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Financial crisis exacerbated by ethical failings

ACCA (the Association of Chartered Certified Accountants) has urged the business world to focus more on its ethical responsibilities and on prioritising the recruitment of senior executives and financial staff with strong ethical compasses.

A new ACCA report, Risk and Reward - Tempering the Pursuit of Profit, looks at where the financial system went wrong prior to the financial crisis, with a massive failure of 'people risk' being identified.

The report was launched at an event at the London School of Economics on 3 June 2010, where Stephen Haddrill, chief executive of the UK's Financial Reporting Council (FRC) delivered a speech.

'The financial crisis has highlighted serious ethical failings,' says Paul Moxey, ACCA's head of corporate governance and risk management, and one of the authors of the report. 'Businesses of all kinds, including the banks, have been increasingly policed by reams of rules and regulations. But we have seen during the crisis that, despite all these regulatory requirements, or perhaps because of them, individuals exploited gaps.'

Moxey continues: 'Take Lehman, for example. According to the official US government investigation into its collapse, Lehman's executives were able to move debt on and off their balance sheets at will by picking and choosing which legal jurisdictions and accounting standards they wanted to comply with. But in doing this Lehman's never broke any rules; the absence of any benchmark of conduct that would have prevented this sort of regulatory arbitrage arguably actually legitimised what they did.'

Risk and Reward - Tempering the Pursuit of Profit identifies two typical frameworks for ensuring risk and ethical behaviour: rules-based or principles-based. Neither can offer a guarantee of responsible business behaviour - prescriptive rules and regulations create loopholes for the unscrupulous, while principles can create ambiguity and confusion for those unsure of what is right or wrong, or an opportunity for those looking for wiggle room.

The paper argues that a strong commitment to ethical business conduct on the part of directors and key staff is a strong line of defence against reputational damage and should be an essential part of any risk management strategy.

The paper makes the following recommendations:

• businesses should prioritise the recruitment of senior executives and financial staff who have a strong ethical compass
• businesses should ensure a strong ethical culture; this should include setting the right tone at the top and then ensuring, and monitoring, that this is reflected throughout the organisation. Listed companies should set out how they do this in their annual reports
• businesses should be aware of outsourcing their sense of ethical responsibility to compliance with external rules
• businesses should maintain the higher internal profile - with sufficient resources - given to the risk function since the onset of the financial crisis and not be tempted to cut this back when recovery sets in

'Ultimately, it is the people who make the decisions in any organisation, so the effectiveness of any set of rules or code of practice will be dependent on the competence and integrity of the individuals who have the authority to actually make decisions,' adds Moxey. 'Finding the right "ethical" candidate for job vacancies can be a tricky task for businesses; the simplest way to shortlist likely ethically literate candidates is to look for those with qualifications - such as the ACCA qualification - that place ethics at the centre of their syllabus.'

Notes to editors

1. ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management.
2. We support our 140,000 members and 404,000 students in 170 countries, helping them to develop successful careers in accounting and business, with the skills required by employers. We work through a network of over 80 offices and centres and more than 8,000 Approved Employers worldwide, who provide high standards of employee learning and development. Through our public interest remit, we promote appropriate regulation of accounting and conduct relevant research to ensure accountancy continues to grow in reputation and influence.
3. Founded in 1904, ACCA has consistently held unique core values: opportunity, diversity, innovation, integrity and accountability. We believe that accountants bring value to economies in all stages of development and seek to develop capacity in the profession and encourage the adoption of global standards. Our values are aligned to the needs of employers in all sectors and we ensure that through our qualifications, we prepare accountants for business. We seek to open up the profession to people of all backgrounds and remove artificial barriers, innovating our qualifications and delivery to meet the diverse needs of trainee professionals and their employers.
4. The report can be downloaded from ACCA's website here.

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For further information please contact:

Nick Cosgrove, ACCA Newsroom
+44 (0)20 7059 5989
+44 (0)7963 496144
nick.cosgrove@accaglobal.com

Helen Thompson, ACCA Newsroom
+44 (0)20 7059 5759
+44 (0)7725 498654
helen.thompson@accaglobal.com