Accounting Ethics (#232)
/In this podcast episode, we discuss accounting ethics. Key points made are noted below.
The Ethical Quandary of the Controller
I’ve mentioned ethical issues off and on in the previous episodes, but let’s get into this in more detail. And let’s start with an example. Let’s say that you’re the company controller, and you’re fairly new to the job. It’s the last day of the year, and the entire management team is going to receive a hefty bonus if the company can ship out a lot of deliveries on the last day of the year. It’s now mid-afternoon of that last day, and the president calls a meeting of the management team – he says that the company will make its numbers, but only if the shipping department keeps shipping orders like crazy until 3 a.m. the next day.
At this point, the president looks at you and says, “That’s OK with you, right?” This puts you, as the controller, in a terrible position. Keeping the books open late is fraud, because you’re taking sales from the next year and stuffing them into the previous year. But on the other hand, let’s look at all of the pressure you’re under. The president has just asked for your opinion in front of the entire management team. The whole team will lose their bonus if you tell the president that sales will be cut off at midnight – which is what’s supposed to happen. And you’re new, so you don’t exactly have any power within the group to support your own position. Chances are, because of all that pressure, you’ll let the late deliveries be recorded in the wrong period, and you just committed fraud. What is everyone else’s reaction? The president personally thanks you, the rest of the management team invites you out for a beer, and you get a bonus. This is the problem with ethics when you’re an accountant, because there’s usually a choice between taking an unpopular position that opposes everyone else, or going along with the crowd. And that’s hard.
Before we get into what you should do about it, let’s keep going with that scenario. In the next month, sales are low again, because you incorrectly recorded some of its sales in the previous year. So the management team fully expects that you’ll leave the books open again, because that’s what you did the last time. And once your initial decision is made to commit fraud, you’ll always be tagged with having a reputation as an easy controller, someone who’s always willing to bend the rules, just to help out the rest of the company. If you extrapolate this scenario all the way out, it could easily lead to a controller - who came into the profession with good intentions – ending up committing a massive fraud and going to jail for it.
A key point to take away from that scenario is that it’s not just bad people who engage in fraud. It’s also people who are perfectly fine, but who get twisted by the circumstances they find themselves in. In fact, I’d say that only a tiny percentage of all people in the accounting profession have such a rigid sense of ethics that they always make the right ethical choice.
The Source of Ethical Problems
So, what can be done? Let’s go back to that example. Whose fault was it, really, that the controller made a bad ethical decision? It was clearly the president. The president imposed pressure on the controller to make a bad call. This situation is really common, because the people who run companies don’t necessarily have a strong moral compass. If anything, too many of them focus so much on performance that they completely ignore how to run the company in an ethical manner.
This is a real problem for new controllers in particular. Consider the situation. You’ve just landed your first job as a controller. Why? Why did the president hire you? Quite possibly because he knows you need the job, and you’re so junior that he’ll be able to force you into making all kinds of bad decisions. This is more common than you might think, because a bad boss runs through a lot of controllers. He’s constantly cycling through them, because they quit as soon as they can.
So the first thing to do when you get into a job at a new company is to take a really hard look at who you’re going to be working for. This means talking to fellow employees and maybe calling up the person who had your job before you. If you find out that your boss has caused problems in the past, then he’s going to do it to you, too. If so, start looking for a new job right away. Yes, I know – you may have been unemployed for months before getting hired, and it’s not economically possible to quit. I understand, but you need to start the next job search anyways, even if you haven’t quit yet. By doing so, you may be able to slide into a new job somewhere else before you’ve been damaged too much.
Boss Reformation
It might be tempting to think that you can reform your boss. By acting like a virtuous saint, your boss will see the light and start donating to orphanages. Right. Someone who is ethically challenged is probably going to stay that way for life. So I’d still say that the best solution is to go somewhere else.
The Accounting Code of Conduct
But if you really want to try to make other people behave better, I have some suggestions for changes that are within your control. One option is to create a code of conduct for the accounting department. And bring it up at regular intervals, so that the staff knows you’re serious. Also, make sure that every supervisor within the accounting department acts like a role model. That means you impose the highest possible standards on them, and reinforce your expectations with them all the time.
Scenario Discussions
Another possibility is to never put your staff in the position of having to make a sudden, knee jerk reaction to an ethically challenging situation. Getting back to my earlier example, what if there was a formal discussion within the accounting department at regular intervals about how to react when someone asks you to keep the books open into the next month? You can walk the staff through a bunch of these scenarios and talk about what the correct response should be. By doing that, no one is thrust into a bad position where they’re making an intuitive judgment call. Instead, they just know what to do.
That obviously helps a great deal with the accounting department, but what about with the rest of the company? The rest of the company is not under your control, so the best you can do is set an example. In this case, it means telling the other managers about what you’re doing. This sends a pretty clear signal that you take ethical positions seriously. And when they know that, they’re going to be much less likely to even present you with those ethically challenging situations. So, in effect, you set up the accounting department as the temple of right thinking. Within that department, everyone has discussed what might happen, and they know how to respond.
The Impact of Good Working Conditions
What else can you do within the accounting department to avoid ethical issues? One approach is to provide them with good working conditions, like flexible hours, not much overtime, and a fair wage. When this is the case, they’re less likely to get back at you by stealing assets or engaging in some other shenanigans that aren’t good for the company.
Set Reasonable Goals
Another possibility is to set reasonable goals for people. Don’t set goals so ridiculously hard that the only way to attain them is by committing fraud. Instead, set modest goals that they should be able to achieve.
Emphasize Communications
Another item is to work on the highest possible level of communication within the department. It could be a staff lunch every week, or cycling through lunches with the entire staff on a regular basis, or maybe just wandering around a lot, so that everyone has a chance to talk to you. That way, if there’s a problem, you’ll hear about it sooner, rather than later.
The Benefits of Fairness
And a final item is fairness. An employee is more likely to engage in unethical behavior if he feels that he’s being dealt with unfairly. For example, there’re two candidates for the assistant controller position, but only one position. So someone is going to lose out. And the loser may be more inclined to do something self-serving to get back at the company. When you have one of these situations, be very clear about the criteria you’re using to make a decision, and explain your reasoning. Someone is still going to lose out, but it’s possible that with the extra communication, they just might understand your position.
Parting Thoughts
All of this may sound quite grim, and you may think that I have a skeptical view of company presidents. Yes it is a grim discussion, because you’ll run across more ethical issues than you would think possible over the course of your career. And yes, I do have a somewhat skeptical view of company presidents, because quite a few of the ones I’ve worked with just don’t think about the ethical ramifications of what they’re doing to their employees.