by Bradley Preber

Published: April 09, 2008 in Knowledge@W.P. Carey


Bradley Preber’s recent talk on business ethics and culture could not have been more relevant or timely. The partner-in-charge of Grant Thornton's Forensic Accounting and Investigative Services practice spoke before a group of W. P. Carey MBA Executive students the same day that an independent report commissioned by the U.S. Department of Justice found that the auditing firm KPMG is allegedly linked to fraud at New Century Financial Corp, a subprime mortgage lender. KPMG denies any wrongdoing, but the incident raised some interesting ethical questions during the discussion, part of the school’s Thought Leadership Series.

The New York Times reported that "New Century Financial … engaged in 'significant improper and imprudent practices' that were condoned and enabled by auditors at the accounting firm KPMG, according to an independent report commissioned by the Justice Department." The report also pointed out that some auditors raised concerns about New Century, but were ignored because of fear that the firm would lose an important client.

Preber would not speak specifically about the auditing company, adding that he thought this would be unethical because they are a competitor of his firm. But when the news was raised by students and other speakers he noted that any company that continues having pervasive and systematic behavior problems with its employees must look at its culture to see if it could be partly what drives that unethical behavior. And if the recurring problem stems from upper management then this will have repercussions for the rest of the company.

Preber added that culture is a factor that can be used to predict fraud and evaluate a company's ethics. He asked his audience to consider some companies that have been in the news for ethical situations and to free associate:

Prompted with Enron they offered "greed," "putting profits before people," "arrogance."

When asked about Microsoft, they said "competence," "market dominance," even "innovation."

PetSmart, the pet specialty retailer, fared well with the group. PetSmart had recalled contaminated pet food and replaced their customer's purchases, Preber said. "This tells customers that the company is there to look after their pets and will rectify any errors made."

Culture played an important role in forming the students' impressions.

Form of culture and substance of culture must align

When companies take quick action, as PetSmart did, they foster an ethical business culture. But fast and appropriate reflexes are not enough.

Preber argued that the form of a company's culture must align with the substance of the culture. Form, Preber said, includes standards and values that can be verbalized or written down. He stated examples such as policies and procedures, compliance officers, industry norms and laws and regulations. Substance, however, is the action that grows out of acceptance of the form, by the company, its managers and its employees. Actions could include the way employees talk about their bosses, establishment of an anonymous complaint line for employees and rewards for good behavior.

If substance and form align, Preber explained, then desirable and acceptable workplace behaviors are more probable. When unethical behavior surfaces and is tolerated, it is because form and substance of culture are unaligned.

"This is when attitudes deteriorate and the incentives for unethical behavior rise," Preber said.

Ethics wane, the accountant thinks, when form is placed over substance. Form over substance results in rationalization, living with bad decisions, cheating and fudging the system. When asked how to avoid unethical clients, Preber suggested operating only with those that share your ethics.

"It's not my job to correct clients' ethics. If their ethics don't mesh with yours, always walk away."

Avoiding the gray area

Marianne Jennings, a professor of legal and ethical studies in business at W. P. Carey School of Business, frets about stories like KPMG. Author of "The Seven Signs of Ethical Collapse: How to Spot Moral Meltdowns in Companies … Before It's Too Late," Jennings noted that previously, scandals only surfaced every decade.

"Enron and the Sarbanes-Oxley Act of 2002 -- which tried to reform American business practices -- were only five years ago, so we are seeing scandals more frequently and the same pattern over and over," she said.

Jennings pointed out that KPMG settled tax shelter fraud allegations with a fine, and just a few weeks ago paid to settle for its role in the Xerox accounting fraud. The New Century Financial issues came after these two problems.

"The pattern seems to suggest that KPMG needs that exercise of seeing whether the client's values are the same as their values, or they have not yet come to grips with the importance of ethics and values over the retention of clients and keeping the revenues," Jennings commented.

In her book, Jennings writes that "all unethical organizations are alike; their cultures are identical and their collapses become predictable." She identifies seven warning signs that a company culture is unethical: pressure to maintain numbers; fear and silence in the ranks and leadership; young and inexperienced executives and a bigger-than-life CEO; a weak board; conflict; pressure to produce constant innovation; and a penchant for philanthropy that assuages guilt for questionable decisions.

When a sufficient number of the seven signs have infected the culture, Jennings writes, intelligent and otherwise upstanding people may do things that are at least unethical, and often illegal.

Things start to become slippery, Jennings said, because that gray area can include unethical actions that are not technically illegal. "If we want change, then it is the ethics within this gray area that must be studied more."

To keep out of trouble, Jennings suggested asking oneself: "Why is this area gray to you? If you are there, then you are probably already in trouble, looking for a way around a rule."

Asked what professors and mentors can do to help prevent poor business behavior, Jennings said that teaching ethics has never been more important. Giving business students continual case studies showing the risks and costs of living in that gray area, and giving them the gumption to act when they feel uncomfortable is essential, she said.

"Creating change means driving this home."

Bottom Line:

• Brad Preber, an accountant dealing with fraud and litigation cases, says that we can learn a great deal about a company's ethics through its culture.
  
• He also thinks that when the form and substance of a company are out of whack, attitudes deteriorate and incentives for ethical behavior wane.
  
• Jennings' seven warning signs that a company culture is unethical: pressure to maintain numbers; fear and silence in the ranks and leadership; young and inexperienced executives and a bigger-than-life CEO; a weak board; conflict; pressure to produce constant innovation; and a penchant for philanthropy that assuages guilt for questionable decisions.
  
• If you find yourself in a gray area, you are probably already in trouble, Jennings says.

Additional Reading: "Executive Role Models Crucial in Building Ethical Workplace Culture"

Labels: ethics, leadership, risk mitigation, security