The best writing of 2012
www.professionsforgood.com
Outstanding writing
on professional
ethics & standards
in business
Outstanding writing on professional ethics & standards in business - 2012
Contents
Outstanding writing on professional ethics & standards in business - 2012
Foreword
THE IMPORTANCE
OF BUSINESS ETHICS
Louis Armstrong CBE:
Chairman,
Professions for Good
In modern society we place our trust in a wide range of expert advisers,
specialists and representatives to act in the best interests of both ourselves
and the organisations and communities we work and live in.
1
Foreword
Louis Armstrong CBE, Chairman of Professions for Good
2
Shareholders need teeth to snarl at bosses
Rupert Steiner, Chief City Correspondent, Daily Mail
4
Would your ethics stand up to scrutiny?
Simon Dent, Arup
6
Investigating claims
Duncan Minty, independent adviser in business ethics and corporate responsibility
7
How to rebuild trust in business
Dr Graham Dietz, Durham Business School, Durham University
10
Lawyers as gate-keepers – a return to ethics?
Richard Moorhead, Centre for Ethics and Law, University College London
13
“It can’t happen here” – how businesses might inadvertently be encouraging fraud
Christie Malry, Chartered Accountant and blogger
16
Scandals have made the UK a dangerously low-trust society
Allister Heath, Editor, City A.M.
18
Profession must collaborate or risk its reputation
Kevin Reed, Editor, Accountancy Age
20
Business ethics: am I boring you?
Katherine Bradshaw, Institute of Business Ethics
22
Management responds to crisis in trust with drive to increase professionalism
John Milburn, Chartered Management Institute
24
Ethics: the bottom line is, you need them
Octavius Black, CEO, Mind Gym
Professions for Good, which represents leading professional membership
bodies, is committed to reinforcing the value and virtues of the UK’s qualified
professionals and their Institutions. We are encouraging the professions to
be standard bearers for re-establishing trust in society, which is critical to a
functioning democracy and a thriving economy.
26
Size does matter according to incoming AADB sanctions
Rachael Singh, Accountancy Age
Our ‘Writing Competition’ and this compendium of articles are designed
to encourage thinking and debate about this vital social and business issue.
Professionals, such as lawyers, accountants, engineers, architects, surveyors,
and medics have an immense influence on almost every aspect of our lives.
Their professional ethics and standards are of great importance in establishing
the necessary trust and integrity in the delivery of their services.
However, with the stress of years of financial crisis, the march of globalisation,
the impact of technology and the media’s appetite for reporting on the frailties
of those in the public eye, the public’s trust in British institutions, and by
association, the professions, has waned.
To promote the importance of the role of the professions, their codes of
ethics and standards and the confidence and trust these engender, Professions
for Good commissioned Spada, a leading communications consultancy, to
help run a highly successful competition in 2012 to establish the best writing
on the subject of ethics and professional standards in business or public life.
Following the announcement of the winners, we are now delighted to present
twelve outstanding pieces of journalistic or blog writing from 2012 on this
subject, including our competition winner, short-listed and other selected
entries, and other published writing on ethics and standards.
Louis Armstrong CBE
Chairman, Professions for Good
1.
Outstanding writing on professional ethics & standards in business - 2012
Rupert Steiner:
Chief City
Correspondent,
Daily Mail
Winner:
Professions for
Good Prize 2012 Best journalist
article or blog post
SHAREHOLDERS NEED
TEETH TO SNARL AT BOSSES
SHAREHOLDERS NEED
TEETH TO SNARL AT BOSSES
Continued....
Shareholder revolts are on the up. A record number of investors giving
boards a drubbing might appear as if the new Stewardship Code is working,
but nothing could be further from the truth.
As many as 15 FTSE 100 firms
have seen more than 20% of their
shareholder base refuse to back pay
proposals already this year – more
than double the previous year.
Household names from oil giant BP
to High Street bank HSBC, and the
world’s biggest drinks firm Diageo, all
experienced investor ire.
The problem is shareholder votes on
incentives and rewards have no teeth.
Without any bite, many firms just
shrug off protests as par for the course.
What’s more worrying is that the
rising number of revolts have failed
to embarrass firms to fall into line.
There is safety in numbers – the
more protests, the easier it is too
pass rebukes off as the new normal.
In short, firms are sticking two
fingers up to the small investors
and institutional owners of listed
businesses who have no other means
to hold companies to account.
They are also laughing in the face of
the politicians struggling to stamp out
the largesse.
At the heart of the issue is the
new UK Stewardship Code which
was introduced last year aimed at
improving the relationship between
Outstanding writing on professional ethics & standards in business - 2012
But the Swedes implemented this
measure to dilute the power of
shareholders such as the Wallenberg
family and Handelsbanken group, who
have held dominant positions in many
of the country’s public companies.
investors and the companies
they own.
It is operated on a ‘comply or explain’
basis. In short this means firms sign
up to a code of practice and if they
want to opt out on certain elements,
they can get a sick pass. All firms have
to do is conjure up a viable excuse.
As you might expect the City’s
matron has been a busy girl and
the politicians are not happy.
In the bigger UK market, where the
shareholder register is more diverse,
there isn’t such a need to redress
shareholder imbalance.
Also while good in principle James
Upton, head of corporate governance
at the ABI, says it does come with
a problem.
How do you choose which
shareholder gets a place at the table?
Over the last ten years the link
between median chief executive
pay and performance of the FTSE
100 has been hard to discern.
Across the Baltic Sea in Germany,
employees actually get to sit on
remuneration committees. They
play a part in deciding the pay set
throughout companies.
The financial crisis has made the
public aware of perverse incentives
or excessive levels of reward,
prompting business secretary Vince
Cable to launch a discussion paper
on executive remuneration.
Responses are due by November 24.
This is made easier because staff
already sit on firms’ supervisory
boards, and the workforce is codified.
In Britain union membership is
fragmented with the average union
official representing only 15% of the
private sector workforce.
The ideas that this has thrown up,
which could be adopted in the UK,
are many and varied.
Again issues would need to be ironed
out over who would earn the mandate
to sit on any committee.
In Sweden, shareholders sit on
nominations committees that select
directors for boards. This gives
them a bigger input to boardroom
composition and makes it harder
for chairmen to hand-pick stooges.
“
2.
But probably the most sensible
proposal being considered by Cable
is to make votes on remuneration
reports binding. That means investors
would actually get some teeth.
There would be an agreed level
of votes that firms would have to
garner to see their pay reports
waived through. If their polls fall
short, then their proposals would
have to be reworked.
It would be a stark wake-up call
to businesses who routinely ignore
their owners. And it would redress
the balance for small and big
shareholders alike.
But there doesn’t need to be a raft
of cumbersome new red tape.
If boards viewed the message sent by
shareholders at annual meetings with
different eyes, Cable would not need
to intervene.
During the boom years, firms
considered losing the support of 30%
of their shareholders as the acceptable
casualty of greed.
But when world economics are going
pear-shaped, it is only the reckless
that think they can soldier on without
a third of their investors on board.
… the new UK Stewardship Code … is operated on a ‘comply
or explain’ basis … firms sign up to a code of practice and if
they want to opt out on certain elements, they can get a sick
pass. All firms have to do is conjure up a viable excuse.
