We are facing a crisis of confidence in our capital markets.
It's come about, in part, as a result of some spectacular breaches
of trust by a number of business leaders. As a result we are
now looking at a new era. Regulators, the professions and business
organizations are responding in an effort to make changes that
will re-establish a climate of openness and confidence.
You are business students. Most of you will likely be involved
in capital markets or financial management. You may choose to
become accountants or auditors, investment dealers, financial
executives or managers in the private or public sectors. But
in each and all of those capacities, you are going to have an
impact – you are each going to make a difference.
What you bring to your careers and how you do it, in terms of
both expertise and integrity, will shape our future. At this
point, let me acknowledge that what I'm going to be talking
about is Rebuilding Confidence not Building it. Because in the
context of our capital markets today, it is rebuilding confidence
Over the past few years, our confidence in capital markets and
other institutions has been severely shaken. Every day, we see
and read news about people who have broken trust with those
who should have been able to rely on them.
In discussions about the current crisis in business ethics,
the question is frequently asked “Have public expectations
risen? Or have our standards – standards of behaviour
In my view, there has been a serious slippage in standards,
an erosion of business and personal conduct.
To be sure some corporate failures have been driven, in part,
by good old-fashioned economic cycles. But there is also irrefutable
evidence of systemic weakness, of poor corporate governance,
of ethical failure, and of a cavalier attitude to other people's
Particularly since the collapse of Enron in December 2001, in
North America attention has been riveted on corporate wrongdoing.
WorldCom. Adelphia. Tyco. Even poor Martha Stewart. They represent
failures - and in some cases downright fraud - of management,
directors, external auditors or regulators. And of course, don’t
think it’s just a US wave. We have seen failures around
the world. The collapse of Parmalat is the single biggest financial
failure in Italian history. There have likewise been spectacular
banking and insurance failures in a number of countries.
Here in Canada, we can’t consider ourselves exempt either
– after all, we are the home of Bre-X, Cinar, Livent and
It's not just public companies. Here in Canada, the federal
government's spending of millions of dollars in sponsorship
money, highlighted by Auditor-General Sheila Fraser, has undermined
our trust also in the handling of the public's tax money.
And, I don't know about you, but I wonder every time some level
of government reports that it has a net deficit or surplus on
its books -- how real or valid is that number? It seems that
each and every time a new government looks at the same books
– they give us a different answer.
To try to assess the impact of this erosion of public confidence
on Canada's business climate, my firm, KPMG, conducted a survey
of the directors of the 75 largest corporations in Canada. We
asked questions directed to their perceptions of the risk of
manipulation of a company's financial statements. Now, let’s
recognize that the manipulation of corporate financial statements
is generally carried out as a conspiracy – there is typically
collusion. In every recent example there was a group of senior
people who acted together to deceive directors, auditors, shareholders
and others. Generally it's done for financial gain. Sometimes,
just to make the perpetrators and the company look better and
more successful than it is. I can tell you that directors take
the risk of financial statement manipulation very seriously.
In fact, they ranked it as the greatest reputational risk a
public company can face. So we asked the directors to rate the
possibility of financial statement manipulation.
The directors were asked how confident they were that the companies
whose boards they were on would not encounter manipulation of
their financial statements. On the positive side, a majority
were confident it wouldn't happen – but only 54%. What
is more telling, is that the other 46% weren't sure, or believed
it could happen.
Let’s be clear. None of us expect that there is, or will
be manipulation of financial statements at anything like half
of our public companies. No. What this is telling us is this
– the people who have lost confidence in Financial Statements
isn’t limited to “the man-in-the-street –
it’s not just the retail investor or the “uninitiated”
– the very directors who are closest to the action, who
have direct access and responsibility for management, and for
the financial statements – have lost confidence. Reflect
I can tell you with confidence that the vast bulk of Canadian
businesses are well managed, honest and above board. But the
wave of corporate scandals has significantly enhanced the perception
of risk. Both the reality -- and the perception -- have each
contributed to seriously undermined confidence in our capital
And not only have we become very skeptical about financial reporting
– perhaps of more fundamental concern, people now also
increasingly question the ethics and motives of some people
in positions of power and trust.
Enough of the bad news. What is being done about it? Fortunately
– much is being done.
Regulators in Canada, the United States and other countries
are stepping up to the mark. And so are business people.
A very high profile piece of legislation in the United States,
passed in 2002, was the Sarbanes-Oxley Act - which stemmed primarily
from the Enron experience. That was the most dramatic legislative
reform to hit American capital markets since the Securities
Act and Exchange Act of the 1930s. CEOs and chief financial
officers of US public companies must now personally provide
assurance about their financial filings, their disclosure and
their company's internal controls. Audit committees must be
completely independent and they must oversee the external auditor's
independence. Sarbanes-Oxley raised the bar of expectations
of corporate management and imposed criminal penalties for knowingly
misleading the markets. The presumption is – and I expect
its right – that the thought of a little jail time will
focus the mind.
