Business ethics contribute towards shareholder value
There has been a resurgence of interest in ethics in reaction to the corporate governance scandals of the beginning of the decade.
Global drivers for change
Governments around the world are now well aware of the need for trust in capital markets. The United States learned the hard way how fragile trust can be and responded with the Sarbanes-Oxley Act which, among other things, requires senior financial management of US listed companies to have ethical codes and for management and auditors to report on the effectiveness of internal controls over financial reporting. This has resulted in wholesale review and documentation of policies and procedures.Little research has been carried out on ethical practice in companies and the role accountants play. Partly this is because interest in the subject is relatively new and partly because ethics is one of those soft areas where it is hard to make objective judgement. One important piece of research was published by the Institute of Business Ethics in the UK. This found that there was a strong correlation between companies which have established ethical codes and a number of measures of corporate financial performance, suggesting strongly that good ethics is the right thing to do not just because it is the right thing to do: it also makes for successful business.
Good ethics are vital to good corporate governance. Company boards too are now becoming much more aware of the need to have the right ethical culture. The culture of an organisation is probably the most important aspect of its system of internal control, and it is the foundation for other internal controls. Management may set out the policies and procedures which it wants followed, but it is the corporate culture which determines when they are followed, amended or ignored.
Large companies listed in the US, since Sarbanes-Oxley, have seen a proliferation of new policies and procedures but anecdotal evidence suggests that this may be breeding a culture where employees become frustrated with the amount of new rules and feel inclined to ignore the ones they see as unhelpful to getting the job done. And as everyone knows, Enron had an impressive code of ethics. ACCA favours a principles-based approach to business ethics, to provide business with a ‘moral compass’ by which to navigate.
The role of the finance professional
The accounting profession globally has taken steps to enhance the importance of ethical behaviour and decision-making. The International Federation of Accountants (IFAC) has launched a revised code of ethics based on a set of fundamental principles to be adopted by individual accountancy bodies. ACCA has already revised its own code of ethics for its members to be consistent with the IFAC standard. These codes are about accountants’ professional ethics.Business ethics is a different, but related, matter. Accountants in business, particularly at board or at top management level, are often regarded as the keepers of the ethical conscience of their organisations. As well as following their own professional codes of ethics, accountants set an ethical example to others.
Business ethics and the CFO
It is against this background that ACCA has worked with CFO Asia Research Services to find out what CFOs in Asian companies think about ethics in their companies and what roles they have in promoting an ethical culture.The findings make for fascinating reading. Of particular significance is that not only are business ethics seen to be an increasingly important issue in the region, CFOs are playing an increasing role in taking responsibility for their application in their companies. CFOs say that they are finding it a challenge to balance the needs of the business with the need to ensure an ethical culture. However, in spite, or perhaps because, of this, most CFOs would like to see more explicit reference to ethics in their national codes of corporate governance, with stronger enforcement.
Theoretically, the US SEC rules which give effect to Sarbanes-Oxley require companies and their auditors to assess the ethical environment. There is however no generally-accepted approach to doing this and it is not just about documentation. Not surprisingly, this important subject tends to be given less attention than it deserves by companies and their auditors. Interestingly, over half the respondents to this survey say they have processes in place for assessing adherence to their company’s code of ethics. This is a higher percentage than we would have expected and it would be interesting to research further and learn more about what companies are doing.
The challenge of living up to one’s ethical values is evident from the survey findings. For nearly 40%, company culture is a cause for concern. Boards set the values and standards for their organisations and we believe that in future boards will insist on knowing how well their companies are living up to these. This goes beyond simply complying with rules: the reputation and the future of the company and individual board members are at stake.
ACCA and ethics
ACCA’s students and members agree that an enhanced emphasis on ethics is appropriate in the interests of integrity and promoting professionalism. A global survey of members revealed that ‘upholding ethical standards’ is one of the most important competences for modern professionals. In a survey of 12,000 of ACCA’s students, nearly three quarters agreed that professional ethics and integrity are the single biggest challenge in the global accounting profession today.ACCA’s new professional qualification, to be introduced in 2007, will adopt a unique focus on ethics. It will include a paper in the final level, called the Professional Accountant, which will concentrate on professional values, ethics and governance. Students will also need to complete an online module on ethics, which will present them with challenging real-life ethical dilemmas to consider. And the practical experience requirements will emphasise the importance of ethics to the well-rounded accountant and finance professional. This is further emphasised by the requirement for all ACCA members to undertake continuing professional development, in which they confirm on an annual basis that they are keeping their skills and knowledge up to date, including in the area of ethics.
ACCA also works with governments, regulators and standard setters around the world to help them put in place regulatory and governance structures which follow best practice. ACCA is also working with the accounting profession, through its involvement in bodies such as the International Federation of Accountants, the Asean Federation of Accountants and the Confederation of Asia Pacific Accountants. It also champions transparency and sustainability reporting through the Global Reporting Initiative.