When I was growing in the ‘70s, it was common to throw trash out the window on the highway. I have vivid memories of eating McDonald’s in the car and heaving it out of the car at high speeds…
Hard to believe, isn’t it?
Over time, people in the US gradually got rid of that terrible habit. Littering, along with smoking, became socially unacceptable. I’d like to think that our ethics improved. What about corporations?
Events force companies to change
The Enron collapse and the mortgage crisis both forced Congress to take action- and attempt to protect the public from unethical corporate behavior. Let’s consider each event:
- Enron: The Enron collapse is a story of corporate greed, driven by a complete lack of financial oversight, including a lack of oversight by the outside audit firm. At the time of its bankruptcy in 2002, Enron was one of largest corporations in the US. It was able to maintain and report bogus financial statements for years. After the company went under, Congress passed legislation to hold both corporate executives and outside CPA firms to a higher financial reporting standard.
- Mortgage Crisis: If you want to understand the ’07-’08 mortgage crisis, watch The Big Short. This movie is funny, sad, and ironic- and it does a amazing job of explaining a complex financial disaster in terms that laypeople can understand. And this is a story of complexity, because no one- not even the professionals- understood the true default risk of mortgage loans. After the smoke cleared, Congress passed legislation to provide more oversight.
Of course, if thousands of business people have behaved ethically, none of this would have ever happened. If you’ve experienced a financial setback, this article may help.
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And don’t be surprised when it happens again- student loans may be the next big crisis.
Who maintains ethics over time?
So, we see a continuing pattern of regulators stepping in after a disaster happens. The real question for ethical companies is this: who maintains ethics over time- who’s ethical when people aren’t looking?
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Successful and ethical
I really like Forbes- maybe the best financial publication out there- and I always check out their list of best companies. Check out these three examples from their 2016 Best Small Companies list:
- Quality Bicycle Products ($200 million in revenue): The company’s warehouse system almost guarantees that its 5,400 bike store customers get needed parts within one day of ordering. Ethic: We do what we say we’re going to do.
- Gainesville Health & Fitness ($16.5 million in revenue): The CEO believes that the ultimate measure of a fitness business is the health of the local community. Ethic: People matter- this isn’t just about making money
- Tasty Catering ($10 million in sales): Hiring and engaging workers has resulted in a 2% turnover rate- as compared with an industry average of 50%. Ethic: We treat people well- people are valued.
It’s not rocket science- these three examples demonstrate ethical principles that are pretty basic.
Independent board members
Perhaps the biggest change that can lead to better ethics is a requirement that public companies increase the number of independent board members. “Independent”, in this instance, means that the board member’s only compensation is the fee earned as a board member. The independent board member is not an employee, a consultant- or selling anything to the company.
Want better ethics? Watch the behavior and input of independent board members
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
(website and blog) http://www.accountingaccidentally.com/
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This post was originally posted on my Quora page. This post is for educational purposes only.
Image: Bullseye Jeff Turner CC by 2.0