Glenn Cheney reports on how US organisations are rebuilding their tarnished reputations.
Something interesting popped up for sale on the eBay internet auction site recently a copy of the Enron ethics policy. The subtle value of the item was hinted in the last words of the description. It said 'unopened'. In the United States, a lot of ethics policies at companies and CPA firms seem to have remained unopened lately. Enron, WorldCom, Tyco, ImClone, Sunbeam, Global Crossing, Arthur Andersen ... Through a dreadful summer of plummeting stock prices, hardly a day went by without news of yet another corporation crashing, burning, leaving investors with ashes while corporate officers walked away with millions. A token few, of course, walked away in handcuffs, but the arrests were too late. The mirage of corporate growth was gone, and with it, the public trust.
It wasn't a crisis of terrorism, oil or war.
It was a crisis of ethics, and according to Rushmore Kidder, director of the Institute for Global Ethics, that's the big one. 'This is a fundamental question of the 21st century,' Kidder says. 'If we don't get a handle on this, it could doom us just as surely as some of the other big issues, like the nuclear threat and environmental collapse. This is becoming a survival issue.' He cites the Chernobyl disaster a technical calamity born of ethical breakdown. A handful of managers and engineers put their ethics aside and conducted an unauthorised experiment. The proportions of the consequent disaster demonstrates how the power and complexity of technology can leverage the power of a few unethical individuals.
The same principle applies to global business. To an unprecedented extent, a few corporate officers can cause a catastrophe that devastates hundreds of thousands of employees, investors, customers and suppliers around the world. If you don't believe the scope of the ramifications, take a look at the world's securities markets. Ten American companies collapse, and the stock market loses four years of progress. A few dozen unethical individuals cause a loss measured in trillions of dollars. 'As we build an interconnected financial grid around the world, something that takes down part of that grid can take down huge amounts of it,' Kidder warns. 'The very systems that we are building in the financial realm are becoming more and more complicated, bigger and bigger, with more ramifications and more capacity for a single unethical input to corrupt them.'
Ethics may be the fundamental pillar of civilisation, but it doesn't take too many unethical termites to bring that pillar down. Once companies, audit firms and investors lose their sense of trust, business becomes impossible, and the system collapses. The most significant failure this year was that of Arthur Andersen. Until it started shredding Enron documents, the firm probably didn't do anything illegal. Its failure was a failure of ethics, and as such, it revealed a potentially fatal flaw in the world's economic system. It's only slightly encouraging to think that 99 per cent of accountants are unassailably ethical.
The terror is that 1 per cent is enough to contaminate the professional reputation.
Though [the US] 'CPA' was once synonymous with integrity, Arthur Andersen's involvement with several scandalous clients left the accounting profession smeared with corporate sleaze.
Now, in the eyes of many, 'CPA' is synonymous with 'CEO', and 'CEO' doesn't stand for anything good. In sink or swim self-defence, the American auditors and accounting organisations have rushed to improve their image and reinforce integrity. The first efforts at recovery were in the legal arena. The American Institute of CPAs (AICPA) and Financial Executives International advised the US Congress on how to strengthen legal enforcement of corporate governance and the accounting industry.
The resulting Sarbanes-Oxley Act of 2002 stiffened punishment for corporate misdeeds, called for an oversight board to watch accounting firms, restricted non-audit services that firms can offer public company audit clients, and outlawed some of the buddy-buddy benefits that corporate officers used to enrich themselves at their companies' expense. But law doesn't preclude the need for ethics. Scoundrels can always get around the law, and law does little to repair professional reputation.
To promote ethics among its members, the AICPA has beefed up its ethics department and continues to work on new programs. Accountants on slippery slopes can call an ethics hotline or send anonymous email to an ethics website. That site also offers a quick quiz about ethics, a more comprehensive ethics examination, a number of case studies, advice on independence, and an ethical behaviour decision-making tree.
Susan S. Coffey, AICPA's vice president of self-regulation and SEC practice section, says the burden that has fallen on professional associations. 'Ethics has always been the cornerstone of the profession,' Coffey says. 'We have always supported ethical behaviour among our members regardless of their discipline. We have always recognised that we have a public interest responsibility, and we will continue to make sure the public is protected.'
