THE IMPORTANCE OF ETHICS TO A COMPANY'S SUCCESS

LANCE R. MANN LANCE R. MANN serves the firm Dean, Dorton, Allen, Ford, PLLC, as an associate director in the assurance services group. His specialized areas include college and university, construction, not-for-profit, manufacturing, and retail. Lance has more than seven years of audit experience as well as experience working in valuations and strategic financial tax services. Lance also serves in the litigation consulting group as a Certified Fraud Examiner. A company's attitude toward ethics has a significant impact on its future. Construction companies are exposed to risk in many aspects of their business. This industry is unique in that companies must have employees at multiple locations (i.e., corporate offices, construction sites, etc.), work with subcontractors, and deal with significant safety issues. The industry has also been plagued with allegations of corruption over contract fraud and conflicts of interest. This type of environment presents the industry with ethical dilemmas on a daily basis. Specific types of ethical and moral situations can range from sexual harassment and conflicts of interest to employee theft and financial statement fraud. Ethics is the discipline of dealing with good and bad and with moral duty and obligation. It establishes the standard of conduct for society and provides the framework for how business should be conducted. Companies typically understand the importance of ethics in conducting business, but, unfortunately, they often just go through the motions when discussing ethics at board meetings or with employees. Moreover, ethics becomes a topic that you talk about with the auditors once a year. Simply giving lip service to ethics communicates to employees that ethical behavior and/or the company's code of conduct are just formalities and not something to take seriously. As a result, it is time to re-emphasize the importance of ethical behavior in the workplace and in conducting business, especially considering that the current economic and social climates are

ripe for unethical behavior. To avoid issues, financial or otherwise, companies need to make sure that their employees understand management's commitment to ethics. Ethical behavior must be exhibited by all employees, starting at the top of the organization. Every organization is responsible for creating a culture of honesty and high ethics. Expectations of acceptable behavior should be communicated to each employee and modeled by management. Creating this culture begins with establishing a mission statement and adopting core values that foster ethical behavior. The core values should set the tone for how an organization will conduct its business. The following items are part of creating an ethical culture within an organization.

Setting the tone at the top

Owners, directors, officers, and managers of a company must behave ethically and must openly communicate their expectations for ethical behavior. Employees typically look to these individuals to determine how best to conduct business. Many employees do not observe management's actions on a regular basis, so communication is equally as important as how management acts. Internal and external communication should be reviewed by top management and/or the owners or directors to ensure a culture of meeting expectations regardless of the means is not being cultivated. For example, management could say, We have to meet budget this month or bonuses are going to suffer. That type of statement could send the wrong message and create undue pressure, causing employees to act dishonestly. The same emphasis on meeting budget could be communicated as follows, Our focus for this month is to meet budget while exhibiting our core values. Management needs to be intentional in communicating and reinforcing the basis upon which the company conducts business. Employees also observe how a company conducts its business. Management should understand that all actions have an impact on how an employee views their employment. If an organization is willing to bend rules or laws to meet its goals, employees will believe that is acceptable behavior. Management should be cognizant of the environment in which it expects its employees to operate. All organizations, public or private, should also have a code of conduct. All new employees should be required to certify that they have read and understand this code of conduct, and, at least annually, all employees should be required to recertify their understanding of the code of

conduct. The code of conduct should address items such as ethics, confidentiality, conflicts of interest, intellectual property, sexual harassment, and fraud. It should also include what to do if someone violates the code of conduct. Employees should be included in the development and refinement of the code of conduct. Employees involved in the process will take ownership over the content and, in turn, be more passionate about ensuring its enforcement. Once a code of conduct is developed, management should make sure it is easily accessible to all employees. It should be included in the employee handbook, posted in break areas, and/or included on the company's intranet. Companies should be intentional about enforcing the code of conduct, and those who violate it should be reprimanded. Not addressing violations of the code of conduct can have the effect of telling employees the code is not importantthat unacceptable behavior is acceptable.

