Absence of Ethical Behavior Communicates a Dangerous Message to Stakeholders

 

Cheating on ethics tests is an interesting behavioral choice, especially as a well-known company in an industry. That’s what high-profile accounting firm Ernst & Young did though, earning itself a $100 million fine, the largest financial penalty in history for an audit firm.

This sends an unintended, unsavory message to stakeholders and is a hardship for corporate communications, public relations and marketing.

First, let’s hear the SEC’s response to the unprofessionalism and behavior failing.

“It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things,” said enforcement director Gurbir Grewal.

He didn’t stop their in his anger, shock and criticism.

“It’s equally shocking that Ernst & Young hindered our investigation of this misconduct. This action should serve as a clear message that the SEC will not tolerate integrity failures by independent auditors who choose the easier wrong over the harder right.”

The company misconduct communicated something very clearly.

“It says that EY can’t be trusted,” says Jack Marshall, president of the ethics consulting and training company, ProEthics, LTD. “Arthur Anderson went out of business because it wasn’t trusted after its role in the Enron and Worldcom scandals, even though its criminal convictions were eventually overturned.”

Jack Marshall, president of ProEthics, LTD

“The Ernst & Young ethics failure is an interesting one and ties back to a few ethical failures that are all too common,” says Mark McClennan, the host of the EthicalVoices.com podcast and author of the upcoming book “Ethical Voices: Practicing Public Relations with Integrity.”

“Specifically,” he continues, “people acting unethically because they believe it is a) in the company and person’s best interest, b) that others are doing it, so it must be OK and c) it will help the company.”

Errors of decision making and misconduct happen for a variety of reasons.

“There are many reasons why people act unethically, and it is important to understand that people make poor choices for different reasons,” McClennan says. “For some it is a desire to get ahead or fit in or earn the promotion. For others it is a belief they won’t get caught, or that their managers would, or does approve it.”

There is more justification, he says.

“Also, scary as it may sound some people may not see cheating as a big deal. Other companies in our industry did it, so if I don’t, we are at a competitive disadvantage.

“They can rationalize it: well I am not embezzling, so it’s not that bad. As humans we have an amazing capacity for rationalization. And biology for millions of years has ingrained in people the desire to focus on what is best for them in the short term. We need to always guard against it. It’s not right, but it is very human.”

As to why EY would ever consider cheating on ethics tests, accept the risk of the SEC’s wrath, fines damaged trust and PR misery in the industry, Marshall has a response about that deficiency of internal governance.

EY’s employees felt they could cheat because of a culture within the company that didn’t reinforce genuine ethical principles,” he plainly states.

“EY may not have known its employees were cheating, but regarded the tests as ‘check box’ exercises that had to be completed. Though it was an ethics test, the company signaled in many ways, from the top down, that they cared about everyone passing the test, not whether they were genuinely ethical.”

The companies public statement is another target for scrutiny.

“We have repeatedly and consistently taken steps to reinforce our culture of compliance, ethics, and integrity in the past,” said EY Americas Chief Communications Officer Suzanne Bouhia. “We will continue to take extensive actions, including disciplinary steps, training, monitoring and communications that will further strengthen our commitment in the future.”

Marshall isn’t impressed.

“I have the Enron Code of Conduct right here on my desk. (The late founder, chief executive officer and chairman) Ken Lay says essentially the same thing in his introduction,” he says.

“The public statement is cynical and meaningless. But they couldn’t exactly say: ‘Oops! Caught us! Now three of the four big accounting firms have been caught recently in cheating scandals. We just have to be more careful.”

The statement isn’t analyzed as sincere either.

“It’s PR (public relations) boilerplate, Corporate Defense 101,” Marshall says. “Ethics doesn’t come into it at all. Businesses never are transparent in such situations.”

There was a better way, he suggests.

“They should have said, ‘Obviously, we have not been doing our crucial job of creating an ethical culture at EY in which all employees and management realize that we, like all accounting professionals, are in the business of trust.

“‘We take this blow to the company as a wake-up call, and pledge to our clients and the public that we will engage in an immediate, company-wide effort to ensure that EY never again will or can witness a betrayal of our values like this.’”

In addition to the historically high fine, the SEC is forcing Ernst & Young to hire two independent consultants for governance reasons, one for the company’s ethics and integrity policies and one to investigate EY’s failure to disclose its findings.

While this seems like a smart, yet rare move, Marshall isn’t convinced it will prove successful. In fact, he is cynical.

“The consulting profession is as riddled with unethical practitioners as any,” he says. “What we usually see is the institution of a new set of rules — you know, like the Enron Ethics Code — and a compliance program.”

That’s not as helpful as might be assumed, he claims.

“These typically don’t teach or reinforce ethics at all,” Marshall says.

To him, it’s “just more regulation and policing measures.”

This is important to know, he says, because, “unethical people aren’t made ethical by tougher rules.”

The failure originates from top-level leadership and that’s where the focus should be directed in hard, yet necessary decisions and actions.

“If the company is serious about addressing the root causes of this scandal, it will overhaul management,” Marshall says.

Why?

Because, “‘The Fish Rots From The Head Down,’ applies,” he asserts.

Mark McClennan, host of the Ethical Voices podcast and author of the upcoming book, “Ethical Voices: Practicing Public Relations with Integrity.”

Industry and company leaders could very well be going about prevention and the approach all the wrong way, says McClennan.

“It is why companies need to invest in training their employees’ ethical minds and have regular discussions on ethics,” he recommends.

“A code alone is not enough. Having ethics training once a year it not enough. That is as effective as someone taking vitamins once a year or going to the gym once a year.”

He elaborates about what his recommendation is not the common practice.

“There are many reasons why companies don’t do it. This includes a feeling that it is a waste of time, that once a year has worked in the past, so it is fine now, to the actual hard costs of lost billable hours or productivity to prioritization,” he says.

“But again, it is short sighted. I could save four minutes a day not brushing my teeth. That is 24 hours a year. I can do a lot with an extra 24 hours. But long term not brushing your teeth for a year is a very bad idea.”

He offers a three-point approach for improvement on the status quo.

“My professional opinion is that businesses should.

  1. Make ethics scenarios a part of the interview process, and not an easy situation.

  2. At least twice a month in a team meeting, set aside time to discuss ethical issues people saw recently. Not just with the company, but in business or society overall.

    It is important that the manager share their opinion last. For once they share their opinion, some employees may not be comfortable sharing a different perspective.

  3. Follow the old adage of what is rewarded is what is done.

    Call out employees that do the right thing.

    That will show other employees the value you put on ethical behavior, reduce fear of retaliation and create a more open environment.”

 
Michael Toebe

Founder, writer, editor and publisher

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