The Economics of Ethics
Ethically minded companies—and CPAs—stand to gain an economic edge among today’s cause-driven consume
Director, Accounting & Compliance, ArrowStream, Inc.
Would you believe me if i told you that most consumers are willing to pay more for ethical goods and services? The answer is, they are.
Millennials are leading the way when it comes to cause-related purchasing, which is the practice and belief that making intentional and educated buying choices will make a positive impact on the world. A leading example of this behavior is how Millennials are purchasing a higher volume of ethically sourced food, and they are increasingly supporting companies and brands with strong ethical and sustainable practices.
The Corporate Social Responsibility (CSR) movement ties directly into this mindset and has gained traction among consumers and corporations equally. Take the blue-chip corporation GE, for instance, which has become world-renowned for its CSR efforts. In 2013, GE tracked about 100 downloads of its 10-K filing, but when it moved to publishing an integrated report in 2015, it recorded over 15,000 downloads, highlighting how investors and purchasers increasingly are valuing additional disclosures and transparency. One of the items celebrated in GE’s integrated report is that Ethisphere Magazine has named it one of the world’s most ethical companies for 10 years in a row.
It should come as no surprise that companies that think with this consumer mindset will gain a competitive advantage in today’s marketplace. I recommend that all companies should actively promote their ethics to stakeholders and customers and demonstrate their commitment to improving society. This expression of their priority to make a difference in the world can give employees a sense of purpose and help clients see the alignment of company values with theirs.
Yet some companies still see being ethical as uneconomical. We can point to stories like the one portrayed in the movie Erin Brockovich that showed a company’s willingness to sacrifice public health and safety for the sake of profits. In another example from the 1990s, a famous automotive mechanic company introduced a sales goal to measure sales per hour, which was supposed to improve the speed of repairs. Instead, it led to overcharging and charging for services that were not needed or were not performed. Even worse are those situations where incentives drive decision-making. The recent woes of Wells Fargo highlight how business behaviors can be affected by the allure of greater stock market returns.
These examples may seem somewhat re-moved from our accounting world, but we too see extreme cases of unethical behavior and decision-making, whether around billable hours, expenses, asset misappropriation, or financial statement misstatements. (By the way, the 2016 ACFE Report to the Nations on Occupational Fraud and Abuse points out that financial statement fraud causes the greatest median loss per case. That says a lot considering the fact that the median loss from a single case of occupational fraud was $150K, and at least 23 percent of occupational fraud cases resulted in a loss of at least $1M.)
So often we see the potential for short-term personal and financial gains in perpetuating one or more of these behaviors, but we miss how unethical and fraudulent behavior can lead to significant losses, damaged reputations and careers, and the diminishing of our roles as protectors of the public interest.
One of the fundamental ethical dilemmas our profession faces is that we are paid by clients for whom we are also providing assurance to the public.
So how do we face and overcome ethical issues like this one?
First, we must be aware of our ethical dilemmas, intentionally prioritize integrity, and consistently think with the public interest in mind, even when incentives may be aligned in different ways.
Second, consistently promoting a culture of ethics will always help in preventing fraud. The ACFE’s report suggests creating a fraud prevention checklist to help promote ethics and establish fraud detection controls. Some checklist items might include anti-fraud training, fraud reporting controls, enforced hiring policies, employee assistance programs and employee surveys.
Finally, we must make our ethics known to others. As accountants, we must adhere to the AICPA Code of Professional Conduct and talk about it with our employees and clients, and in the marketplace. Additionally, we can craft our own company codes of conduct that make ethics a priority in our personal and professional lives.
Each of these steps is inexpensive, yet can significantly impact our ability to create a culture of ethical integrity, which in turn helps to prevent fraud, inspire employees, improve customer engagement and retention, and, ultimately, drive economic gains.
Author and speaker Simon Sinek teaches that “people don't buy what you do; they buy why you do it.” If you make your ethics visible through your words and actions, lead with integrity, and be transparent with what you stand for, you undoubtedly will attract people who value your services.