What the Code of Conduct Says
Consultants are expected to maintain professional and ethical standards when dealing with their clients. This can take the form of maintaining arms length relationships, not intervening in the internal affairs and politics of the clients organizations, keeping confidential information away from interested parties looking for insider knowledge, and reporting any violations in the conduct (financial, operational, and behavioral) by the clients organization to the regulators. This is the code of conduct that is usually prescribed for consulting firms whenever they take on work from client organizations.
Realities of Consultant-Client Relations
However, this is rarely followed in practice as evidenced by the large numbers of corporate scandals that have emerged in the last decade or so where the consultant was found to be aiding and even abetting the malfeasance conducted by the client. For instance, the Enron scandal manifested itself because the consulting firm was in cahoots with the client in cooking the books. Indeed, in this case, it was found that the consulting firms partners went beyond collaboration and were indeed one of the culprits.
Some Examples from the Corporate World
Similarly, the Satyam scandal in India was also found to be a case where the consultants (or some of them) knew about the goings-on in the company and were in breach of the code of conduct and even legal aspects since they did not report the matter to the regulators. However, the saving grace in this case was that when the malfeasance became too big and too hot to handle, it was the new consulting firm that had been roped in for another purpose that blew the whistle on the scam.
Consultants have to Walk a Thin Line between Professional and Personal Obligations
These examples indicate that the consultants have to walk a thin line between fulfilling professional obligations and reporting unethical behavior. Since the client is the one who pays them, it is often the case that the consultants are reluctant to report malfeasance to the regulators.
Further, considering the extremely competitive nature of the market wherein there are several consulting firms competing for the same client, money talks and hence, consultants are often found to go along with the client. There are no easy answers when one considers all the aspects and it would be indeed a brave and conscientious consultant who would be the whistleblower.
Some Solutions Which Were Proposed
Having said that, there are some solutions that have emerged in recent years about the course of action to be taken by the consulting firms. For instance, after the Enron scandal, the SEC (Securities and Exchange Commission) and other regulators ensured that new rules separating consulting and investment banking so that the same consulting firm which was also advising the client in financial matters would now be two different firms. While this was intended to reduce the conflict of interest since it was thought that when consultants and investment bankers represent two firms they would automatically be in a position to wink at malfeasance, it is debatable as to how far this law succeeded given the Global Economic Crisis of 2008 wherein several case of malfeasance came to light.
Conflict of Interest is at the Heart of the Problem
Of course, as some experts have mentioned, the real issue here is of conflict of interest. How far would a consultant go in reporting unethical behavior to the regulators which is expected from him or her when such case involve the very clients who are giving them business.
Further, the fact that many consultants often are embroiled in the internal politics of the client wherein they take sides in corporate and boardroom battles. This indicates the tricky nature of the problem of consultant client relations wherein the temptation to use confidential and insider information to ones advantage is motivated by greed and power.
Finally, above everything the maintenance of normative consultant client relations depends on the institutional structures, the incentives for good behavior as well as the incentives for moral hazard, the role of the regulators and how strictly they enforce the law, and the individuals themselves considering that they are the ones who are either benefiting or losing out when the scandal breaks. It is also about human nature since it is hard to resist the temptations of money and power and at the same time be true to the professional obligations and the observance of the code of conduct.
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