”
3.
Outstanding writing on professional ethics & standards in business - 2012
Simon Dent:
WOULD YOUR ETHICS
STAND UP TO SCRUTINY?
Highly
Commended:
The Leveson Inquiry is investigating the practice and ethics of the UK press,
and it made me wonder whether the engineering profession would stand up
to a similar level of scrutiny. Our work affects the lives of almost everybody
on the planet, but are we sufficiently aware of the ethics of our own behaviour,
judgement and practice?
Associate, Arup
Professions for
Good Prize 2012 Best journalist
article or blog post
We often, rightly, marvel at our own
sense of ingenuity when celebrating
feats of modern engineering. Why isn’t
this sense of achievement corrupted
if the project took place in a country
where construction workers are
expendable and suffer abhorrent
health, safety and welfare conditions?
For any building project, why aren’t
we more concerned with the ethics
of land rights and acquisitions,
supply chain members, contract
awards or even how the construction
materials and equipment (including
the conditions associated with their
manufacture) are sourced?
By being involved and trying to
influence things for the better, in
some way, can we really allay our
ethical compunction or just avoid
passing work to competitors who
may not have the same conscientious
objections?
In the office, the way we interact
with our peers, colleagues or clients
is culturally specific and differs from
place to place, and from person to
person. So even with an obviously
extreme concept such as exploitation,
the limits of what is considered ethical
remain hugely subjective.
Does someone have to feel exploited
to actually be exploited?
Take the culture of long working
hours, for example. Are people being
exploited when they frequently work
unpaid, additional time? Or are they
being offered, and willingly taking, an
opportunity to further their career?
Outstanding writing on professional ethics & standards in business - 2012
“
For any building project, why aren’t we
more concerned with the ethics of land
rights and acquisitions, supply chain
members, contract awards or even how
the construction materials and equipment
are sourced?
”
And if so, is that behaviour unfair as it
potentially prejudices competent and
effective colleagues who elect to not
work beyond their contracted hours?
I believe, to avoid becoming
inadvertently complicit in the
unacceptable behaviour of others,
there should be wider recognition of
the far-reaching ethical implications
of all our decisions and the associated
impact measured; with greater
accountability for those involved.
What do you think? Are the ethical
merits of your potential projects or
clients given enough credence in your
decision making processes? Have you
ever been ethically challenged at work
and were your colleagues sympathetic
or dismissive? What if the ethics and
behaviour of engineers was subject to
its own Leveson Inquiry? How would
we do?
4.
5.
Outstanding writing on professional ethics & standards in business - 2012
Duncan Minty:
Independent adviser
in business ethics
and corporate
responsibility
Highly
Commended:
Professions for
Good Prize 2012 Best journalist
article or blog post
INVESTIGATING CLAIMS
Dr. Graham Dietz:
Senior Lecturer,
Durham Business
School, Durham
University
A recent article in the Post Magazine suggested that complying with the
law and upholding professional standards would put those investigating
potentially fraudulent claimants on ‘the side of the angels’. Was it implying
that such investigators tend to operate well below such standards?
The article was further marred by its
case study having nothing to do with
the use of illegal or unprofessional
investigation techniques, being instead
about a properly investigated and
convicted fraudulent claimant.
While it was probably the magazine’s
editors who chose the article’s title,
it does shine a light on difficulties
the sector (or at least those reporting
the sector) seems to have in reflecting
upon its own behaviours and the
ease with which it moves the focus
onto the behaviours of claimants.
The latter obviously costs it a lot more
money, but that doesn’t obviate the
sector’s responsibilities to get its own
act in order.
Private investigating is an unregulated
activity with no overarching
professional body to set and enforce
standards. So when insurers and
adjusters hire a private investigator,
they have to rely on their own
standards and procedures to ensure
that the claimant under investigation
is treated fairly (most claimants
are customers of the insurer and
so continue to fall within the FSA’s
expectations of fair treatment). It is
Outstanding writing on professional ethics & standards in business - 2012
surprising, and more than a little
worrying, to hear reports that the
sector has yet to establish standards
for how such private investigators
are managed.
It all begins to take on shades of
the News of the World scandal – big
company allows a ‘let’s go get them’
culture to develop and along the
way fails to control how some of the
information is obtained. All it will
take is for a particularly sensitive
case to come along and insurers will
find themselves in the court of public
opinion with less than a leg
to stand on.
This article
was published
on Guardian
Sustainable Business
HOW TO REBUILD
TRUST IN BUSINESS
Restoring corporate trust is not rocket science, says Graham Dietz – but
companies must earn it by finding a blend of ability, kindness and integrity.
Alistair Campbell agonised over
“this huge stuff around trust”.
Organisations as diverse as BP,
Goldman Sachs, Southern Water,
Toyota, Castlebeck Care Homes,
Stockport’s Stepping Hill hospital and,
of course, News International and the
Metropolitan Police have all endured
lost stakeholder trust in recent years.
Yet Madeleine Bunting has
queried – correctly – the prevailing
despondency about trust in the wake
of the phone-hacking scandal. So, are
we living through a crisis of trust in
organisations? If so, what can be done
about it?
An analysis for the Institute of
Business Ethics by Nicola Gillespie
and I last year presented the latest
research on repairing trust after
organisational failures.
Perhaps this is overstating it a bit,
but there is a real risk here that
the considerable energy being put
behind the sector’s very justified
initiative to tackle fraudulent claims
will create a blindspot to its own
ethical responsibilities around how
those cases are investigated. News
International presents a near perfect
example of where insurers don’t
want to end up.
The first thing to understand is trust
itself. It may feel mysterious and
elusive, but in fact we know a great
deal about how it is formed and
sustained, and recovered. The essential
sequence is universal. To initiate trust,
we must be worthy of it.
Follow Duncan Minty’s blog
Ethics and Insurance
6.
Trustworthiness, in turn, consists of
three main characteristics: technical
competence to perform a task reliably
(ability), having benign motives
(benevolence), and acting according
to acceptable ethical principles such
as fairness and honesty (integrity).
Display these three attributes
consistently and credibly, and you
will be trusted by all but the most
paranoid. Get any of them wrong,
and your reputation will suffer.
Trust is remade – strengthened or
undermined – in every encounter.
As with individuals, so with
organisations. A trustworthy
organisation is one that operates
effectively, acts with due concern for
the interests of its stakeholders and
conducts itself with integrity. Support
for trust and trustworthy employee
conduct needs to be reinforced
throughout the organisation: by its
leaders (role-modelling), its culture
(values and beliefs), its policies and
procedures (task design, checks and
balances, HR), and management
practices (targets, incentives,
supervision). Organisational
trustworthiness can also be achieved
through external regulation.
When an organisation becomes mired
in a scandal, struck by a crisis, or
suffers persistent underperformance,
its investors, customers, regulators,
and employees can lose confidence in
its capacity to deliver, and disengage.
The reputational damage can even be
fatal – as with Arthur Andersen and
the News of the World.
A failing organisation needs to
recover trust among its employees
quickly. Barring mass layoffs, these
are the only people that can deliver
improved performance in the future.
In any event, trust’s impact on
performance should be compelling 7.
