Trust as Foundation of Finance and Accounting Shyam

Trust as Foundation of Finance and Accounting Shyam Sunder, Yale University Session on Financial Integrity and Misconduct Society for Advancement of Socio-Economics In Virtual Space, July 18 -20, 2020

Professions • A professional is one whose loyalties extend beyond self (business) interest to the discipline and customer/clients • For example, a physician who pursued his business interests without regard to allegiance to his oath is not considered a professional • ”One who does well by being good. ” 10/25/2021 Sunder: True and Fair 2

Excessive Dependence on Rules Undermines Professionalism • What is a profession? • Is being an accountant, banker or CFO a profession? If not, should they change and become one? • If yes, how can they be a better professionals? 10/25/2021 Sunder: True and Fair 3

Traditional Hippocratic Oath • I swear by Apollo Physician and Asciepius and Hygieia and Panaceia and all the gods and goddesses, making them my witnesses, that I will fulfill according to my ability and judgment this oath and this covenant: • To hold him who has taught me this art as equal to my parents and to live my life in partnership with him, and if he is in need of money to give him a share of mine, and to regard his offspring as equal to my brothers in male lineage and to teach them this art—if they desire to learn it— without fee and covenant; to give a share of precepts and oral instruction and all the other learning to my sons and to the sons of him who has instructed me and to pupils who have signed the covenant and have taken an oath according to the medical law, but to no one else. • I will apply dietetic measures for the benefit of the sick according to my ability and judgment; I will keep them from harm and injustice. 10/25/2021 Sunder: True and Fair 4

Traditional Hippocratic Oath (Contd. ) • I will neither give a deadly drug to anybody if asked for it, nor will I make a suggestion to this effect. Similarly I will not give to a woman an abortive remedy. In purity and holiness I will guard my life and my art. • I will not use the knife, not even on sufferers from stone, but will withdraw in favor of such men as are engaged in this work. • Whatever houses I may visit, I will come for the benefit of the sick, remaining free of all intentional injustice, of all mischief and in particular of sexual relations with both female and male persons, be they free or slaves. • What I may see or hear in the course of the treatment or even outside of the treatment in regard to the life of men, which on no account one must spread abroad, I will keep to myself holding such things shameful to be spoken about. • If I fulfill this oath and do not violate it, may it be granted to me to enjoy life and art, being honored with fame among all men for all time to come; if I transgress it and swear falsely, may the opposite of all this be my lot. 10/25/2021 Sunder: True and Fair 5

Yale 2003 Version of Hippocratic Oath • In the tradition of Hippocrates and all the other great physicians who have come before me in the ancient field of medicine, I will fulfill, according to my ability and judgment, this pledge: • I will be just and generous to those who have taught me this art, holding them in highest esteem, and will give guidance and instruction freely to all those who wish to follow in this path. • I will strive to correct the knowledge that I have acquired and to extend its domain, while remembering that medicine is more than science, and that warmth, sympathy, and understanding may heal as well as the surgeon’s knife or the chemist’s drug. • I will practice my art solely for the benefit of my patients, knowing that at times I must put their interests before my own. May I never see in my patient anything but a fellow human in pain. My goal will be to help, or at least to do no harm. • I will remain free of all intentional injustice, practicing with integrity and honor, and will not exploit my privileged role in the lives of my patients. What is revealed to me in confidence, I will keep inviolably secret. I will use my skills to serve all in need, with openness of spirit and without bias. • In the presence of my teachers, my family, and my friends, I make this pledge freely and upon my honor. I am ready for my vocation and now I turn unto my calling. 10/25/2021 Sunder: True and Fair 6

Accountants and Bankers Have struggled with their business and professional motivations Pressure of legal liabilities Reluctance to accept responsibility for fraud detection Accusations of conflict of interest Reluctance to defend themselves on the basis of professional judgment based on the reasonable amount of evidence that was available at the time • Seeking protection of written accounting and auditing standards • But written standards can go only so far • Beyond a certain level, they begin on encroach on professionalism (box checking physician or lawyer? • • • 10/25/2021 Sunder: True and Fair 7

Defending Judgment in Finance and Auditing • Defending audits on the basis of professional judgments instead of written accounting and auditing standards • It is a difficult thing to do • There is great temptation to think that by writing rules to follow in work, as long as accountants follow these rules, they shall be protected from liability • This is highly defensive mode of thinking • It does not work, and worse • It de-professionalizes the accountants making them appear to be hiding behind the rules • Government policies of the recent decades have not helped 10/25/2021 Sunder: True and Fair 8

Professional Leadership • Restoring the role of accountant and bankers as a professional with self-discipline and responsibilities that extend beyond business • Leadership requires us to reconsider how accountants can remain a profession, and not get reduced to a trade • This cannot be done without a social norm, by dependence on written rules alone • Need a moral compass 10/25/2021 Sunder: True and Fair 9

Parallels with Law • In law, “guilty beyond reasonable doubt” serves this function • After lawyers have finished they lawyering, the final judgment is a lay decision by members of community untutored in law • This process keeps the statutory and common parts of the law in balance to help maintain order in society • While everyone would not agree with every decision, the general lay acceptance of judgments of the courts is essential • This is where finance and accounting have failed 10/25/2021 Sunder: True and Fair 10

Moral Compass for Accounting and Finance • How can we earn lay acceptance? • Thousands of pages of written rules will not protect us from wrath of society if the final outcomes are not “true and fair” • This what the President of the U. S. promised the public on July 9, 2002 after Enron. World. Com: “We're moving corporate accounting out of the shadows, so the investing public will have a true and fair and timely picture of assets and liabilities and income of publicly traded companies. ” • In these 7 years, have we gotten closer? • If not, why not? • Increasing dependence on written standards cannot move us closer to, “true and fair” 10/25/2021 Sunder: True and Fair 11

Looking for Trust JP Morgan Chase 2622 Bank of America 2354 Citicorp 1917 Wells Fargo 1895 Goldman Sachs 931 Morgan Stanley 853 US Bancorp 467 TD Bank N. A. 389 PNC Financial Services 382 Capital One 372

Thank you www. som. yale. edu/faculty/sunder Shyam. Sunder@yale. edu