The Association of Chartered Certified Accountants urges the business world to focus more on its ethical responsibilities and on prioritising the recruitment of senior executives and financial staff with strong ethical compasses.
A new ACCA report, "Risk and Reward - Tempering the Pursuit of Profit", looks at where the financial system went wrong prior to the financial crisis, with a massive failure of "people risk" being identified.
"The financial crisis has highlighted serious ethical failings," says Paul Moxey, ACCA's head of corporate governance and risk management, and one of the authors of the report. "Businesses of all kinds, including the banks, have been increasingly policed by reams of rules and regulations. But we have seen during the crisis that, despite all these regulatory requirements, or perhaps because of them, individuals exploited gaps."
Moxey continues: "Take Lehman, for example. According to the official US government investigation into its collapse, Lehman's executives were able to move debt on and off their balance sheets at will by picking and choosing which legal jurisdictions and accounting standards they wanted to comply with. But in doing this Lehman's never broke any rules; the absence of any benchmark of conduct that would have prevented this sort of regulatory arbitrage arguably actually legitimised what they did."
The report identifies two typical frameworks for ensuring risk and ethical behaviour: rules-based or principles-based. Neither can offer a guarantee of responsible business behaviour - prescriptive rules and regulations create loopholes for the unscrupulous, while principles can create ambiguity and confusion for those unsure of what is right or wrong, or an opportunity for those looking for wiggle room.
The paper argues that a strong commitment to ethical business conduct on the part of directors and key staff is a strong line of defence against reputational damage and should be an essential part of any risk management strategy.
The paper makes the following recommendations:
- Businesses should prioritise the recruitment of senior executives and financial staff who have a strong ethical compass
- Businesses should ensure a strong ethical culture; this should include setting the right tone at the top and then ensuring, and monitoring, that this is reflected throughout the organisation. Listed companies should set out how they do this in their annual reports
- Businesses should be aware of outsourcing their sense of ethical responsibility to compliance with external rules
- Businesses should maintain the higher internal profile - with sufficient resources - given to the risk function since the onset of the financial crisis and not be tempted to cut this back when recovery sets in
"Ultimately, it is the people who make the decisions in any organisation, so the effectiveness of any set of rules or code of practice will be dependent on the competence and integrity of the individuals who have the authority to actually make decisions," adds Moxey. "Finding the right 'ethical' candidate for job vacancies can be a tricky task for businesses; the simplest way to shortlist likely ethically literate candidates is to look for those with qualifications - such as the ACCA qualification - that place ethics at the centre of their syllabus."