BERNARD AGULHAS: Ethics matter in audits
When audit firms shift their attention to profit, and lose their focus on doing their main job properly, it’s a recipe for disaster
As one does in trying times, I spent the weekend perusing some literature in a bid to make sense of the hysteria that has catapulted the auditing profession into the court of public opinion recently.
Every day, there’s a new headline suggesting that KPMG’s current woes are the inevitable result of a corrupted system that has failed to protect the public.
It’s a misguided perception — but that doesn’t mean our profession doesn’t have issues to address.
Profitability must follow professionalism at audit firms — not the other way around
In The Balanced Company: A Theory of Corporate Integrity, ethics experts Muel Kaptein and Johan Wempe write: "The attention corporations are paying to ethics is driven by more than idealism and a sense of duty: it is often also motivated by enlightened self-interest." (It’s somewhat ironic that Kaptein and Wempe once worked at KPMG.)
"Sound corporate ethics can improve a corporation’s public image, empower stakeholders and boost profits. It is possible to conceive of situations where ethical decisions come at a cost of profits."
At the audit regulator, we have always maintained that audit practices have to walk a tightrope between profitability and professionalism. Profitability must follow professionalism at audit firms — not the other way around.
Too much attention on the bottom line creates the risk of compromising professional or ethical principles. This might be okay in other industries, but it can never be acceptable in the highly regarded world of auditors.
The auditor is that professional in whom the public and investors place their hard-earned confidence. This stems from a certain level of trust, integrity and belief that he or she will do the right thing.
"Doing the right thing" isn’t as difficult as some would have you believe: as human beings, we know when this has been achieved because of a certain feeling deep down, and a good night’s sleep.
But we do not live in a perfect world. It is human to be distracted by social evils, power and self-interest, which can convert good people into arrogant and egotistical Machiavellis.
Objectivity and independence
True leaders, including those in charge of our audit firms, have a responsibility to do what is best for all stakeholders — including employees, investors and those who rely on our professional services to instil confidence.
I am reminded of two dilemmas referred to by Kaptein and Wempe.
The first, the "dirty hands dilemma", refers to the assumption that, to make profits, leaders may have to break the law. The second, the "entangled hands dilemma", refers to a situation in which the interests of individuals to whom certain responsibilities have been delegated are at odds with the interests of the corporation.
Again, resolving this is not impossible: we know why we have laws and that we should not have conflicting interests.
While conflicting interests blur our judgment, often we don’t even know we are conflicted. We become so entangled in relationships that we forget the very raison d’être for the association is based on objectivity and independence.
The literature also reminds us of the dangers of "unconscious bias", another human trait. This is precisely why auditors must exercise professional scepticism — a behavioural competence requiring them to question information and not just accept what they are told.
So let me rephrase Kaptein and Wempe in appealing to those who have the power to steer corporations in the right direction: unethical behaviour will attract bad press if a corporation inflicts damage on someone or something. And it will abolish a corporation’s public image, disempower its stakeholders and extinguish profits.
We can’t afford to disregard the power and speed of the new forums for popular opinion, such as Facebook and Twitter. While this public voice is one of reason in some cases, this is not always so. So we must not unconditionally play to this gallery.
Instead, we need to educate and inform opinions to achieve a fair outcome for society as a whole. Maybe then everyone will sleep well at night.
• Agulhas is the CEO of the Independent Regulatory Board for Auditors