I started my professional career at one of the “big four” accounting firms working within the audit department.
As it is customary, audits are performed within a ‘Chinese wall’ environment and auditors are bound by law not to disclose any information to third parties nor to other colleagues within the firm. Reason being, auditors have unrestricted access to sensitive financial information that can be used to front run markets.
One particular late Friday night, a couple of us were sitting at a bar close to the client’s Head Office and after a couple of drinks, Donald, a colleague and good old friend of mine working on the same audit asked me point blank whether I would entertain making use of the privileged information we held and buy shares before the company released its results, which were due in less than 3 weeks. The company had done remarkably well that year and we knew that such results would have had a significant impact on the share price. I was shocked at this jaw dropping indecent proposal. I assumed that it was the beer talking and not him.
On the way home, I could not help thinking about the money I could make on the back of this information. I must admit, that throughout the audit, this idea had already loosely crossed my mind, but at no point I took it seriously and never thought of actually taking action on my privileged position. Besides the moral aspects of the situation, I also knew the legal repercussions including the withdrawal of my professional warrant. However, all these consequences became secondary, and I started thinking on ways to do the deal without getting caught – this is where I started to scare myself. The next morning, after a cold shower, I realized that I was being very silly and laughed off the scary thoughts I had in my mind the previous night.
The following Tuesday morning, I crossed Donald at the entrance of our client’s car park. The first thing he told me was “I did it – I bought the stock”. This was wrong on so many fronts.
I had really hoped that Donald was drunk that night or perhaps he was just joking about the whole story. Now I was put in a very awkward position. By him telling me, I was ‘conflicted’ which means that technically and legally, I had the fiduciary duty to report Donald to my Partner in charge and the Risk Compliance Officer. However, Donald knew I wouldn’t have exposed him given our good friendship. I believe Donald told me to induce me in following him in the act. Donald had committed a criminal offence, that of insider dealing. If caught, he would face hefty penalties, withdrawal of his professional warrant and potential imprisonment. This was a very serious offence.
That morning I didn’t have time to speak to him properly. For all I know he was pulling my leg and made it all up. Nevertheless, I was tormented. If true, should I act as a whistleblower and expose the irregularities of my friend or just close an eye and pretend I didn’t know anything? Or should I do like Donald and make a killing by insider trading?
That night, I visited Donald at home. Even though I knew he was well aware of the gravity of his acts, I felt that I had to go over the illegality of the situation and the potential consequences. I also explained to him the awkward position he had put me in. Even though I did not threaten him in anyway, he immediately realized I was very serious. I advised him to reverse the trade in a way that would not flag any suspicions and that any profit from such trades should be given back to the community and more importantly not to engage in such activity in the future as this would jeopardize his reputation and credibility. Donald didn’t expect me to come on so strong on him. He was both surprised and thankful. He agreed to the idea of giving the profits to charity but he didn’t promise me to do so immediately as that might have raised suspicion.
Donald is still working for the same firm today, as a Senior Manger. We never spoke about this incident again. To date, I still don’t know whether he had actually acted on his promise. I want to believe he did. We are still friends, but that incident did change our relationship.
Is it easy to decide what is ethical and what is not? Ethics is an ethos, and I believe what some people consider it morally just others might not. It could be a matter of cognitive dissonance, where people behave in a way to realign their frustrations and justify their actions. In my opinion, determining what is ethical is not hard when taking situations in isolation but in reality things are never black or white which makes this ethical delineation harder to figure out. For instance, in my case above, I knew that Donald acted unethically and I should have reported his actions. But is it ethical to expose a good friend to the authorities? I just did not have the courage to do it even though it meant that I had to “break the Law” myself.