Question

Describe the conflict(s) of interest in the provision of the following services:

(a) underwriting and research by the same investment banking.

(b) auditing and consulting by the same accounting firm.

(c) credit assessment and consulting by the same credit-rating agency.

Answer 1

(a) underwriting and research in investment banking-

when an issuer benefits from optimistic research and investors desire unbiased research.
- information produced by researching companies is used to underwrite the securities issued by the same companies. the bank is attempting to simultaneously serve two client groups whose information needs differ
- spinning occurs when an investment bank allocates hot, but underpriced, IPOs to executives of other companies in return for their companies' future business
(b) auditing and consulting in accounting firms and conflict of interest
- auditors may be willing to skew their judments and opinions to win conslting business
- auditors may be auditing information systems or tax and financial plans put in place by their nonaudit counterparts
- auditors may provide an overly favorable audit to solicit or retain audit business
(c) credit assessment and consulting by the same credit rating agency-

conflicts of interest may arise when credit-rating agencies also provide ancillary consulting services. Debt issuers often ask rating agencies to advise them on how to structure their debt issues, usually with the goal of securing a favorable rating. In this situation, the credit-rating agencies would be auditing their own work and would experience a conflict of interest similar to the one found in accounting firms that provide both auditing and consulting services.