trial now being held in the UK, the salient points of which (for this blog at least) are as follows: “A former UBS AG … banker told a London court that paying $7,100 for strippers to entertain consultants advising a German utility on a disputed derivatives deal didn’t create a conflict of interest.”   Looked at it as an “upside conflict” – meaning the consultants receiving free entertainment – maybe it is indeed not a powerful a COI (although personally having never been to a strip joint that’s just a guess).   But this particular sort of upside has an element of “debt conflict” too: given the embarrassing nature of the expenditure the consultants could well be concerned that their dirty secret would be revealed, i.e., they would likely be indebted to the bank for keeping quiet.   Of course, there would be reason enough to hide $7100 worth of even wholesome recreation paid for by a vendor, but it presumably has less potential to embarrass – and thus cause serious reputational loss – than does being entertained by strippers.

Finally, how should information about “debt conflicts” be used in C&E programs?  Certainly, debt should be included in the interests section of  the code of conduct or COI policies – which it usually, but not always, is.  Moreover, if one is providing examples of COIs in training and other form of C&E communications it may be worth mentioning there as well.  The point here is not merely to identify debt as one of many sources of potential COI, but to help give examples of COIs that will resonate with employees  – which I think debt-related ones often will do, precisely because of the above-described control aspect. And powerful examples of the effects of COIs can help to strengthen compliance in this area generally.

One Comment
  1. Dr. Worden 3 years ago

    Interestingly, Deloitte puts its “stock” in its own institutional fire-walls as sufficient to thwart the structural conflict of interest still inherent in the client-pays system. I think the reliance brings with it a systemic risk, largely because of the power of the human instincts that are at odds with the fire-walls. So I like your point on the importance of loss-avoidance from a human-instinct standpoint. I do think that the structural COI that is woven into the current public accounting system in the US is more gain-oriented that loss-avoidance-oriented because the main culprit is the motive to have the “client” company pay again next year.

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