Ethics and Power

The nTan Report on the dealings of the defunct BAI Group reveals the worst aspects of the capitalist system: corporate wrongdoings, lenient audit practices and regulatory failures. Funds raised from insurance policyholders were channelled towards companies with no real business prospects. Accounting tricks were used to bury losses and manufacture phoney profits. Proponents of big government would ask for more controls over the financial services industry so as to avoid another BAI-like calamity. Yet, the blame does not lie with the market economy but with human frailties. Cronyism rendered the debacle possible and made it harder for the public to know what was going on. By way of derogations, existing laws were not enforced properly, with the result that all the watchdog agencies completely missed the fact that a business empire was built on a foundation of sand. The issue here is one of ethics, for sure, but it is also one of power. Exposing company chicanery is one thing, screaming for scalps is another thing. A government determined to make a political point has no qualms about destroying a big business group and creating financial havoc in the process. We therefore need independent institutions to check the devastating power wielded by the government of the day. Unfortunately, the Central Bank gives cause to criticism as it is selective about which failed bank to close and about which confidential document to release to the public. There are reasons to believe that the publication of the nTan Report serves a political purpose. The Bank of Mauritius said it received a copy of the Report on 27 January. Its Governor had sufficient time to digest it on the same day and to give a press interview that was published the very next day. He had remained silent for three long weeks since some extracts of the draft interim report were leaked out to a Sunday paper. In contrast, when the contents of the nTan Report on the MCB/NPF case appeared in a daily paper in March 2005, the same Governor sought a gagging order. The law on banking secrecy has not changed since, but he has deemed it fit to disclose the report on BAI. The leakage of sensitive information on bank accounts was not a matter of concern for the Bank of Mauritius although it had the harmful effect of scaring foreign investors. Yet, when it comes to the published report on BAI, many people’s names and figures are blacked out (the same could have been done to the report on MCB/NPF). By concealing information contained in the report on BAI, the Central Bank has raised doubts about the real motives of its public release. Only full transparency can add to the credibility of the financial sector. The nTan Report opens on two pages of disclaimers that speak volumes about the incompleteness of the work done by the consultant. He has been careful to add the suffix “like” to the noun “Ponzi”. If there is a variety of Ponzi schemes, as Governor Basant Roi claims, then the banking business can be said to be similar to a Ponzi scheme. What banks do is to use the funds they receive from depositors to cater for withdrawals, to lend and to invest in assets. Actually, the biggest Ponzi-like scheme is public finance where the Treasury is allowed to carry billions of rupees of unfunded liabilities and to hide expenditures in off-budget items. What is illegal in the private sector is legal for the government! It would not be easy to find the members of the board and top management of BAI guilty of engaging directly and knowingly into a Ponzi scheme. True, they will have a lot to answer for. But the prosecutors will have to prove not only that the disputed activity is a crime, but also that those involved were acting with criminal intent. In general, “white collar” cases run into the issue of mens rea, or what the great English Jurist William Blackstone called a “vicious will”. In the face of the publicity that will be given to this prosecution, cooler heads must prevail. The Bank of Mauritius wants to tighten the regulatory rules in order to scrutinise closely the audit and reporting process. However, no additional regulation can replace ethics. Mauritius has an army of accountants, but paradoxically its auditing industry needs to address a shortage of skilled auditors. Auditing is loaded with complex value judgements. The job requires high skills to detect aggressive recognition of revenues or overstatement of profits. Any political approach to regulation will gain from being cautious. There is no need to extend state power over the actions of business owners and managers when investors themselves will definitely place a new premium on earnings quality and transparent accounting. The work of the auditing profession is critical to investor confidence in our capital markets. Let consumer demand force auditors to get tough on their corporate clients, who will pay for more billing hours rather than for regulation costs. Ethics will thus be brought by market power.