Slide 1

Dr. Michael Mainelli, Executive Chairman, The Z/Yen Group

[An edited version of this article originally appeared as "Ethics: Easy Life Or Risky Business?” Accountancy Age, VNU Business Publications (4 November 2004page 27.

So who are accountants – book-keeping tick-bashers or professionals?  Before you pick the obvious answer, remember that one, “tick-bashing”, is risk-less; follow the process and you need few ethics - while the other is fraught with risk; as a “professional”, your opinion must be substantiated with, in the extreme, material financial loss.  Unfortunately, current debate on draft ethical standards (start with Financial Reporting Council reports) fails to make these risk distinctions clear.

When the audit and accountancy profession came under pressure in the post-Enron, post-Worldcom, post-Global Crossing, post-Parmalat, etc., world, it became apparent that a clear separation of audit from non-audit work might form part of the solution.  Accountancy firms felt that external authorities, if forced to impose separation, would of course follow traditional internal firm boundaries among audit, tax and management consultancy where tax work, for instance, would naturally be seen to be part of audit work.   Z/Yen pointed out that external authorities might draw their own boundaries.  Perhaps all non-audit work would be seen as a potential conflict of interest.

If independence is primary, not only should auditors perform no other work but, ideally, they should somehow be paid directly by shareholders rather than management.  Unfortunately, shareholders seem to fail to see why they should pay directly.  Possibly auditors could be replaced by other certification systems such as ISO 9001.  Moreover, smaller companies, it is claimed, desire an integrated service that allows them to benefit from cross-over knowledge of their operations by recognising that the principal/agent problem is not so acute where managers are shareholders, such that auditors can be accountants providing tax advice and other related services without conflicts of interest.  Hmmm.

Perhaps the entire basis of accountancy is flawed.  As was argued in a paper, of which I was a co-author [“Balancing the Odds: Stochastic Accounting”, Balance Sheet, Volume 10, Issue2, pages 22-27, MCB University Press (2002)], audit is flawed at a basic level.  Auditors present a single value when reality is a range of values.  From this stem many ethical problems the profession faces – why did you choose this number when there were others?  why didn’t you show the possible range of outcomes?  why do analysts spend so much time reconstructing the range of outcomes when you provided shareholders with a single number?

Let’s go further, why shouldn’t auditors move from weasel-words to back up their opinions with measures of how they reduce volatility?  Shouldn’t a well-audited portfolio of companies, i.e. one of the Big Four firm’s, show reduced volatility of estimated profit versus actual profit?  If so, shouldn’t this translate into increased shareholder value?  If so, shouldn’t auditors back up their estimates of future reduced volatility with some indemnification?

Ultimately auditors and accountants must address their own ambitions.  If they desire a comfortable life, then they should retreat behind the ‘process’ and eschew any ambition of sitting at the high table of business.  For UK auditors, this means ceasing to espouse that they are superior to USA CPA’s.  On the other hand, if auditors aspire to be professionals then they must accept that they express opinions and that those opinions attract risk – though we then need a longer discussion on the nature of the audit industry.

Further, auditors must re-examine the roots of their profession and realise that single numbers need to be replaced by more scientific ‘ranges’.  Not only are ranges a more accurate reflection of reality, they form a more solid basis for a science of audit and a more accurate reflection of reality for shareholders.  And all this effort is, naturally, in the interest of giving shareholders a reasonable opinion rather than queasiness-inducing statements such as “due processes were followed” but “ultimately your investment turned out to be worthless”.  We should look forward to statements that “our stochastic audit processes estimated a range of outcomes into which your investment fell” – for better or worse.  “Your could have paid for a tighter range, but didn’t.  Sue us if you’re upset.”

Michael Mainelli, PhD FCCA FCMC MBCS CITP MSI, originally did aerospace and computing research followed by seven years as a partner in a large international accountancy practice before a spell as Corporate Development Director of Europe’s largest R&D organisation, the UK’s Defence Evaluation and Research Agency, and becoming a director of Z/Yen (   Michael also achieved the first ISO 9001 certification in the City of London financial markets for the accountancy practice in 1990 and went on to help clients, such as one of the largest commodity traders,  achieve ISO 9001 certification.

Michael’s humorous risk/reward management novel, “Clean Business Cuisine: Now and Z/Yen”, written with Ian Harris, was published in 2000; it was a Sunday Times Book of the Week; Accountancy Age described it as “surprisingly funny considering it is written by a couple of accountants”.

Z/Yen Limited is a risk/reward management firm helping organisations make better choices.   Z/Yen undertakes strategy, finance, systems, marketing and intelligence projects in a wide variety of fields (, such as developing an award-winning risk/reward prediction engine, helping a global charity win a good governance award or benchmarking transaction costs across global investment banks.