Outstanding writing on professional ethics & standards in business - 2012
Outstanding writing on professional ethics & standards in business - 2012
HOW TO REBUILD
TRUST IN BUSINESS
HOW TO REBUILD
TRUST IN BUSINESS
Continued....
Continued....
enough to warrant senior leaders’
attention. Trusted leaders inspire
superior performance from their staff,
and trusted employees deliver more
for their leaders.
When people find themselves –
quite suddenly – working for a
discredited, even vilified, organisation,
the guilt and shame by association
can be a distressing, even devastating
experience. The depth and rigour of
the response is critical at each stage,
from the immediate official statements
through the investigation into the
failure’s causes to the systemic
reforms designed to ensure it cannot
happen again.
Preventing a reoccurrence is the
bare minimum expected, but is not
enough; the accused organisation also
needs to send fresh and enhanced
signals of its ability, benevolence
and integrity. A false move can make
matters worse, as BP’s Tony Hayward
and News International’s Rebekah
Brooks have discovered to their cost.
Weighing up the options for those
first public statements, for how to
conduct an investigation, and for
reforms to the system is a delicate task.
Senior managers confronting these
decisions face multiple audiences:
whose interests to prioritise?
On this, the CEO of Mattel Toys,
Bob Eckert, has been exemplary.
When Mattel faced a massive toy
recall crisis in 2007, his explicit focus
was not only on his customers –
parents – but also his staff.
Although natural instinct may be
defensive self-preservation, and
to concede responsibility seems to
justify stakeholders’ lost trust in
the short term, several case studies
suggest, paradoxically, that sincere
acceptance of culpability and remorse
will be interpreted favourably, as a
powerful display of benevolence and
integrity. If it stops hostile momentum
gathering behind the story, it can even
be a shrewd PR move. The response
last year of the chief executive of
Castlebeck Care Homes to Panorama’s
expose of abuse at its Winterbourne
House facility was impressive: contrite,
self-critical, and thorough.
When Tony Wray took over
Severn Trent in the wake of a data
manipulation scandal, he and his
senior team undertook an imaginative
roadshow of company locations to
challenge his angry workforce with
the potential for their own culpability
in errors or capitulation to dubious
managerial pressures. His company
won an industry award in 2008 for
its recovery process.
Another fundamental decision
point is whether to respond with
a “legalistic” or a “relationship”
approach. Both attempt to limit
reputational damage, but in
strikingly different ways.
The legal route aims to minimise
financial risk, and avoid a media
firestorm, by suppressing information.
Tactics include outright denials, “no
comment”, countersuits and even
superinjunctions. But a self-serving
legalistic response can heighten
staff cynicism and risk further
opprobrium, undermining rather
than recovering stakeholder trust.
The “relationship” approach takes an
alternative premise, which is that the
best way to protect the organisation’s
reputation in the short and long term
is by investing in its relationships
with key stakeholders. This approach
foregoes some of the obvious
defensive legal reactions in favour of
transparency, candour, and taking
responsibility – even if this means
submitting to apologies and regret,
and making costly reparations.
8.
“
A failing organisation
needs to recover trust
among its employees
quickly. Trusted leaders
inspire superior
performance from
their staff, and trusted
employees deliver more
for their leaders.
”
That said, a second paradox is that the
“relationship” approach can be painful
for staff: it is not easy to be confronted
with the organisation’s failings,
and many may resent the guilt by
association. This certainly happened
at the BBC after its faked phone-in
and “Sachsgate” crises in 2007-08, and
more recently at News International
following the arrest of Sun journalists
in relation to alleged illegal payments
to police and other public servants.
The third paradox is the prospect
of an “over-reaction”. After a major
trust failure, a common response is
to implement strict new controls. For
many social workers the revised child
protection procedures following the
murder of “Baby P” are so onerous
that they may make detection of
vulnerable children harder, and hit
recruitment into the profession.
Goldman Sachs’ reforms following
the ‘Abacus’ fraud case in 2010 were
criticised for seemingly introducing
layers of inflexible bureaucracy.
Systemic procedural reforms are
vital for organisational trust repair,
and trust can co-exist with controls.
It is a matter of degree: overregulation is frustrating for staff,
and can be counter-productive
in fostering trust and recovering
operational competence. The
reforms need to balance the need
for a competent level of controls
with considerations of operational
effectiveness, and the implications for
employees’ trust and trustworthiness.
Dr Graham Dietz co-authored the
report Building and Restoring
Organisational Trust for the
Institute of Business Ethics.
9.
Outstanding writing on professional ethics & standards in business - 2012
Outstanding writing on professional ethics & standards in business - 2012
Richard Moorhead:
Professor of Law &
Professional Ethics,
and Director at the
Centre for Ethics &
Law, University
College London
This article was
published on
legalweek.com
LAWYERS AS GATE-KEEPERS
- A RETURN TO ETHICS?
LAWYERS AS GATE-KEEPERS A RETURN TO ETHICS?
The business pages tell us corporate leaders, perhaps cowed by reactions
to executive pay and the more general desire to rebuild the legitimacy of
capitalism, are increasingly interested in ethics. An interesting question is
whether this change, if it is real, will permeate into the way lawyers advise
their clients.
There will be some way to go if the
FSA are to encourage ‘proactive’ and
‘judgment-led’ regulation, but if they
are even halfway successful they may
have a significant impact on how
lawyers advise their clients. Punish
enough clients who lawyer up and
employ defensive, zealous tactics
and the tactics become discredited.
It would become clear, then, that
regulators other than the professions’
regulators have a key role in shaping
the ethics of the legal profession.
They will, likely, have to succeed in
persuading the courts that in taking
a proactive and judgment-based
approach the rights of defendants are
not being fatally weakened.
The conventional view is that
commercial lawyers act zealously
in their clients’ interests, no matter
what the impact is on third parties.
This ‘standard conception’ is that they
can, and should take any step that
advances their clients interest unless
it is plainly unlawful or clearly in
breach of professional conduct rules.
The default position of this standard
conception is that if the law in an area
is grey, lawyers and clients can exploit
uncertainty in their own favour.
To be sure, there are risks in the
‘if its grey, we can play’ approach.
The travails of some of News
International’s former lawyers may
be a timely example. Hackgate aside,
though, there are some interesting
signs that the ‘client zeal’ model may
come under pressure.
One is an apparent change in the
approach of (some) regulators. The
FSAs fining of hedge fund boss
David Einhorn for insider dealing
is being taken as a signal that the
FSA is toughening up its approach.
Einhorn, told by a corporate broker
acting for Punch Taverns that the
company was preparing a significant
equity fundraising and knowing this
would depress the share price, gave
instructions to sell all of his hedge
fund’s holding in Punch. They refused
to accept Einhorn (who still protests
his innocence) insistence that he had
requested of the broker that he not be
given confidential information (in
the lingo, he had not been ‘wallcrossed’ - which would make the
trade an insider trade). In essence,
the FSA is saying Einhorn should
have relied on his own judgment not
reassurances he sought from others.
In a recent FT article, Hector Sants
(leading on the break up of the
FSA into prudential and conduct
regulation) says this:
“We would like firms not to just take
the narrow perspective of what can they
get away with within the rules and how
long can their lawyers delay, but take
the broad perspective. When the right
way forward is clear, they should get
on with it.”