In the United States, we've seen the regulators, the stock exchanges
and justice officials become much more active in pursuing questionable
practices and dealings. As they should. We’ve seen the
Here in Canada, there have been a number of similar developments.
An important turning point came in January of this year. The
Ontario Securities Commission and other provincial regulators
released the new investor confidence rules. These rules have
teeth. Like Sarbanes-Oxley, they will raise the bar and hold
corporate management, boards of directors and auditors accountable.
The CEOs of all Canadian public companies, and the CFOs, will
have to personally certify in each of their interim and annual
filings that they have personally reviewed the documents, (ignorance
is no longer an excuse), and that based on their knowledge,
there are no untrue statements or material omissions. And soon
they will also have to personally certify that their internal
controls over financial reporting are not only well designed,
but also that they are functioning effectively.
There are extensive proposed new rules for audit committees
– who may be on them, and what their job is.
Practically, auditors were accountable to management in the
past. Today it is clear – they are accountable to Audit
Committees. Audit committees will have a written mandate to
oversee directly the work of the external auditors, including
any non-audit services that they provide. Companies will be
required to establish procedures for so-called whistle blowers
in the company who may have concerns about accounting or auditing.
They will be required to publish their code of conduct.
The Canadian guidelines are, for the most part -- not prescriptive.
They recognize that the Canadian corporate landscape is varied,
with a great many small companies and a lot that have a dominant
shareholder. So companies are advised to implement corporate
governance practices flexibly and sensibly to fit their circumstances.
But they will have to disclose what they're doing, whether they
are following the recommended best practices, and if not, explain
There is an increasing recognition of the value of well-informed
Board members, who take the time to fully understand the nature
and operations of the businesses they oversee. I expect Directors
will be committing significantly more time and energy to their
mandate. To serve on an audit committee, they now have to be
financially literate. Directors should have access to continuing
education to maintain or enhance their abilities.
The accounting profession has also stepped up to the mark to
improve standards. As a profession we worked closely with regulators
to create the Canadian Public Accountability Board, chaired
by former Bank of Canada Governor Gordon Thiessen. This is a
totally independent Board – a concept which KPMG strongly
supports -to oversee the work of external auditors. It looks
at each firm’s standards and will thoroughly review our
processes to make sure we are adhering to them. The Board will
impose tough sanctions on auditors or audit firms that fall
The accounting profession has undertaken other measures. Sweeping
new accounting rules are redefining the treatment of a number
of items that have been subject to manipulation. The CA profession
has created new standards governing the independence of auditors
from the clients we serve. There is a new standard coming on
the auditor's responsibility for fraud and error.
Not only have the regulators and accounting profession been
active -- so have shareholders.
The Canadian Coalition for Good Governance was formed several
years ago by a group of Canada's leading institutional investors.
These include big pension plans and investment firms that together
represent approximately $500 billion in assets. They have a
fair bit of clout. The Coalition has published expectations
of public companies when it comes to matters such as Board structures
and mandates. Their members have spoken out publicly on issues
such as executive compensation and practices that they believe
may favour management over the shareholders. They also speak
directly to companies behind closed doors when a direct approach
may be more useful.
Another non-government organization that has recently become
more active is the Institute of Corporate Directors. The Institute
is supported by firms across Canada, including KPMG.
On of their current priorities is education for directors –
in fact they recently established a Corporate Governance College.
I’m proud to be able to tell you that KPMG is one of the
founding sponsors of the College, and in fact I sit on its Advisory
Board. The College is mounting courses for directors across
Canada, and I think is already sold out for the next three offerings.
Clearly our directors also see the need for more and better
education on how to be an effective director. So far I've been
talking about new rules, regulations, standards and recommendations.
And certainly that is a necessary first step to rebuilding confidence
in our capital markets.
But let’s face it -- it's the people behind the rules
and the numbers that count. The spectacular failings we have
witnessed may have been facilitated by an inadequate regulatory
system, but they were committed by individuals – by people
who knew what they were doing and what the potential impact
of their actions would be.
It may indeed be far more difficult, but to get to the root
issues, we have to deal with the people. The regulators recognize
that too. For example, the recent Canadian corporate governance
proposals ask that Canadian boards of directors assume explicit
responsibility for satisfying themselves as to the integrity
of the CEO and other senior officers. Corporate leaders are
expected to create a culture of integrity throughout their organizations.
The Canadian Coalition for Good Governance says that
the number 1 standard for a good director is to "demonstrate
integrity and high ethical standards."
The recent CICA proposals on auditing similarly stress the importance
of an organization fostering a culture of honesty and ethical
behaviour. This is a culture that is rooted in a strong set
of core values that provide the foundation for employees as
to how the entity conducts its business.
I spoke about the KPMG survey of corporate directors. Here is
a quote from one of the respondents. He said,
"No one should continue as a director of a public company
without complete confidence as to the integrity of the CEO and
CFO, and as to there being a culture of honesty and forthrightness
in the company."
He’s got it right – and this is the theme we are
seeing again and again as regulators, business people and professionals
are striving to rebuild confidence – the fundamental importance
of personal integrity.
