Are ethics and profits mutually exclusive?

IN THE WAKE of scandals such as Libor, Wonga and now Tesco, it seems like some senior executives could perhaps be of the view that ethics and profits are not compatible. Early reports of Tesco’s expensive £263m mistake are that this serious breach of accounting standards emerged due to a small group of staff providing misleading information to auditors. If these allegations prove to be correct then it raises serious questions about the structures in place within the company to verify accounts.

As painful as end-of-year accounting and auditing can be, when lunch and other corporate expenses mount up but cannot be substantiated with receipts, the forensic inquiry by accountants that forms part of their ethical duty of “professional scepticism” is an important check and balance. Knowing how much a business is worth is one of the many fundamental public services that accounting provides, assuring the markets that a firm is worth what it says. This highlights, in my mind, why ethics and profits are not and should never be seen as mutually exclusive.

Despite technological advances we still all operate on the basic human instincts of our cave-dwelling ancestors. Most humans crave security and are risk averse. Trust has evolved over time to help us determine who will maximise or minimise our sense of security. It can dictate everything from who you will ask for directions from a crowd of people, to who you choose to bank with, and ultimately who you are prepared to do business with. The markets mirror this, so trust is a key component of its operation. This is why, despite a reputation for volatility, the markets do not respond well to surprises. As the share price fall of Tesco proves, one shock or unexpected turn and you will suffer the consequences.

Learn from a book

So ethics are an essential part of any business’s sustained profitability. Yet some take the approach like they are an add-on that can be squeezed into a handbook or a one day workshop. This is a mistake. Ethics need to be a constant that combine industry-wide professional standards with an instinct not dissimilar to the sense of security outlined above. Attending a one day workshop or reading a handbook is unlikely to change someone who is unethical.

While it will provide a frame of reference for expectation, most people are not monitored constantly while working, so an unethical employee that refuses to change will soon slip back to their old ways. All businesses should therefore seek people who can be trusted to not only get on with the job but to do so in a way that is ethical, as ethics, like any business value, need to be something that employees live by.

This is even more vital for those that rise to the top, as executive staff, whether they like it or not, are brand ambassadors.

Questions of profitmakers

A person who has sold the most or achieved the biggest profit will usually be singled out for success in business. However, the definition of corporate achievement needs to expand to include how that person operates as an individual and whether this fits in with the business’ ethics. Questions like: “How big a profit margin did they achieve?” should be followed with: “How did they go about achieving this?” and finally, “does this match how we aim to operate as a business?”

Asking questions like this should hopefully help ensure that those who rise to the top are those who will keep attaining larger profits but will also not risk damaging your reputation or invoking regulatory action as a result, because as cases like Tesco prove again, one should never underestimate how important ethics are to the bottom line.

Tania Hayes is head of conduct & compliance at AAT, an accounting and finance qualifications and membership body