Trust Us, We're Experts PA

“For years, we sold sleazy,” explained Leonard Weinglass, the clothing chain’s founder, describing the store’s successful marketing mix of tank tops, slit miniskirts, and other risqué fashions for teenage girls. Somewhere down the line, however, Merry-Go-Round began to lose its way. Rapid expansion had left it overextended and losing money in droves. Its creditors and nearly everyone except Ernst & Young knew that the company would have to close down hundreds of its stores if it wanted to survive.

Instead of action, however, Ernst & Young frittered away months conducting studies, producing financial projections, and drafting proposals. Rather than closing stores, it recommended stocking up on merchandise and trying to increase sales. When Merry-Go-Round’s chief executive disagreed, the law firm that had recommended Ernst & Young in the first place intervened to block his authority. By the time creditors finally pulled the plug, the company was more than $200 million in debt.

According to the Wall Street Journal, Ernst & Young’s legal sin consisted of failing to disclose a hidden conflict of interest. “The law firm that recommended Ernst & Young and later intervened on its behalf had a business relationship with Ernst & Young—one that neither of them had disclosed to the bankruptcy court,” the Journal reported. “Moreover, Ernst & Young had another business relationship, also undisclosed to the court, with the land-lord of some of the stores that could have been shuttered if there had been a quick round of closings.” Rather than serve the needs of Merry-Go-Round, in other words, its advice had helped protect the interests of the landlords.²

When advising the business community, expert consultants like Ernst & Young have a legal and financial responsibility to inform their clients of any external entanglements that might influence their judgment and their ability to give unbiased, helpful advice. Failure to do so is a serious offense that carries dire penalties. Our society has evolved strong, detailed, and effective laws to protect the interests of businesses and their creditors. Failure to disclose a conflict of interest is only one of the requirements that can bring penalties down upon the head of a financial adviser. In fact, failure to disclose any risk factor that might influence the decision of a reasonable investor is regarded as fraud and can be punished not only with fines but with actual jail time.

No such standard applies, however, to the experts who inundate the general public with advice on other matters. Neither they nor the journalists who rely on their punditry feel much need to inquire into possible conflicts of interest, or to disclose them when they exist.

The experts who appear on the evening news and other public affairs programs come from prominent and not-so-prominent universities, think tanks with impressive-sounding names such as the Statistical Assessment Service or the National Center for Policy Analysis, “white hat” nonprofit organizations such as the American Cancer Society or the American Medical Association, and research journals such as the New England Journal of Medicine. Many experts are closely tied to powerful interest groups—typically government, industry, or professional bodies. These interest groups provide them with jobs, access to power and status, training, ability to publish their work in professional and academic journals, and other benefits. Affiliation with these organizations also serves to accredit the experts, enhancing their credibility in the eyes of the media and the public. Establishment experts also often have some degree of power to suppress the ideas of their critics in quiet, behind-the-scenes ways by preventing their work from being published in key journals or otherwise keeping their views from receiving prominent public airing.³