To rebuild confidence, each of us who play a role in
the capital market -one by one - has to focus on working and
acting in the best interests of those who rely on us, and in
the best way we possibly can.
In the business community we need to rebuild a culture that
firmly establishes the principles of integrity, ethics and accountability.
That's why individual organizations - in both the private and
the public sectors -- need core values, basic principles, codes
of conduct, and, sometimes, complex procedures. It is the organization’s
commitment to integrity – in both what it says and what
it does – that sends the message to its people as to what
is acceptable, and expected behaviour.
Let me illustrate briefly by talking about my own profession,
auditing. As you know, an external auditor is charged with giving
an opinion on the fairness of the financial information supplied
by management to the shareholders and others. We provide assurance
that the statements provide a fair and balanced disclosure of
an organization’s financial performance and financial
When we perform an audit, we don't just look at the numbers.
Because we recognize that in the process of providing audit
assurance, we have to depend on others - and on their judgment
calls. Management is responsible for preparing the financial
statements and those statements include a great many assumptions
and estimates based on their knowledge of their own organization
And so we start an audit by considering the people who create
the numbers and make the decisions. We're interested in their
characteristics and motivations, in their ethics and reputation.
We consider our past experience with them. We study their internal
policies. We evaluate the tone set for the organization by their
In fact, even before we take on a new audit client, we have
to know who we are dealing with - management, board members,
and their ethics and reputation. We do background checks on
the executives. We consult with the company’s former auditors,
their bankers, and their lawyers. We evaluate a company's ethics
and culture. It is a very subjective process – sometimes
we have to rely on a bit of “gut instinct” –
and we consult with others internally. And then, unfortunately,
sometimes we do resign from accounts, and we do reject new client
opportunities -- if we don’t like what we see.
Similarly during the audit whenever we’re not comfortable,
not really sure about a judgment call or an answer we’re
given, we resort to one of our best tools -- consultation. Whenever
the antenna is raised, whenever something doesn't seem right
- or just doesn’t add up or make sense . . . we discuss
it with someone else, get another opinion. So now, indulge me
as I offer you some advice. What I’ve just talked about
doesn’t just apply to the auditing profession. As you
begin your careers, I encourage you to learn to trust your own
instincts and to stop, and challenge yourself when something
just doesn’t feel right. So what’s the message?
Do what’s right -- be ethical, and associate with ethical
people. This sounds pretty obvious, straightforward and simple.
But you know what? It's not.
As you move ahead in your careers, you will from time to time
be faced with ethical decisions. If the decision is between
going over to the dark side or staying in the light, of course
the choice is obvious. However, the most difficult ethical dilemmas
are in the grey areas. By grey I don't mean shady. I mean issues
that are simply not just black or white. Basically honest people
can be caught off guard by the complexity of ethical decisions
in the grey zone.
Going forward in your careers I encourage you to keep this in
mind. You will face decisions or actions that are problematic.
Often these may involve what at first glance seem to be minor
matters. Minor or not, if you have any concerns, consult --
talk to friends or colleagues whose judgment you trust.
As business students now and decision-makers in the future,
I think that what you will find is that there are three qualities
of good governance that are as necessary to an organization,
as they are to a successful personal career:
1. Knowledge: make sure you have the qualifications necessary
for the job you've signed on to do. Don't fudge it or fake it.
2. Commitment: If you've signed up, then give it everything
you’ve got -- give the time and energy to the people who
are depending on you.
3. Ethics and integrity: The cornerstone of a successful career,
and a successful person.
There are rules and regulations for every business career you
may choose down the road. But there will also be times when
you are called upon to exercise your own personal judgment.
Each of you will find that you will have to make professional
and ethical decisions in complex situations.
So my advice is this -- build your career with people you trust,
an organization that invests in its employees, one with a tone
at the top that carries all the way through to the way every
person is expected to act. There are a great many very good
companies here in Canada. Choose one that you respect and one
that will invest in you. And in return, make a real contribution
to your employer, its stakeholders and to our community.
As I said when I started, most of you will be involved, in one
capacity or another, in Canada's capital markets. I hope some
of you will decide to become chartered accountants. Even auditors.
But most importantly, choose a career you're going to enjoy.
One you find intellectually challenging. And always, always
guard your personal and professional reputation fiercely.
You will be held to high standards. The public’s expectations
regarding honesty, integrity and transparency have increased
considerably. Back to where they should be. This is great, and
let’s make sure we don’t disappoint them again.
So as I said at the outset, I am here to ask for your help.
No matter which path you choose, your decisions, your actions,
your choices will set the tone for Canada’s business community.
You will be players in our capital markets. You will be shaping
organizations and hiring people. Many of you will attain positions
of power and trust.
"Building Confidence" is going to be your
job. Do it well.
This speech was given on March 12th at The Roundtable Conference
sponsored by Schulich School of Business in Toronto, Ontario.
Rob Brower is an auditor with KPMG – www.kpmg.com