Strong regulator action will be
required to overcome a lawyer
(or client’s tendency) to take a
compliance/avoidance view of their
obligations (‘what is the minimum
I have to do to comply, or how can
I avoid regulations in place rather
than comply?’) and the tactical use of
delay. It would be interesting, indeed,
if Einhorn had taken legal advice on
whether the trade was lawful and
waived a supportive opinion under
the nose of the FSA when they came
to enforcement action against him.
10.
Continued....
Relatedly, there is a very interesting
article from Whelan and Ziv on Social
Science Research Network which
suggests some corporate clients are
beginning to seek to regulate their
lawyers’ ethics. Some of this covers
fairly well-known territory like
increasing emphasis on diversity
policies and broadening the range
of competitor businesses who their
outside law firms are conflicted out
from acting for (a not uncontroversial
approach). There is also a very
interesting focus by some corporates
(Walmart and Bank of America
are mentioned) which include a,
“prohibition on using obstructive
and coercive tactics in litigation, the
duty to protect the integrity of the
justice system, to consider and favour
negotiation and ADR over contentious
adversarial strategies, and in general to
act ‘ethically’. ”
There are, of course, a range of
questions about this approach: how
extensive is it? Does it influence their
outside lawyers’ behaviour? What
happens when business interests and
ethical interests are in opposition? It
is too early to say. In large part the
ethical obligations are framed within
- and seen by the drafters of these
requirements - as being supportive of
the business aims of the clients. Put
simply, more work is needed to assess
whether this is window dressing or a
substantive change but it does signal
that the old paradigms of corporate
legal ethics may be changing. One
very concrete example that Whelan
and Ziv take from Walmart, is
one which would have had a very
interesting impact in the context of
News International’s problems:
“If Outside Counsel believes that a
Walmart Associate (including any
Legal Department personnel) has
or will engage in illegal or unethical
activity as a representative or agent
of the Company, the most senior
Outside Counsel responsible for the
matter through which such activity
is discovered must immediately and
confidentially contact the RLDA (or a
Walmart Associate General Counsel
or General Counsel, as appropriate).
No Walmart Associate has authority
to instruct Outside Counsel to act in
an unethical manner in connection
with any Walmart matter”. In other
words, Outside Counsel are being
used as a mechanism to monitor
improper behaviour of the client’s
agents, turning them into “lawyer gate keepers”.
11.
Outstanding writing on professional ethics & standards in business - 2012
LAWYERS AS GATE-KEEPERS A RETURN TO ETHICS?
Continued....
I would be very interested to hear
whether such clauses are being
written into instructions from general
counsel in the UK. I would also be
very interested to hear whether such
policies have any impact.
Follow Richard Moorhead’s
blog ‘Lawyer Watch’, providing
research and commentary on the
legal professions.
“
Punish enough clients who lawyer up and
employ defensive, zealous tactics and the
tactics become discredited. It would become
clear, then, that regulators … have a key role
in shaping the ethics of the legal profession.
”
Outstanding writing on professional ethics & standards in business - 2012
Christie Malry:
Chartered
Accountant
and blogger
“IT CAN’T HAPPEN HERE”
- HOW BUSINESSES MIGHT
INADVERTENTLY BE
ENCOURAGING FRAUD
Competition
Entry:
Most businesses would think that they’re unlikely to be hit by fraud. But do
some commonplace corporate practices unwittingly make it more likely for
fraud to occur?
Professions for
Good Prize 2012 Best journalist
article or blog post
Talk about corporate fraud and
most people will likely think of
Enron or Worldcom. As well as being
monumentally big frauds, they also
have a cast of infamous baddies that
– so legend has it – single-handedly
caused those frauds to happen: Jeff
Skilling and Andrew Fastow in the
case of Enron, and Bernie Ebbers
at Worldcom.
But here’s a name you might not know:
Toby Groves. Toby was a basically
honest person who nevertheless found
himself at the centre of a multi-million
dollar mortgage fraud, for which he
was eventually jailed. Toby’s incredible
story is told in an excellent NPR
podcast, which is well worth a listen.
Toby doesn’t fit the mold of ‘evil
wolf ’ surrounded by a sea of ‘lambs’.
And his story is, in fact, much more
representative of the way frauds
typically take place. It’s not a bad
person who sets out to commit
fraud from the offset. Rather, it’s a
fundamentally good person who
finds themselves in a bad situation and
who then ends up doing the wrong
thing, even though their intentions
are basically honest.
Similarly, they don’t use the sheer
force of an evil personality to recruit
12.
others to help them. They simply
ask nicely. They’re not asking for
much. They just need a little favour,
which will make everything all alright
again. Quite often it might be a short
term fix to keep the business afloat.
The small transgression is portrayed
as minor in comparison with the
potentially huge consequences
of ‘doing the right thing’, which
could include many lost jobs and
ruined lives.
Having helped out in this way
once, people are often willing to
help again, even if the objective
is now the much less noble aim
of covering up the tracks left by
the previous fraud. Large frauds
start small.
The influence of management
practices on fraud
Even if it’s not that well understood
by the general public, the origins of
frauds are well documented in the
academic literature. However, I now
want to explore whether there might
be aspects of modern corporate
behaviour that actually make frauds
of this sort more likely. No business
wants to be defrauded, but could
they inadvertently be sowing the
seeds of fraud?
13.
Outstanding writing on professional ethics & standards in business - 2012
Outstanding writing on professional ethics & standards in business - 2012
“IT CAN’T HAPPEN HERE”
- HOW BUSINESSES MIGHT
INADVERTENTLY BE
ENCOURAGING FRAUD
“IT CAN’T HAPPEN HERE”
- HOW BUSINESSES MIGHT
INADVERTENTLY BE
ENCOURAGING FRAUD
Continued....
Consider the following:
• Job vacancies commonly specify
that they want ‘a good team player’.
They want people who get on with
others and who conform to the
norms of the organisation. People
that question the way things are done,
that challenge perceived wisdom, that
rock the boat, simply aren’t welcome.
When a longstanding and trusted
colleague asks for ‘just a little favour’,
the good team player is expected to
help, instinctively.
• Employers also want people who
are commercial. Who wouldn’t want
to be ‘commercial’, if the alternative
is to be ‘uncommercial’? But what
does this mean? Typically, it means
someone who is prepared to look
to exploit loopholes in regulations
or who will put the pursuit of profit
ahead of doing what’s ‘right’. Among
experienced staff, this kind of
commercial behaviour tends to be
rewarded, while slavish rule-following
is frowned upon.
• Confidentiality is very important
within business. Saying what’s going
on outside the organisation, even
discussing with one’s partner, is
considered very bad indeed, even if
that behaviour is illegal or unethical.
Unfortunately, this feeling can extend
to departments too, so that employees
are sometimes encouraged by their
managers to keep other departments
out of the loop. Even worse, it can
encourage employees to be cagey and
hostile to both internal and external
audit functions.
• Finally, management structures
encourage the notion that employees
should defer to authority within
their organisation. So more junior
employees may be susceptible
to falling in line with what their
authority figures are telling them to
do rather than doing what’s right.
