THE IMPORTANCE OF ETHICS TO A COMPANY'S SUCCESS

LANCE R. MANN

LANCE R. MANN serves the firm Dean, Dorton, Allen, Ford, PLLC, as an associate

director in the assurance services group. His specialized areas include college and

university, construction, not-for-profit, manufacturing, and retail. Lance has more

than seven years of audit experience as well as experience working in valuations

and strategic financial tax services. Lance also serves in the litigation consulting

group as a Certified Fraud Examiner.

A company's attitude toward ethics has a significant impact on its future.

Construction companies are exposed to risk in many aspects of their business. This industry is

unique in that companies must have employees at multiple locations (i.e., corporate offices,

construction sites, etc.), work with subcontractors, and deal with significant safety issues. The

industry has also been plagued with allegations of corruption over contract fraud and conflicts of

interest. This type of environment presents the industry with ethical dilemmas on a daily basis.

Specific types of ethical and moral situations can range from sexual harassment and conflicts of

interest to employee theft and financial statement fraud.

Ethics is the discipline of dealing with good and bad and with moral duty and obligation. It

establishes the standard of conduct for society and provides the framework for how business

should be conducted.

Companies typically understand the importance of ethics in conducting business, but,

unfortunately, they often just go through the motions when discussing ethics at board meetings or

with employees. Moreover, ethics becomes a topic that you talk about with the auditors once a

year. Simply giving lip service to ethics communicates to employees that ethical behavior and/or

the company's code of conduct are just formalities and not something to take seriously. As a

result, it is time to re-emphasize the importance of ethical behavior in the workplace and in

conducting business, especially considering that the current economic and social climates are

ripe for unethical behavior. To avoid issues, financial or otherwise, companies need to make sure

that their employees understand management's commitment to ethics.

Ethical behavior must be exhibited by all employees, starting at the top of the organization. Every

organization is responsible for creating a culture of honesty and high ethics. Expectations of

acceptable behavior should be communicated to each employee and modeled by management.

Creating this culture begins with establishing a mission statement and adopting core values that

foster ethical behavior. The core values should set the tone for how an organization will conduct

its business. The following items are part of creating an ethical culture within an organization.

Setting the tone at the top

Owners, directors, officers, and managers of a company must behave ethically and must openly

communicate their expectations for ethical behavior. Employees typically look to these individuals

to determine how best to conduct business. Many employees do not observe management's

actions on a regular basis, so communication is equally as important as how management acts.

Internal and external communication should be reviewed by top management and/or the owners

or directors to ensure a culture of “meeting expectations regardless of the means” is not being

cultivated. For example, management could say, “We have to meet budget this month or bonuses

are going to suffer.” That type of statement could send the wrong message and create undue

pressure, causing employees to act dishonestly. The same emphasis on meeting budget could be

communicated as follows, “Our focus for this month is to meet budget while exhibiting our core

values.” Management needs to be intentional in communicating and reinforcing the basis upon

which the company conducts business.

Employees also observe how a company conducts its business. Management should understand

that all actions have an impact on how an employee views their employment. If an organization is

willing to bend rules or laws to meet its goals, employees will believe that is acceptable behavior.

Management should be cognizant of the environment in which it expects its employees to

operate.

All organizations, public or private, should also have a code of conduct. All new employees

should be required to certify that they have read and understand this code of conduct, and, at

least annually, all employees should be required to recertify their understanding of the code of

conduct. The code of conduct should address items such as ethics, confidentiality, conflicts of

interest, intellectual property, sexual harassment, and fraud. It should also include what to do if

someone violates the code of conduct. Employees should be included in the development and

refinement of the code of conduct. Employees involved in the process will take ownership over

the content and, in turn, be more passionate about ensuring its enforcement. Once a code of

conduct is developed, management should make sure it is easily accessible to all employees. It

should be included in the employee handbook, posted in break areas, and/or included on the

company's intranet. Companies should be intentional about enforcing the code of conduct, and

those who violate it should be reprimanded. Not addressing violations of the code of conduct can

have the effect of telling employees the code is not important—that unacceptable behavior is

acceptable.

Work environment

A positive work environment leads to improved employee morale, which, in turn, helps to

minimize unethical behavior. The best work environments are those in which employees have

confidence in their employer. Communication is one of the most important aspects of creating a

positive work environment. Companies should begin by clearly communicating expectations to all

employees, regardless of position. Positive/ethical behavior should be publicly praised and

rewarded with a strong emphasis on treating employees fairly and with respect.

Other areas to consider when creating a positive work environment include hiring, training, setting

compensation, assessing promotions, and creating expectations for employees. The human

resources department is integral to ensuring the work environment is properly managed and

aligned with the entity's core values. For example, promoting employees that do not deserve the

promotion can create animosity within the workplace that could lead other employees to act

unethically. The same goes for compensation setting, performance evaluation, and hiring

practices. The key is to avoid favoritism by staying true to the organization's core values and

published code of conduct.

