The Limits of Transparency: Pitfalls and Potential of Disclosing Conflicts of Interest

A conflict of interest of the type discussed here occurs when one’s professional responsibilities conflict with one’s personal interests, which are often material but could also involve other goals, such as power or status. Conflicts of interest have been at the heart of many recent economic crises. For example, the sudden demise of high-flying corporations such as Enron and WorldCom has been attributed, at least in part, to the fact that accounting firms auditing those corporations were also providing lucrative consulting services that could have been jeopardized by an unfavorable audit. In the recent mortgage crisis, credit-rating agencies that evaluated the mortgage-backed securities were hired and fired by firms whose bonds they were rating—a situation that still exists in auditing. In the dot-com bubble, firms that were underwriting IPOs were also giving investment advice to their retail clients. Further, the dramatic increases in healthcare costs in the United States over past decades have been fueled in part by conflicts of interest, including payments from medical device and pharmaceutical companies to physicians and fee-for-service remuneration schemes (Jerome P. Kassirer 2005). There have been many policy efforts to deal with conflicts of interest—including regulatory interventions that led to the separation of auditing and consulting functions at accounting firms—as well as legislative initiatives, including large parts of the Sarbanes–Oxley Act and the Financial Reform Bill of 2010. Across the diversity of policy interventions, however, there is one striking constant: the ubiquity of disclosure. Virtually all policies intended to mitigate the negative effects of conflicts of interest— The Limits of Transparency: Pitfalls and Potential of Disclosing Conflicts of Interest