Each of these areas would seem to
make it more likely that an employeeinitiated fraud could flourish, by
encouraging employees to be helpful
to each other, to cut corners where
there’s money to be made, to keep
quiet about minor wrongdoing and to
follow orders without question.
How might business react?
There are many factors which make
fraud possible, so there is no simple
course of action that will allow a
business to eliminate the risk of fraud
completely. However, I tentatively
suggest the following possible actions
that might help reduce some of the
problems.
• Promote diversity. In the 2012 Sir
Thomas Gresham Docklands Lecture,
Charles Taylor of the US Office of
the Comptroller of the Currency
suggested that diversity
of financial institutions and financial
products could help to make the
14.
Continued....
“
No business wants to be
defrauded, but could they
inadvertently be sowing
the seeds of fraud?
”
financial system safer. Similarly, it
stands to reason that involving people
from different backgrounds, different
social classes, different religions,
different ethnicities and even different
sexual preferences in an organisation
should make fraud less easy to
undertake. This kind of diversity
would be expected to help diffuse the
groupthink and clique-like behaviour
that can allow fraud-reinforcing
behaviours to set in.
• Strengthen whistleblowing.
While it may still be seen as akin
to snitching, it is an essential part
of protection against fraud. The
Public Interest Disclosure Act,
introduced into UK law in 1998,
provides some robust protection for
whistleblowers, on paper, at least.
However, the perception remains that
whistleblowing is a course of action
that’s likely to lose you your job,
livelihood and maybe any chance of
ever finding paid employment ever
again. The charity Public Concern
at Work provides free material to
improve public knowledge of the
whistleblowing regulations and to
support potential whistleblowers.
Those charged with governance
should look to embed meaningful
whistleblowing procedures in their
business and to demonstrate to
employees that whistleblowing will
not be punished, but will be rewarded.
• Employ professionals. Professional
institutes help to support the ethical
decision-making of individuals by
training them in ethical concepts
during and after the period of
qualification. The emphasis on an
ethical code, central to most serious
professions (e.g. accountancy),
serves to keep ethics at the forefront
when making business decisions.
Businesses should consider helping
their employees to obtain professional
qualifications, both as part of better
employee relations but also as part
of a plan to strengthen the business’s
defences against fraud.
Conclusion
To determine whether modern
management practices really do
make fraud more likely, or whether
the mitigating factors serve to reduce
it, will require academic research.
A brief search didn’t unearth much
existing literature in any of these
areas, so I hope that academics will
undertake some research to shed
light on these matters.
Read more at:
http://www.fcablog.org.uk/
15.
Outstanding writing on professional ethics & standards in business - 2012
Outstanding writing on professional ethics & standards in business - 2012
Allister Heath:
Editor, City A.M.
This was published
as the Editor’s Letter
in City A.M.
SCANDALS HAVE MADE
THE UK A DANGEROUSLY
LOW-TRUST SOCIETY
SCANDALS HAVE MADE
THE UK A DANGEROUSLY
LOW-TRUST SOCIETY
In his bestselling book ‘Trust’, Francis Fukuyama argued that social capital
is an essential prerequisite to prosperity. High-trust societies enjoy complex
networks of voluntary associations, and this creates a climate conducive to
commercial cooperation, entrepreneurship, the building of large companies
and international trade. He warned in the 1990s that trust was in decline in
the US; research by YouGov suggest that this process of social disintegration
is certainly accelerating in the UK.
The good news is that even if such
manipulation did take place it doesn’t
seem to have had any impact on prices
charged to consumers or companies.
In some cases, prices may have briefly
been pushed down. That, however,
is scant consolation. The authorities
must ensure that all wholesale markets
are clean – and that includes Libor
and other interbank lending rates, but
also energy, commodity markets and
all other indices. There are always bad
apples in every walk of life. They need
to be rooted out and punished.
punished severely. It is only when
wrong-doers are routinely jailed
– regardless of profession, income
or status – that the criminal law
will properly act as a deterrent and
that the public will realise that the
authorities are serious. In most
cases, the decline in trust that
affects so many UK institutions was
deserved. Those who messed up
must show that they have changed
– and start the fightback to regain
the public’s confidence.
White collar crime, if that is indeed
what has happened, needs to be
Follow Allister Heath on Twitter.
The decline in trust in many
professions is astonishing. BBC news
journalists were trusted a great deal
or a fair amount by 81 per cent of the
public in 2003; this is down to 44 per
cent today. Senior police officers are
down from 72 per cent to 49 per cent;
senior civil servants from 26 per cent
to 21 per cent. Trust in family doctors,
school teachers, trade union leaders,
local police officers and judges has
also been significantly eroded. Just 38
per cent trust upmarket papers, down
from 65 per cent. Even estate agents
are down, from 16 per cent to 10 per
cent. The City and financial firms have
clearly suffered a massive loss of trust.
The only slightly surprising finding
is that local MPs are only a little less
trusted: down from 44 per cent to
37 per cent. More intuitively, all the
parties are hugely mistrusted, even
by many of their own voters: just 16
per cent trust top Lib Dems, 19 per
cent top Tories and 23 per cent top
Labour politicians.
Of course, excessive trust is a bad
thing. It breeds complacency and an
ultra-deferential society which doesn’t
question elites or the received wisdom
Continued....
sufficiently. Figures of authority aren’t
always right; sometimes, they commit
horrendous crimes. They often make
mistakes. Scientists, economists,
doctors, policemen, judges or bankers
can all be horribly wrong.
But extreme lack of trust isn’t
healthy either: when nobody believes
anything anybody says, we end up
with ignorance, fear and misery,
with conspiracy theories and mob
rule (including of the digital kind)
replacing sensible, rational debate.
It is also in this context that the
recent energy manipulation
allegations must be seen. Markets
needs to be transparent and reliable.
Investors need to assume that prices
are a true reflection of supply and
demand. They need to be able to
trust organised markets; in the wake
of Libor, which virtually everybody
trusted too much, they cannot. So
the claims that there may have been
some dodgy dealings in the wholesale
energy market – with several
individuals going on the record with
such allegations – is a matter
of extreme seriousness.
16.
17.
Outstanding writing on professional ethics & standards in business - 2012
Outstanding writing on professional ethics & standards in business - 2012
Kevin Reed:
Editor,
Accountancy Age
Competition
Entry:
Professions for
Good Prize 2012 Best journalist
article or blog post
PROFESSION MUST
COLLABORATE OR RISK
ITS REPUTATION
PROFESSION MUST
COLLABORATE OR RISK
ITS REPUTATION
The latest blog from Michael Izza castigating aggressive tax avoidancepeddling among the institute’s members was well-meaning, but has been
criticised by respondents for, among other things, effectively calling on
advisors to not provide their clients with accurate tax mitigation options.
In fact, such an approach could easily
transpose across audit and insolvency,
where various interested groups give
those two sections of the profession a
good kicking on a regular basis.
Balancing that out were comments
from Tax Advice Network chairman
(and former tax faculty chair) Mark
Lee in support of Izza’s theme.
Taking a binary position in tax
matters, particularly for advisors, is
contentious. “If it’s legal it’s fine – we
owe a duty to provide clients with the
best options to reduce their tax bill as
possible,” say many of them.