Management should have an open-door policy and should be available to employees when they

have questions or concerns. Management should seek input from employees on how employees

perceive management and the company. They should also ask about the general work

environment and the morale around the office. If employees believe that management is

passionate about creating a positive work place, they will be more apt to provide management

with their viewpoints. Employees should also be able to communicate concerns anonymously in

order for management to obtain input from those reluctant to approach them directly. This can be

accomplished by providing employees with contact information for a board member or having a

whistleblower hotline.

Overall, a positive work environment will lead to better morale, which fosters higher productivity

and greater overall performance. Employees in a positive environment more readily take

ownership over their job responsibilities and carry out those responsibilities with pride. A positive

work environment also detracts from inappropriate/unethical behavior, as it helps eliminate

employees rationalizing unethical behavior. In most cases, employees will rationalize a decision

before they carry it out. If your employees have a positive environment in which to work, they will

be less apt to act unethically.

Internal controls

Internal controls play a big part in creating an ethical work environment. It is important to

eliminate the opportunity for employees to act unethically. There are two main areas in which

internal controls should be implemented: controls over the safeguarding of assets and controls

over financial reporting.

Safeguarding of assets. Companies should design and implement controls to help ensure all

assets are safe. Employees prone to dishonesty will typically try to steal items that are useful in

their personal lives. Cash is typically the easiest asset to misappropriate. Deter employees away

from stealing by ensuring quality controls over cash on hand, cash receipts, and cash

disbursements. Companies should also implement controls over property, equipment, and

inventory that might be easily taken.

Financial reporting. Organizations should design and implement controls to help ensure that the

monthly, quarterly, and annual financial statements are accurate. Employees may have incentive

to misstate the financial statements to obtain performance-based compensation, to help the

company meet shareholder expectations, or to simply please management. Controls should

include reviewing and approving manual journal entries, reviewing the financial reporting

package, and, depending on the size of the organization, periodically scanning through the

general ledger detail.

The key to having strong internal controls is management being engaged and having an active

board of directors and/or an active owner group. These groups should hold annual risk

assessment meetings to discuss the various risks affecting the organization. Included in this risk

assessment should be a discussion about “what could go wrong.” Companies need to discuss

how employees could steal money, how the financial statements could be misstated, how the

overall control environment could affect the work environment, and other potential areas of

concern. Once the areas of concern are determined, companies need to go further and determine

what types of controls are in place to mitigate these risks. Companies should also periodically

have their internal controls independently reviewed. Often, a company has designed a great set

of controls, but they are not being followed. Having an independent review can highlight the areas

in which internal controls are not being followed or in which controls are not designed

appropriately.

Non-financial areas

Construction companies also have many non-financial ethical and moral issues to cope with on a

daily basis. These issues can have significantly more impact on a company's reputation than

financial issues. Examples of these areas include sexual harassment, discrimination, hiring

practices, confidentiality, conflicts of interest, etc. An organization should include these types of

risks in its annual risk assessment performed by the owners and directors. Owners and directors

need to ask management those hard questions about if they are doing enough to reduce these

risks to an acceptable level. Simply having a policy is not enough— what is management doing to

ensure these issues do not negatively impact the company?

Communication is imperative in creating an ethical culture. Employees need to understand that

management is aware these issues exist and that the organization has implemented programs

geared toward eliminating these issues. Employees should be required to understand these

programs and controls. Ongoing education should also be implemented to ensure employees

understand what, where, when, and how these moral and ethical situations can occur and how to

react. Proactive communication on current events and issues can help reinforce the importance

of ethical behavior. As previously discussed, employees need to have a means to report

suspicions and instances of actual unethical behavior. Companies should have a policy to follow

up on all reports.

Ethical behavior is not just something that should be talked about. It is something that should

impact every aspect of one's business. It is something that has to start at the top of each

organization and work its way to every employee. Companies need to openly discuss how

important ethics is whenever possible with all employees. It is not enough to simply create core

values and have a code of conduct. Companies need to discuss these items with their employees

to ensure they understand them. Management and owners need to live the core values every

day. Companies should also focus on creating a positive work environment and internal controls

to eliminate rationalization and opportunities to act unethically.

A company's attitude toward ethics has a significant impact on its future. There are many

examples where unethical behavior has led to poor publicity, a diminished reputation, and,

ultimately, a company's demise. Ethical behavior will probably never lead a company to unlimited

success, but the lack of ethical behavior can impact a company's access to success. Ensure that

your employees, customers, and vendors all understand that you pledge to conduct your

business in a fair and ethical manner. In summary, create an environment that fosters ethical

behavior and act how you expect your employees to act.

© 2012 Thomson Reuters/RIA. All rights reserved.