Work environment
A positive work environment leads to improved employee morale, which, in turn, helps to minimize unethical behavior. The best work environments are those in which employees have confidence in their employer. Communication is one of the most important aspects of creating a positive work environment. Companies should begin by clearly communicating expectations to all employees, regardless of position. Positive/ethical behavior should be publicly praised and rewarded with a strong emphasis on treating employees fairly and with respect. Other areas to consider when creating a positive work environment include hiring, training, setting compensation, assessing promotions, and creating expectations for employees. The human resources department is integral to ensuring the work environment is properly managed and aligned with the entity's core values. For example, promoting employees that do not deserve the promotion can create animosity within the workplace that could lead other employees to act unethically. The same goes for compensation setting, performance evaluation, and hiring practices. The key is to avoid favoritism by staying true to the organization's core values and published code of conduct. Management should have an open-door policy and should be available to employees when they have questions or concerns. Management should seek input from employees on how employees perceive management and the company. They should also ask about the general work environment and the morale around the office. If employees believe that management is

passionate about creating a positive work place, they will be more apt to provide management with their viewpoints. Employees should also be able to communicate concerns anonymously in order for management to obtain input from those reluctant to approach them directly. This can be accomplished by providing employees with contact information for a board member or having a whistleblower hotline. Overall, a positive work environment will lead to better morale, which fosters higher productivity and greater overall performance. Employees in a positive environment more readily take ownership over their job responsibilities and carry out those responsibilities with pride. A positive work environment also detracts from inappropriate/unethical behavior, as it helps eliminate employees rationalizing unethical behavior. In most cases, employees will rationalize a decision before they carry it out. If your employees have a positive environment in which to work, they will be less apt to act unethically.

Internal controls
Internal controls play a big part in creating an ethical work environment. It is important to eliminate the opportunity for employees to act unethically. There are two main areas in which internal controls should be implemented: controls over the safeguarding of assets and controls over financial reporting. Safeguarding of assets. Companies should design and implement controls to help ensure all assets are safe. Employees prone to dishonesty will typically try to steal items that are useful in their personal lives. Cash is typically the easiest asset to misappropriate. Deter employees away from stealing by ensuring quality controls over cash on hand, cash receipts, and cash disbursements. Companies should also implement controls over property, equipment, and inventory that might be easily taken. Financial reporting. Organizations should design and implement controls to help ensure that the monthly, quarterly, and annual financial statements are accurate. Employees may have incentive to misstate the financial statements to obtain performance-based compensation, to help the company meet shareholder expectations, or to simply please management. Controls should include reviewing and approving manual journal entries, reviewing the financial reporting

package, and, depending on the size of the organization, periodically scanning through the general ledger detail. The key to having strong internal controls is management being engaged and having an active board of directors and/or an active owner group. These groups should hold annual risk assessment meetings to discuss the various risks affecting the organization. Included in this risk assessment should be a discussion about what could go wrong. Companies need to discuss how employees could steal money, how the financial statements could be misstated, how the overall control environment could affect the work environment, and other potential areas of concern. Once the areas of concern are determined, companies need to go further and determine what types of controls are in place to mitigate these risks. Companies should also periodically have their internal controls independently reviewed. Often, a company has designed a great set of controls, but they are not being followed. Having an independent review can highlight the areas in which internal controls are not being followed or in which controls are not designed appropriately.

Non-financial areas
Construction companies also have many non-financial ethical and moral issues to cope with on a daily basis. These issues can have significantly more impact on a company's reputation than financial issues. Examples of these areas include sexual harassment, discrimination, hiring practices, confidentiality, conflicts of interest, etc. An organization should include these types of risks in its annual risk assessment performed by the owners and directors. Owners and directors need to ask management those hard questions about if they are doing enough to reduce these risks to an acceptable level. Simply having a policy is not enough what is management doing to ensure these issues do not negatively impact the company? Communication is imperative in creating an ethical culture. Employees need to understand that management is aware these issues exist and that the organization has implemented programs geared toward eliminating these issues. Employees should be required to understand these programs and controls. Ongoing education should also be implemented to ensure employees understand what, where, when, and how these moral and ethical situations can occur and how to react. Proactive communication on current events and issues can help reinforce the importance of ethical behavior. As previously discussed, employees need to have a means to report

suspicions and instances of actual unethical behavior. Companies should have a policy to follow up on all reports. Ethical behavior is not just something that should be talked about. It is something that should impact every aspect of one's business. It is something that has to start at the top of each organization and work its way to every employee. Companies need to openly discuss how important ethics is whenever possible with all employees. It is not enough to simply create core values and have a code of conduct. Companies need to discuss these items with their employees to ensure they understand them. Management and owners need to live the core values every day. Companies should also focus on creating a positive work environment and internal controls to eliminate rationalization and opportunities to act unethically. A company's attitude toward ethics has a significant impact on its future. There are many examples where unethical behavior has led to poor publicity, a diminished reputation, and, ultimately, a company's demise. Ethical behavior will probably never lead a company to unlimited success, but the lack of ethical behavior can impact a company's access to success. Ensure that your employees, customers, and vendors all understand that you pledge to conduct your business in a fair and ethical manner. In summary, create an environment that fosters ethical behavior and act how you expect your employees to act.
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