Those that see grey in-between the
black and white are more likely to
encounter hand-wringing situations
where they are stuck between a ‘duty
of care’ in outlining all options,
despite some possibly being risky or ...
unsavoury. Of course, the decision is
up to the client.
As long as our tax system stays
fundamentally as it is, there will
always be providers of ‘exotic’ tax
schemes that, while legal, will be
viewed by many as beyond the pale.
For the ICAEW, I don’t see how it
could haul its members over the coal
for providing schemes such as Jimmy
Carr’s K2. Who is the institute to
decide where the legislative line is
drawn? That doesn’t mean it has to
support them, but I think the institute
Continued....
should be pragmatic on this one.
The matter is made more complex
by what are often relatively benign
tax decisions presented as ‘outrageous’
by the media and publicity-gobbling
politicians.
So what’s the answer?
We know the profession does a
damned good job at doing HMRC’s
dirty work – and, in a more general
sense, is the major crutch on which
an ailing business community leans
for technical and advisory support.
I think the institutes must collaborate
much more closely, policy- and
publicity-wise, in extolling the virtues
of their members, and making it
clearer that advisors do follow the
tax rules – it’s just that sometimes the
rules aren’t very well put together.
At the moment, the profession appears
too cynical, fragmented and reactive.
“
Reputational damage is serious
– just ask ex-Andersen staff.
It’s time to pull together, step
out, and focus on the ‘good things’
the advisory profession does.
As long as our tax system stays fundamentally
as it is, there will always be providers of ‘exotic’
tax schemes that, while legal, will be viewed by
many as beyond the pale.
”
If we have an umbrella group of
professional accounting bodies
known as the CCAB, let’s use it rather
than letting it be a glorified tea and
coffee meeting for the institutes’
presidents and chief execs. It would
be great to get the firms themselves
working as one on this, but I fear
that’s a step too far.
18.
19.
Outstanding writing on professional ethics & standards in business - 2012
Outstanding writing on professional ethics & standards in business - 2012
Katherine
Bradshaw:
Communications
Manager, Institute
of Business Ethics
This was published
on the ‘Social Impact
Hub’ on Guardian
Sustainable Business
BUSINESS ETHICS:
AM I BORING YOU?
Essential to today’s business yet not connecting with employees,
business ethics need to be more about storytelling than tick-box exercises.
High-profile misconduct cases often
involve companies which have an
ethics policy or code in place. Recent
research also suggests that many staff
are unaware of these policies.
While a survey from the Institute
of Business Ethics showed that 60%
of UK employees received training
on standards of ethical conduct
another revealed that less than a
third (29%) were aware of the values
of their organisation.
It is clear that business ethics has
an image problem; the message
that it is important is not getting
through. Somehow, among all the
corporate communications which
employees receive every day –
from their manager, from the chief
executive, from HQ – messages
about ethical commitments and
standards aren’t noticed.
We need to bridge the gap between
ethics programmes and daily worklife
– and stories can help us do that.
No matter how sophisticated we are
as a society, stories continue to be
our preferred way of communicating
and sharing our experiences of
life. From a book at bedtime to the
latest cliffhanger of our favourite
soap, stories help us connect and
communicate our emotions and
values with each other.
Business ethics training at its worst
can include material which seems
distant to staff and how they do
their day-to-day job. A set of
compliance dictats communicated
with slides animated with clip art, or
an eLearning programme with easy
multiple choice questions conducted
in isolation, is unlikely to engage
anyone with what really matters.
Ethical values need to be embedded
into company culture so that they are
reflected in the way that business is
actually done. This requires an ethics
programme with objectives beyond
just imparting knowledge and raising
awareness of expected standards –
the challenge is to communicate
their relevance and importance at
all levels and locations in a way that
impacts on understanding, decisions
and behaviours.
If the desired learning outcome
of ethics training is ultimately to
encourage personal responsibility
for the ethical conduct of the
organisation, it is imperative that
trainees are engaged in the learning
process. Scenarios or storytelling
can foster that engagement.
The world as it is
in reality, not clip art
To be effective, learning needs to
fit with trainees’ experience of the
way their world operates, and be
practical and applicable to their
lives. Using scenarios in a learning
situation supports these three
elements – experience, practicality 20.
BUSINESS ETHICS:
AM I BORING YOU?
Continued....
“
It is clear that business
ethics has an image
problem; the message
that it is important
is not getting through...
We need to bridge the
gap between ethics
programmes and daily
worklife – and stories
can help us do that.
”
and application – and also adds a
fourth dimension of participation.
Scenarios are a means of
communicating an organisation’s
ethical values, standards of behaviour
and approach to speaking up about
misconduct. When done well, trainees
are able to identify with the characters,
situations and relationships portrayed
even if they have not directly
experienced the ethical issue being
communicated. This connection is
the key to motivating learning and
embedding messages.
Minor ethical violations can spiral
The events that lead major companies
to collapse can sometimes begin with
seemingly minor ethical violations
that spiral into something much
bigger. Most people are not evil
fraudsters intent on world domination;
good people sometimes do bad things
because they feel detached from the
impact of their actions.
Using scenarios gives staff practice in
talking about ethical dilemmas and
“voicing values”, thereby giving them
the confidence to act appropriately
when faced with real-life challenges.
Alternative ways of thinking about
ethical issues develop as different
viewpoints are shared.
Flexible, relevant
and sometimes funny
One of the benefits to using scenarios
to communicate ethical values is their
flexibility: they can be brief Q&As
in a code of ethics; fictionalised case
studies in a staff newsletter; serialised
‘ethics soap operas’; or used as part
of group discussions in a dedicated
ethics training workshop.
Source material can be gathered from
within the organisation; ask for stories
and relevant situations from ethics
ambassadors and business heads. Your
organisation is full of stories – use
them to communicate the importance
of doing business ethically.
And don’t be afraid of humour –
it can be a valuable tool, enabling
people to relax and enjoy the training,
making them more likely to open
up and participate in discussions.
Ethics is too often seen as a killjoy
subject, po-faced and moralising. Use
humour, with tact, and be aware of
cross-cultural differences. Be aware,
also, that some may feel that using
humour trivialises the subject and the
seriousness of the topic. A scenario
for senior managers in the wake of a
crisis may require more gravitas than
a video for recent graduate recruits.
Whether it’s an after-dinner speech
or a day-long training session, most
situations where we seek to make
a connection are improved by the
telling of a good story. And ethics is
no different.
Katherine Bradshaw is the author
of ‘Developing and Using Business
Ethics Scenarios’, the sixth in the IBE’s
good practice guides, available online.
21.
Outstanding writing on professional ethics & standards in business - 2012
Outstanding writing on professional ethics & standards in business - 2012
John Milburn:
Head of Brand
and New Media,
Chartered
Management
Institute
The findings of
this research into
professional
management
was published
on the Chartered
Management
Institute website
MANAGEMENT RESPONDS
TO CRISIS IN TRUST
WITH DRIVE TO INCREASE
PROFESSIONALISM
MANAGEMENT RESPONDS
TO CRISIS IN TRUST
WITH DRIVE TO INCREASE
PROFESSIONALISM
“
With trust in business falling in the wake of high-profile scandals such as
those in the banking sector, new research from the Chartered Management
Institute (CMI) suggests that managers are seeking to demonstrate their
professionalism by attaining Chartered status.
