The Missing Ingredient

In this part of the module I have learned ethics for the finance professional. This subject is relevant for myself in three areas which is why I am really interested in it. Firstly, over the past 6 months, I have been writing a dissertation on how there is hope that new audit regulation will improve audit quality and I have looked into accounting scandals and what it means to be ethical in the audit profession. Secondly, I am going to be an auditor (far flung from when I wanted to be a fireman when I was a child) when I leave university, so I need to understand that ethics are really important. And finally, in semester 1 of this year, we learnt about ethics and normative ethical theories (Kant, Rand etc) and it is interesting to be able to apply that thinking to real case studies.

I myself have been aware of a lot of ethical scandals and news reports over the past few years and further into the past which really bring to light a couple of things. After each scandal, new regulation is passed to stop it from happening again (but it always does) and that business leaders are not learning from past mistakes. I have noted a few scandals below:

In the table above, you can see that scandals will happen, then a series of regulation will be passed, then it will happen again. This will continue to go like this probably forever. I did some investigation and it was clear to see what I am talking about. So, in 2001 (Enron) and 2002 (Worldcom) scandals happened, then the Sarbanes-Oxley (SOX) Act 2002 was passed. Then in 2010 (Lehman Brothers), the financial crisis was happening, more regulation e.g. Financial Services Act (FSA), and then a few years later we have more scandals. When will it stop?

Many columnists and accounting professionals who look into scandals report that scandals are still increasing year-on-year, with one saying that there was an increase of 46% in account fraud from 2013 to 2014. This is worrying because new regulation such as SOX was passed to try and protect stakeholders from accounting errors and fraud. I would like to ask a question to whether any regulation could be passed to stop it? or will businesses just try and find new loopholes?

What I found when doing my dissertation and which I have also learned from the lectures is that there are certain reasons to why accounting scandals happen between businesses and financial professionals. I have learned about the PIPCO acronym (Professional Behaviour, Integrity, Professional Competence, Confidentiality and Objectivity) which shows a few reasons (I am sure there are more) why finance professionals may fail their duty. The one thing I find when conducting my research was that Objectivity was the main reason into why finance professionals did a poor job. If they become to familiar with the client (known as lack of independence, such as going on holiday together or being 'mates' at the pub) then they are more likely to let things'slide' as it is said. I do believe that this is the biggest risk and probably the reason why a lot of scandals happen. 

For example, I read an article about how Arthur Andersen auditors of Enron were treated 'as if they were employees of Enron' and they were invited to company picnics and so on. If this is not a lack of independence then I do not know what it; and we all know how that turned out.

My belief is that being ethical in your role as a finance professional is the most important factor in being successful, and not about how much money you earn or how big your bonus is. If you cannot be ethical, you may be jepardising someones pension or rainy day fund which could cause a lot of harm and unhappiness. In relation to ethics being the missing ingredient, I think that the finance professional (a minority rather than a majority) sometimes misses thinking about ethical considerations.

One final note that I was really interested in when listening to this lecture was a question the lecturer mentioned was "should white collar crime be punished as harshly as murder?". This was interested and provoked a lot of thought because of a video of Dennis Kozlowski (former Tyco CEO) who for his crime may be in prison for 25 years (longer than some murderers). My thoughts to the question are that murders should obviously face more time in prison, but white collar crime can hurt people in different ways and can cause a lifetime a distress and suffering for some people, so definitely should be treated more harshly than it currently is. I feel CEOs of these companies are not put off because they see the rewards (bonus etc) outweighing the risk (prison).