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Description of Chinese Wall. Explanation.

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Definition Chinese Wall. Description.


A Chinese Wall is a metaphor for a virtual barrier to the flow of information between two different functions of an organization, in order to prevent possible conflict of interest. Typically, the wall is purely conceptual, although sometimes functions may be divided by physical barriers (areas of a building, for example) as well as policies.
 

Such walls were supposed to exist between the auditing function and the consulting divisions of big auditing firms. However the Enron/Anderson Consulting case showed that these walls did not work well here.


In banking, a Chinese wall is supposed to exist between the M&A function in the investment bank section and the brokerage function, advising clients about investments. Again, passing information through the wall, although forbidden, has occurred, because it can be extremely lucrative. During the dot.com rush passing this kind of information through the "wall" was not unusual and was a major cause of the stock crash in 2000.


Other (better) solutions to prevent conflicts of interest are to split certain companies, legislation (Sarbanes-Oxley), more attention for business ethics.


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