The research showed that 97 per
cent of those who had become
Chartered did so in order to build
professional recognition, with 94 per
cent seeking accreditation both to
prove their commitment to ongoing
professional development and their
commitment to management as a
profession. By contrast, just 24 per
cent were motivated by the prospect
of a pay increase.
With adherence to an ethical code
of conduct at the heart of Chartered
status, 90 per cent also agreed that
becoming Chartered is a sign of
higher levels of professional integrity.
The report, Professionalising
Management: the impact of Chartered
Manager, examines how Chartership
has benefited managers as individuals
and the impact on their employers.
Ranked by managers as one of the
top 3 most effective management
development options, the report
reveals that the most widespread
benefits of becoming Chartered
are increased self awareness (93
per cent) and self confidence (86 per
cent). By making significant savings
or performance improvements
(68 per cent) or implementing
product, service or market innovations
(65 per cent), it is calculated that
Chartered Managers deliver an
average of £362,176 in added value to
their organisations.
Ann Francke, CMI Chief Executive,
said of the results:
“At a time when trust in business
has been rocked by scandals in
some of our biggest companies, firms
need managers who are committed
to the highest standards of integrity.
Chartered Manager is a seal of
approval for managers, showing
that they are committed to the
highest standards of integrity and
have a proven ability to deliver
business results.”
With adherence to an
ethical code of conduct
at the heart of Chartered
status, 90% agreed that
becoming Chartered is
a sign of higher levels of
professional integrity.
”
Commissioning Director of BAE
Systems (Maritime – Submarines)
is one employer who has benefitted
from providing Chartered Manager
to employees. He said:
the confidence to act on what they
see. That enables them to challenge
traditional ways of doing things and
rise to the challenge of leading projects
at cost and on schedule.”
“Chartered Manager raises the
standard of our leadership and manmanagement, which enables our
managers to motivate their teams to
deliver products, to time and to cost
– meaning that we are able to meet
our customers’ high expectations. It
also broadens the perspective of our
managers, many of whom are highly
skilled in a technical occupation. It
helps us offer them career development
across a range of roles and lets them
know that the business values them
and is investing in them.
Ann Francke added:
Providing these very technically skilled
employees with independent recognition
of their management skills gives them
Although personal gain was not a key
motivation for individuals to become
Chartered, the research found that
around one in three people enjoyed a
promotion or career progression as a
result, with an average salary increase
(where received) of £7,190 a year.
The report’s case studies show how
leading employers use Chartered
Manager to support business wins,
for example as a form of quality
assurance for customers. Stuart
Godden, Engineering and
Continued....
22.
“When we are all challenged to
deliver more for less, there can hardly
be a better time to look again at how
professional managers can deliver
better results. We all face a tough
business environment but developing
world-class managers is the key to
growth. Chartered Managers have
the confidence, the skills and the
integrity that’s needed to help their
employers succeed.”
Access a copy of the research
report, ‘Professionalising
Management: the impact of
Chartered Manager’ online.
Notes
The 2012 Edelman Trust Barometer measures attitudes
about the state of trust in business, government, NGOs
and media across 25 countries. It shows that the public’s
trust in business in the UK dropped from 44% in 2011
to 38% in 2012, while trust in CEOs also fell. Details
available at http://trust.edelman.com/
l Professionalising Management: the impact of Chartered
Manager includes findings from a survey of 412
Chartered Managers, carried out in April 2012.
l
The Chartered Management Institute (CMI) is the
only chartered professional body in the UK dedicated
to promoting the highest standards of management and
leadership excellence. CMI is the founder of the National
Occupational Standards for Management and Leadership
and sets the standards that others follow.
l
23.
Outstanding writing on professional ethics & standards in business - 2012
Outstanding writing on professional ethics & standards in business - 2012
Octavius Black:
CEO,
Mind Gym
This article was
first published
in The Sunday
Telegraph
ETHICS: THE BOTTOM
LINE IS, YOU NEED THEM
ETHICS: THE BOTTOM
LINE IS, YOU NEED THEM
Simple is seductive. Perhaps that is why corporate chiefs are so ready to
embrace Milton Friedman’s axiom that the only thing for business to do
is to increase profits within the rules of the game.
Not mentioning that small cash
income in a tax return is fine
when you think about how much
government wastes. We are wired to
alter our view on what is right to fit
with our own interests.
Continued....
The trouble is that the rules change
fast and people with a finer ear than
most CEOs get caught out. MPs and
moats; hacks and phone hacks; police
and leaks.
Recent studies indicate that engaged
employees are the critical precursor
to delighted customers. Indian
behemoth HCL is run on the
principle that employees come first.
Behaviour that seemed acceptable
in the morning is vilified by the
afternoon. Andrew Moss, Sly Bailey
and Virkram Pandit found themselves
on the wrong side of acceptable in the
“shareholder spring”. Apple and Nike
are publicly punished because they
were remiss in the care, not of their
own employees, but of workers in
their suppliers’ factories.
And so it is with business ethics.
The way to protect against the
unpredictable swings of the moral
compass is to behave with integrity
from the off. That’s all very good but
if we haven’t already got ethics, how
do we get them?
Into this comes the debate about
business ethics. Should businesses
have them and, if so, what should
their leaders be doing differently
to get them?
In general, rules aren’t the answer.
As rule-makers, we will always have
failed to think of something and, more
dangerously, we will be encouraging
people to focus on navigating the
system rather than take responsibility
for doing what is right.
Part of the answer lies in how we
teach business. The fact that MBA
students cheat more than other
graduates highlights the need to put
ethics at the core of the curriculum.
But most employees don’t have MBAs.
Turning an organisation to pay
attention to the customer is easier
when you start with people in frontline service roles because they want
to please customers. It is congruent
with their values.
The same principle applies to building
an ethical business – recruit people
who have congruent values, help them
see why living to these values will
“
The simplicity of “profit only” is
beguiling. But research has long
shown that businesses that focus on
customers are more profitable than
those that focus on the bottom line.
The rise and fall of Sears – once a
leading Harvard Business School case
study on the value of customer service;
now, having had its guts ripped out
in the pursuit of immediate returns,
a corporate basket case – is the
Ozymandias of customer first.
Legislation can help (e.g. bribery
acts) but it may have unintended
consequences (e.g. on the corporate
hospitality industry that funds
so many arts and sports). Simply
imploring people to behave
honourably will have a limited
effect too. In their enlightening
book, Mistakes Were Made (but not
by me), Carol Tavris and Elliott
Aronson show how we invariably
find ways to justify our behaviour
however morally hollow.
The customer pedestal is, however,
under siege from, perhaps
surprisingly, the humble employee.
Finessing your personal expenses
is OK because of the legitimate
things you paid for and forgot about.
24.
make their lives better as well
as helping their business flourish,
and reinforce at every turn. Leaders
would do well to talk about purpose
more than profit. They can also help
by sharing dilemmas (sell insurance
to someone who doesn’t really need
it versus miss my target) and talk up
those who behave with honour.
But the most powerful way to build
organisational integrity is to appeal
to self-interest. Aristotle talked of
“the good life”, lived according to
our values. In a world where we seek
happiness in so many of the wrong
places, the route to fulfilment lies not
in things but in people, not in what
we achieve so much as how.
