Why leadership is an ethical issue for accountants

Whatever the size of your company, it’s the job of leadership to maintain and enforce a strong ethical culture across the organisation.

Failure to lead ethically can prove costly to a business – both financially and reputationally.

Last March, the Financial Reporting Council (FRC) handed Grant Thornton a £1.9m fine for a series of ethical failures in its auditing of alcohol retailer Conviviality. The regulator found Grant Thornton’s under-resourced ethics function had deficiencies in policies and procedures, and it failed to effectively communicate its code to staff.

In addition to hitting the auditor’s bottom line, the FRC also demanded Grant Thornton establish a board to oversee the firm’s compliance with ethical standards and conduct a review to identify any skills and resource gaps.

The FRC’s response demonstrates the regulator’s clear commitment to enforcing strong ethical practices at accountancy firms and serves as a reminder to organisations to revisit the AAT Code of Professional Ethics.

AAT guidance on ethical leadership

AAT believes ethical compliance is crucial to maintaining confidence in the services of accountancy professionals. It has recently published additional guidance on ethical leadership and culture that states: “A defined and visible ethical culture will discourage bad behaviours and the associated dangers of regulatory or professional compliance breaches. Invariably, the costs to rectify such breaches, whether in fines or internal policy and practice changes, can be a significant burden on your business.”

This view is shared by David Isherwood, head of ethics and Partner at BDO. He explains how his firm has sought to create an ethical culture through leadership.

“We see our ethics code as really important to the firm’s longer-term success. It is not just a bolt-on or something we just write a few manuals for. We try to think about it from the ground up and integrate it into everything we do,” Isherwood says.

The AAT guidance on leadership advises firms to establish a purpose from which standards and conduct can then flow. BDO took two years to ‘uncover an authentic purpose’, which Isherwood says provides the foundations for the firm’s ethical procedures.

He says: “The BDO purpose culminates in our core values onto which we layer codes of conduct which decides behaviour for everybody in the workplace.”

Leading by example

The AAT guidance says it is vital that ‘leaders must walk the walk’ when it comes to professional ethics, noting that ‘there is no shortage of cases where leaders have behaved in ways that suggest one rule for them, and it is clear how that behaviour undermines any other messages they may be trying to communicate.”

Richard Houston, CEO of Deloitte North and South Europe, says: “No individual, no matter their seniority or experience, is above the brand, reputation, values or ethics of our firm.”

The AAT guidance suggests appointing and training ethics champions to support the messaging from leadership and demonstrate the importance being placed on ethical practice, as BDO, PwC, and others have done.

Blowing the whistle

Devising a robust ethics code only has value if it is enforced and employees are given avenues through which they can raise concerns when behaviours may be falling short.

Laurie Endsley, global chief ethics and compliance officer at PwC, says the firm actively encourages and supports employees who call out activities that contravene the ethics code.

Endsley says: “Living our purpose and values at PwC means behaving properly in everything we do. And as movements like #MeToo have shown us, it’s critical that we support a speak up culture for our own people and our clients.”

Where failures or breaches occur, AAT’s guidance recommends organisations communicate their responsive action to ‘ensure full transparency and trust’. In other words, reassure employees that appropriate action is taken and to reinforce the message across the business that the ethics code is taken seriously.

It is also important that firms can put their hands up when things do go wrong and make clear the steps that have taken to ensure mistakes are not repeated.

However, Isherwood suggests proportional response should be given to breaches of the code.

“There can be a tendency for firms to have a nuclear response to breaches of ethics, but quite often all that is required is a conversation. Good people do bad things, and organisations can learn from mistakes and implement new controls and training,” he says.

Recalibrate the moral compass

A professional ethics code cannot be left to stagnate. The AAT guidance is clear that a business’ ‘moral compass must be recalibrated regularly, to ensure it is fit for purpose with multi-data points reviewed for the effectiveness of the ethics programme’.

BDO’s Isherwood says the firm is constantly updating the code of conduct and ethics manuals.

“The ethics policies and procedures are in a constant improvement environment. They are constantly updated so when we come across breaches or things aren’t right or when we hear of new best practice out there, we look at that. I suspect that not a week goes by where we don’t update a policy or procedure,” he says

An up-to-date code of ethics also acts as an important recruitment and retention tool. As the AAT guidance states: “A reputation for acting honestly, fairly and ethically attracts clients and helps recruit and retain the very best personnel.”

Isherwood says that the next generation of employees has high expectations for their treatment in the workplace, which means ethics codes must evolve.

“There needs to be some dynamism in the ethics code to meet the expectations of new employees coming into the organisation,” he says.

Employers also need to listen to their employees when formulating codes. BDO holds regular in-depth employee surveys, the results of which feed into the constantly evolving ethics procedures and policies.

Businesses with established, enforced codes of professional ethics will not be immune from conduct failures, but they certainly stand a better chance of handling issues when they arise and learning from their mistakes.

Boxout: Formulating a professional ethics code

• Understand the business purpose: what does the business do, and why does it exist?
• Ensure senior management demonstrate the code and lead by example
• Establish an ethics board with dedicated ethics professionals
• Provide confidential and reliable means for employees to speak up
• Have a clear policy for dealing with breaches of the code
• Review procedures regularly and keep ethics codes up to date

Read the AAT guidance

AAT has produced four guidance notes to support its ethics code. Members and students can download these resources from the links on our ethics page.

Gill Wadsworth is AAT Comment’s news writer.