Do you know how to discourage unethical behavior in your firm?
Unethical behavior can ruin your firm. It can destroy your reputation and could lead to costly lawsuits as a result. As an accountant, you need to steer your firm toward valuing ethical behavior and avoid common rationalizations for excusing corrupt practices.
Fortunately, Gusto, along with our partners at CPA Academy, delivered an informative webinar all about preventing firm corruption and encouraging ethical accounting practices. Our webinar titled, “Ethics: The Four Most Common Rationalization Used by Horrible People,” featured the accounting and ethics expertise of Greg Kyte, founder of Comedy CPE, and Caleb Newquist, Editor-at-Large at Gusto. You can watch the full presentation here.
In this article, you’ll learn about two common rationalizations for excusing unethical behavior. We’ll also share highlights from Greg and Caleb’s presentation that involve the Enron scandal and the defunct accounting firm Arthur Andersen LLP. In addition to this article, which is Part One of the webinar series, read Part Two to learn about additional rationalizations for excusing unethical behavior.
Rationalizing unethical behavior
Greg and Caleb covered two frequent rationalizations that accountants and other employees use in order to justify unethical behavior. They primarily pulled from an edifying article from author Saul W. Gellerman published in Harvard Business Review back in 1986. The article titled “Why ‘Good’ Managers Make Bad Ethical Choices” covers the four key rationalizations that Greg and Caleb expound upon in their webinar.
The first rationalization was the idea that the unethical activity is actually acceptable:
“One of the main rationalizations … [is the] belief that the activity that you’re engaging in is within reasonable, ethical, and legal limits [and] that you’re convinced that the activity is not really illegal or immoral.”
– Greg Kyte
Greg and Caleb cited the defunct accounting company Arthur Andersen LLP as an example of rationalizing one’s behavior by believing it to be ethical. The accountants at Arthur Andersen were involved in the Enron scandal. Enron misled regulators and investors with corrupt accounting practices. Arthur Andersen was indicted for obstruction of justice because they shredded documents relating to Enron’s conduct. Although the actions of Arthur Andersen’s accountants were corrupt and unethical, they justified their behavior because they were technically in accordance with standard practices:
“[Arthur Andersen] were being sticklers about following the standards to the letter of the rules that they were bound by the auditing standards. … Once everything started falling apart at Enron, … one of the partners over the audit was like, ‘Oh, there’s some horrible things going on with our client.’ They checked and [said], ‘Can we shred all of our documents related to that client during that period? … Actually, according to the standards, we can.’ Then they sent out [an] email, and they go, ‘Everybody, shred everything.’”
– Greg Kyte
The United States Supreme Court eventually reversed the indictment, but Arthur Andersen had already destroyed its reputation.
Corruption as a means to advance yourself and your firm
The second rationalization that Gellerman discusses is the idea that unethical activity will advance your career or firm:
“Saul Gellerman says this as a rationalization number two: … A belief that the activity is in the individual’s or the corporation’s best interest and that the individual would somehow be expected to undertake the activity.”
– Greg Kyte
When people believe that it’s for the greater good of their firm or their own careers, they justify cutting corners and engaging in unethical behavior. Greg noted that some businesses even encourage corrupt behavior. He stated that he was offered a job where the CFO insinuated that accountants receive additional compensation by engaging in unethical practices.
“One of the things that [the CFO] did when we [were] just having this conversation … [is he said,] ‘If you come to work here, we pay you well, but there’s also a lot of other great things that you get from working here with us.’ … What I walked away from with [was] the feeling [that there was] corruption going on here and that’s actually part of what [they] consider [their] compensation package.”
– Greg Kyte
This illustrates a typical problem for accountants—the view of morally ambiguous behavior as an additional means of compensation. They justify their unethical behavior to advance their careers or finances.
When it comes to companies, individuals will sometimes feel a sense of obligation to engage in corrupt practices to meet expectations, especially when the company has shareholders:
“[With] publicly-traded compan[ies], … a lot of people [will rationalize] financial statement fraud. … [They] had to meet the analyst expectations. … [That was] a big deal with Enron. … The analyst[s] all said, ‘These guys are amazing. They’re going to make you all the money. Invest in them,’ and then they had to meet the expectations to keep that alive.”
– Greg Kyte
Accountants will sometimes feel obligated to engage in unethical behavior because they perceive it to be in the best interest of their firms and they need to meet growth expectations.
How to avoid unethical behavior in accounting
As Greg and Caleb noted, the accountants at Arthur Andersen didn’t believe that what they were doing was unethical because they technically weren’t breaking any standard practices. Additionally, many of the people working at Enron engaged in unlawful behavior to meet shareholder expectations, and this exemplifies how that can result in corrupt practices.
It’s easy to view dishonest behavior as a way to advance your firm. Accountants at your firm may feel comfortable with corrupt behavior because they believe it to be standard practice. To combat corruption and unethical behavior at your firm, you need a great deal of transparency. This is especially important in preventing bad behavior when it comes to advancing a firm. An accountant may believe that what they’re doing is in the best interest of the firm, but if there’s transparency, then others can hold that worker accountable and prevent them from continuing unethical behavior.
Another critical part of preventing unethical behavior is establishing an ethical tone. If accounting executives and managers establish that ethical behavior is the most important part of their firm, subordinate accountants are more likely to avoid unethical behavior. Greg observed that one way to establish an ethical tone at your firm is through firing someone who engages in unethical behavior:
“One of the great things to do is fire somebody that you think might not be ethical and then make sure people know why that person got fired. … If you have a core value that ‘We are going to be ethical,’ that only becomes culture if there’s a story that you have that shows you valuing ethics above money.”
– Greg Kyte
Your firm needs to value ethics over money and growth. A great way to promote honest behavior is through having a story that proves your firm’s cultural values, and you can create a story by firing unethical clients. If Arthur Andersen had fired unscrupulous clients, such as Enron, maybe they wouldn’t be defunct.
“Upper management at any company … [has] to say, ‘Hey, you know what’s in our company’s best interest? Ethical behavior is always in our company’s best interest.’ … [Arthur Andersen accountants] were following the rules, but they were being unethical. That came around, and it destroyed them. … Ethical behavior wasn’t the [most important] interest [for] Arthur Andersen, [and now] they’re not a company anymore because of their unethical behavior.”
– Greg Kyte
Your firm should also consider implementing anti-fraud policies and training. This reiterates that your firm values ethics above profits, and it also educates accountants so that they can avoid engaging in corrupt behavior.
More ethics for accounting
Avoiding unethical rationalizations in your firm is critical for its long-term success. You need to encourage ethical behavior and make it clear that your firm values integrity above profits. Although it may seem like engaging in certain unprincipled practices could be financially beneficial to your firm, a loss of reputation can lead to your firm becoming defunct, even if you technically didn’t break any rules.
If you’re ready to learn about the two other rationalizations that Saul Gellerman discusses in his article “Why ‘Good’ Managers Make Bad Ethical Choices,” read Part Two of this webinar article series. You can also watch the full webinar here to learn even more from Greg and Caleb.
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