Financial Times

Good leadership needed
Corporate fraud and ethics
By Sunil Karunanayake
Corporate frauds in organizations leads to low employee morale and commitment. Business performance too gets adversely affected. Cost of frauds to the US revenue has been estimated at US$ 660 billion in 2004.

The chairman of the US Securities Commission is reported to have said that "The most important thing that Directors should do is to determine the elements that must be embedded in the Company's moral DNA".

Corporate frauds as the term indicates involves the officers at the highest levels of organizations such as CEOs, CFOs and controllers and hence detection is not easy.

In Sri Lanka perhaps due to the relatively smaller number of listed companies in operation. corporate scandals are not a popular topic. However, most of the Sri Lankan multinational subsidiaries are now on board with the latest Corporate Risk Management procedures apart from the Corporate Governance requirements required for listed companies.

The 85-year imprisonment sentence delivered to 65-year-old ex-CEO of US telecom giant WorldCom, Bernie Ebbers, for falsifying accounts marks yet another land mark in the scene of corporate crimes since the bubble blew with Enron.

He now joins the league of Ken Lay of Enron and Richard Scruchy of Healthsouth for betraying the trust placed on the CEOs. Perhaps over the years more emphasis on demanding profit targets linked to rewards and unplanned lay-offs affected the fundamental disciplines and weakened the control process. Integrity too was a casualty.

Corporate scandals involving Enron and WorldCom brought immense pressure on the accountancy profession as a result of deficiencies of financial reporting, falsifying accounts, lack of ethical behaviour etc.

WorldCom is said to have capitalized billions of dollars as revenue expenses to report higher profits and the auditors Arthur Anderson failed to report these events.

The Sarbanes-Oxley Act (Sarbox) was the US government's response to these unethical acts to provide security to investors. Even though these scandals have been aligned as accounting scandals apart from accountants, directors, brokers and analysts too have been tainted with unethical behaviour.

This has been addressed effectively by Sarbox driving more responsibilities to the directors. According to The Association of Certified Fraud Examiners, forty percent of frauds were detected by way of tips from individuals mostly employees, customers and suppliers. Sarbox has strengthened the position of whistle blowers. Perhaps this characteristic is common in Sri Lanka too. Other sources of detection were internal auditing (23 percent), accidental discovery (21 percent) and internal controls (18 percent).

Research conducted by the Business Roundtable Institute for Corporations identify regaining public trust, effective company management in keeping with investor expectations, integrity in financial reporting and fairness of executive compensation as key ethical issues.

These research-backed conclusions place a huge responsibility on those who man high offices in large companies to maintain high ethical standards in an era of falling values. Whether in public or private sector it is the greed for power and benefits that lead to lowering of ethical standards to enhance one's own wealth at the expense of stakeholders.

In Sri Lanka there has been more focus on politicians and public servants (though without much result) than on corporate conduct. Publishing codes of conduct is not sufficient. Good leadership with high ethical standards from the top is essential. The fact that most of the corporate scandals emerged from the US a high temple of free enterprise and ethical standards and US government's swift reaction to arrest the wrong doings is a striking point of the saga.

(The writer could be reached at - suvink@eureka.lk)

Back to Business