As Albert Camus wrote,
“integrity has no need of rules”.
But it does have a need for advocates.
Find out more about
Mind Gym online.
Turning an organisation to pay attention to
the customer is easier when you start with
people in front-line service roles because they
want to please customers. It is congruent
with their values.
”
25.
Outstanding writing on professional ethics & standards in business - 2012
Outstanding writing on professional ethics & standards in business - 2012
Rachael Singh:
Senior Reporter,
Accountancy Age
Competition
Entry:
Professions for
Good Prize 2012 Best journalist
article or blog post
SIZE DOES MATTER
ACCORDING TO INCOMING
AADB SANCTIONS
SIZE DOES MATTER
ACCORDING TO INCOMING
AADB SANCTIONS
Member firms should take heed that the accounting watchdog has
rolled up its sleeves and is about to crowbar public confidence into
financial reporting systems.
the same misconduct than a larger
firm, but it should be proportional
and have the same effect.
Tribunal can charge, the fine will be
purely determined by the members
turnover or income.
Second is a range calculation. This is
where the Tribunal will determine the
level of the misconduct (they suggest
five levels) and apply a percentage of
turnover as the fine depending at what
level of misconduct the member is
found guilty of. For example, a level
one misconduct would be x% but a
level five would be significantly higher
at y%.
Don’t throw stones
It plans to do this by drastically
increasing the way in which it dishes
out fines to members and member
firms found guilty of misconduct,
according to a recently launched
consultation. The watchdog hopes
the change in the way fines are
calculated will see more proportionate
reprimands dished out, but what is
that going to mean for firms?
Recently the Accounting and Actuarial
Disciplinary Board (AADB), an
operating arm of the Financial
Reporting Council, was unhappy
at the low level fine it dished out to
PwC for its audit of JP Morgan - even
though it was the most substantial it
had ever handed down. Although the
£1.4m fine slapped on PwC in January
by the AADB tribunal arm may have
been the largest ever given, it was a
drop in the ocean to the £2.46bn in fee
income the firm posted for the year
ending 30 June 2011.
“... we do consider that the increases in
recent times of the fees payable by firms
such as [JP Morgan] to firms such as
[PricewaterhouseCoopers] indicate the
need for a substantial increase in the
level of penalty payable for misconduct
of the kind under consideration in this
case,” the document says.
Back in January following the
announcement of the record fine
AADB’s executive counsel Tom
Martin told Accountancy Age: “This
may now be a point to have a debate
on financial sanctions on accountants
to ensure that it is proportional”.
The AADB wants to increase fines
on larger member firms because
the way they are currently calculated
is not adequate to incentivise the
right behaviour and is failing to
be a “credible” deterrent in the
public’s eyes.
It claims accountancy has changed
so much and with the Big Four
dominating 99% of the audit contracts
in the FTSE 100, misconduct by one
of them is considered more serious
and potentially more damaging in the
public interest as a result of their size
and scale. Therefore a reprimand must
be seen to have actual consequences
rather than a paltry sum of £1.4m.
Spoilt for choice
The board is consulting on three
structures to calculate fines in the
future. Firstly is the minimum starting
point, where a member (individual
or firm) must pay a yet to be defined
percentage of group turnover so the
reprimand would be proportionate
to the size and scale of the firm.
Essentially a firm with a lower
turnover will receive a lower fine for
26.
Continued....
The third structure in discussion is a
maximum percentage of turnover. So
a Tribunal would agree that it cannot
be more than x% of annual turnover.
In the event no annual turnover can
be used the Tribunal will look at
profits per partner, market share, the
number of audit and non-audit clients,
partners and employees to determine
the size of the firm.
For individuals the Tribunal will take
into consideration their salary and
all benefits including pension, bonus
and share options. However, the
AADB has yet to determine whether
or not assets will be included in the
calculation or not.
Changing the reprimand structure to a
percentage-based system is something
the AADB hopes will instill public
confidence into the system. It also
means there is no limit to what the
The sanctions guidance is not just
about structures, it delves deeper and
outlines some of the behaviours seen
in the accountancy profession that
it wants to put a stop to or prevent.
Most notably it highlights that many
firms are pinning the blame of audit
failures on partners, when they
are not the only ones at fault. The
audit partner may have to bear the
brunt of the responsibility, but they
would not have acted alone and the
responsibility of conduct ultimately
lies with the accountancy practice.
The Tribunal wants firms to take
responsibility in disciplinary
proceedings for the conduct of its
partners, directors and employees.
It hopes the changes to the sanction
structure will encourage practices
to update training and or change its
internal processes.
“It would not be in the public
interest if member firms were able to
transfer all responsibility, blame and
consequence to the individual members
involved, thereby neutralising the
deterrent to member firms pursuing
business practices that could damage
public confidence in the accountancy
profession and corporate reporting in
the UK,” it said.
27.
Outstanding writing on professional ethics & standards in business - 2012
“
SIZE DOES MATTER
ACCORDING TO INCOMING
AADB SANCTIONS
Continued....
The AADB also advises firms
considering loopholes to keep their
fee income down that calculations
will be based on group turnover which is expected to mean for all
of the UK - not including Europe or
global earnings. Any firm considering
separating their audit business or
setting up a separate company for
each audit should be warned, the
AADB will not accept that as a
turnover figure.
The Tribunal arm is expecting a surge
in appeals thanks to the increase in
monetary reprimands, but it claims
it’s ready and believes the benefits
of the changes will far outweigh any
disadvantages and costs. Members
have until 11 July to make their voice
heard before the consultation closes.
Not out to sink the ship
For large firms, that take on hundreds
of audit cases, if they are to face
several disciplinary actions it has not
yet been defined whether the Tribunal
will take into consideration fines
already dished out and changes made.
For example, if a firm is facing two
disciplinary actions for two separate
audits by the same partner it is unclear
whether those changes will be taken
into account in both cases or just the
first. We could see a firm having to pay
x% of overall fee income for the year
ending April 2012, and then see them
Outstanding writing on professional ethics & standards in business - 2012
paying the same again for overall
fee income for the year ending April
2012 in a separate case - meaning
firms could stand to lose a significant
percentage of their overall fee income
if they are slapped with several
reprimands in a year.
However, it is not the intention of
the AADB to bankrupt a member or
put a firm out of business. Tribunals
will not impose an unreasonable
penalty on a scale that will have a
devastating effect on the member and
it is encouraged to consider the effect
of the fine on business continuity. It
will also give discounts to firms and
individuals that admit their mistakes,
work with the investigation team and
make changes.
… many firms are pinning the blame of
audit failures on partners, when they are
not the only ones at fault. The audit partner
may have to bear the brunt of the responsibility, but they would not have acted alone
and the responsibility of conduct ultimately
lies with the accountancy practice.
”
Overall the changes seem harsh
but they could mean firms and
individuals will change the way they
work to ensure everything is by the
book, or that we are about to see a
huge spike in appeals.
This story appeared on the web only
publication Accountancy Age.
Bibliography:
This is an exclusive story on the FRC’s disciplinary arm
taking action on levelling the playing field on disciplinary
measure in audit firms – to instil public confidence in the
reprimanding process of auditors.
28.
29.
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