The AICPA is expediting various new projects. One will provide best practices guidance on how much a firm, office or partner may depend on one client. The guide will identify threats and recommend mitigation and safeguards. The institute has also issued an exposure draft on changes to its code of conduct to avoid the ethically dubious 'revolving door' problem of auditors being hired by former clients.
A few weeks before the Enron collapse, the International Federation of Accountants (IFAC) completed a four-year re-write of its code of ethics. The overhauled code moves to a principles-based approach and has been adopted by the European Commission and IFAC organisations in most other countries. Recognising the damage that misbehaving corporate financial officers have done to the profession, the Institute of Management Accountants set up a website where any financial professional anywhere in the world can sign a pledge to comply with the institute's code of ethics. The institute also opened its ethics hotline to all financial professionals. A new ethics education program will soon be administered live over the internet.
The Institute of Internal Auditors (IIA) as seen no need to change its ethics policy or services. It is reiterating the links between ethics, internal auditing, and corporate governance. 'We are becoming much more conscious of ethics being driven by the tone at the top,' says William G. Bishop, IIA president.
'We see corporate governance as a partnership of management, the board, internal auditors, and external auditors. It takes all four to make the ethical environment strong and effective.' Bishop believes that most people in most organisations are honest and ethical. What they often lack, however, is a vehicle for grappling with ethical problems at the top of their organisation.
Internal auditors, he says, should serve that purpose, functioning as ombudsmen whose trustworthiness is intrinsic to their job, a force obliged to defend good ethics. The big accounting firms offer their partners and staff varying degrees of support for ethical behaviour. PricewaterhouseCoopers' US firm stands out for having a department dedicated to internal ethical concerns and reinforcement. 'An internal ethics management function like ours is considered a best practice in any large, decentralised organisation,' says Barbara Kipp, partner, ethics and business conduct leader. 'Probably three-quarters of Fortune 500 companies have some kind of ethics activities, not just a code of conduct but things like ethics help-lines, ethics officers, and training.'
Kipp says it's hard to measure the effectiveness of ethics programs because they are designed to prevent ethics problems or detect problems before they become serious. Her office deals with internal ethics issues only, though the PwC assurance group offers clients help with such ethics-related governance issues. Deloitte & Touche CEO Jim Copeland discussed his concerns for ethics in a recent speech. He cited a Wall Street Journal survey that found 72 per cent of Americans believe a company representative will say whatever it takes to keep the company out of trouble. He mentioned a recent jury selection pool in which over half of the potential jurors agreed that 'corporate executives will lie to increase profits.' That distrust, Copeland said, may explain why Americans pulled $29 billion out of US stock funds between June and August of this year.
Discussing how to recover his profession's image, Copeland warned against over-promising and creating a false sense of confidence among investors. To do so, he said, would be a greater fraud than what has already happened.
Among Copeland's recommendations is the teaching of ethics at all levels of education. His firm is examining itself to look for ways to ensure ethical conduct, including the possible appointment of a chief ethics officer.
United Technologies, with 155,000 employees in 183 countries, prides itself on its ethics program. The company has 190 business practice officers who serve as ethics officers. The company has adopted the FEI code as part of its own. Patrick J. Gnazzo, vice president of business practice at UT's headquarters in Hartford, Connecticut, USA, manages the program. 'We started as a [legal] compliance program in 1986, then moved into an ethics program in 1991,' Gnazzo says. 'Compliance means our people must obey the law wherever they do business, even if their government doesn't enforce it.
An ethics program goes beyond compliance to determine how we want to be perceived by our customers, shareholders, employees, vendors, communities, even our competition. It's an expression of who we are and how we do business.' That, in a nutshell, is what American accountants are now remembering that ethics go beyond compliance and determine what they are and how they do business.
Further reading
'Accounting involves ethics, not just technical issue's by Curtis C Verschoor, Strategic Finance, September 2002
'Entering the third age of ethics' by Rushmore M Kidder, Strategic Finance, October 2002
'New scandals, old lessons: Financial ethics after Enron' by Gregory J Millman, Financial Executive, July/August 2002
'The social impact of business failure: Enron' by Uma V Sridharan, Mid-American Journal of Business, Fall 2002
'What can you learn from Enron?' by Jo Ann S Barefoot, American Bankers Association. ABA Banking Journal, August 2002 About the author
This article was written by Glenn Cheney, a US-based journalist.
