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What makes a good company go bad? Recognising and remedying the warning signs of ethical collapse can help prevent accounting scandals and restore market trust.
There came a point, as all the corporate scandals of the past year continued to break, that we passed beyond simply uttering the emotional declarative, "How could they have done that?" We entered into the intellectual and logical inguiry of, "How did this happen?" We can no longer dismiss all of the scandals as simply the work of rogues and pathological CEOs and CFOs. There have been too many scandals for the statistical odds to bear out our facile theory that these anomalies occurred because ethically challenged, financially insane executives caught boards and auditors off guard.
With recent announcements that Mortel will do yet another restatement of its financials (its third in three years) and that GM will restate its earnings for 2000 through 2005, we have perhaps reached a point that demands deeper inquiry. How do competent, professional people at good companies such as these get their financials so wrong? We are forced to look beyond attribution to individuals gone bad, and question whether the processes and the checks and balances on corporate governance and operations are sufficiently solid to warrant the market's trust.
When we look beyond individual blame, we can find common threads. There are tangible issues and processes that any company can address to avoid becoming one of the many financial headline stories that find the rest of us shaking our heads in disbelief. Long before an organisation announces restatements, settlements, investigations or even indictments, there are warning signs. Identifying those signs and then putting antidotes into place prevents good companies from going bad. Recognising and remedying the seven signs of ethical collapse is the next step in corporate governance beyond the ethics codes, the ethics training, and the checklist processes. These gualitative factors may well be more important than the financial analysis of a company; the numbers are only as good as the culture of the company that put those numbers together.
Sign 1: Pressure to meet numbers
All companies and organisations have goals and numbers that they have established as targets. But a company headed towards ethical collapse has graduated the numbers...