It's Time to Focus on Ethical Blind Spots

Do the right thing. This simple rule is the foundation of ethics policies but, as we've seen recently, it is often easier said than done. The Libor-rigging scandal has enveloped more than a dozen big banks across the world and continues to unfold. JPMorgan is contending with $5.8 billion in losses from "London Whale" trades. Capital One was ordered by the Consumer Financial Protection Bureau to repay millions of credit card customers who were allegedly deceived into buying costly add-on services.

And the list goes on.

This string of ethical lapses reinforces the importance of building a strong ethical culture throughout an organization from the top down. Ethics plays a significant role in a company's overall value and performance. CEOs and CFOs should be working to protect their businesses – and themselves – from violations. There are innumerable cases where ethical breaches have led to stock price declines, corporate reputational harm and costly litigation.

Unfortunately, at companies across the globe the tone from the top continues to weaken. Managing Responsible Business, a global business ethics survey of almost 2,000 Chartered Global Management Accountants (CGMA) in nearly 80 countries, found neither senior management nor boards of directors seem to be reviewing, analyzing and monitoring ethics information at the level recorded four years ago. In 2008, research showed that 86% of senior management and 68% of boards reviewed ethics data. The new survey, conducted by the American Institute of CPAs and Chartered Institute of Management Accountants, found those numbers have dropped to 78% and 56%, respectively.

This decreased focus on ethics comes at a time when there is also added pressure on financial professionals to act unethically. More than a third of those surveyed (35%) said they sometimes or always feel pressured to compromise their organization's standards of ethical conduct. While pressure is strongest in developing economies, this compares to 28% of respondents in 2008.

What's more, we've found that 80% of organizations provide a code of ethics to guide employees about ethical standards in their work, but only 36% collect ethics information, such as the number of employees attending ethics training and actions taken on hotline reports.

For the financial services industry, there is an even larger gap: 86% of financial services companies provide a code of ethics to employees, yet only 36% collect reports based on ethical information.

Clearly, rhetoric does not always match reality. Since ethical performance can only be managed with the right information, this disparity suggests that ethical practices fall short of stated policies.

Senior leadership needs to identify and closely examine ethical blind spots in order to mitigate risks. These blind spots will vary from company to company and can range from bribery to conflicts of interest to fraud. The Libor scandal is a perfect example of how important internal controls are in order to limit instances of fraud and unethical behavior.

It's also crucial that corporations pay attention to gray areas that might not seem like clear-cut ethical violations. Even if executives don't have hard evidence of an ethics violation in hand, they need to be attuned to all possible pitfalls.

Once senior management has discussed and properly identified potential ethical problem areas, they need to ensure they have established a mechanism by which to monitor corporate ethics and collect and report this information.

It's no secret that ethics violations can cost a company its reputation and put a massive dent in the bottom line. Knowing there is a significant gap between policy and action, it is time for executives in the financial services industry to take proactive precautions to protect their companies and to follow through with ethics implementation.

Arleen Thomas, CPA, CGMA, is senior vice president of management accounting at the American Institute of CPAs.