When Thomas A. Bowman, president and chief executive officer of the Association for Investment Management and Research, testified on corporate governance last March before the Committee on Banking, Housing and Urban Affairs, he gave a powerful argument for improving investor protection in the wake of corporate scandals.
One his concerns: auditor independence could be compromised by conflicts of interest, if the firm did auditing and consulting work for the same corporate client.
"Full and fair disclosure of all conflicts of interest between a client and its auditors must be required," he said, including "information about fees for non-audit services, the nature of non-audit services provided..."
But what of AIMR's own efforts to establish best practices for money management firms? In its widely followed performance presentation standards for money managers it makes no demands for disclosure about potential conflicts of interest in the verification process.
The safeguards about independence and disclosure of conflicts of interest Mr. Bowman advocated for auditors of corporate financial statements aren't included in AIMR's rules about verification firms, which are like auditors of performance reporting of investment advisers.
To Mr. Bowman's and AIMR's credit, some of the auditing independence and disclosure proposals he recommended in his testimony were enacted last year in the Sarbanes-Oxley corporate reform legislation.
When asked about the discrepancy between his testimony and the standards promulgated by his association, Mr. Bowman said in an interview: "I think the standards committee that oversees the performance presentation standards really should be taking another look to see whether or not there ought to be stronger language in the standards that suggest if you are going to have a verifier, that the verifier be independent and basically not verifying some other kind of work...for the firm.
"To me that makes intuitive sense. It's also consistent with what I said in regard to auditors before the Sarbanes committee."
"In principle, you don't want an auditor auditing his own work," Mr. Bowman said. "I think the same thing holds true (for verification firms). There may be other services a verifier may be providing that have absolutely nothing to do with measuring (a manager's) conformance with" the performance presentation standards.
"If they are working with a firm (money manager) where they do influence, could influence PPS adherence, I think that issue needs to be addressed" in terms of conflicts of interest disclosure and verification independence, he said.
"We want to do whatever best practices are," Mr. Bowman said. "As AIMR, I think we have a higher responsibility for corporate governance" than groups that don't set standards.
"If we are going to advocate standards in accounting for companies, best practices, we think we ought to adopt those same best practices at AIMR."
AIMR's lagging appreciation brings to mind the anecdote about the revolutionary intellectual in 18th century France who sees a rabble marching through the streets with torches and clubs, heading for some royal administration center.
"I have to follow that mob," the revolutionary exclaims to a companion. "I'm their leader."
Still it's better to follow than not move at all.