Ethical intelligence for accountants

Garreth Hanley:
This is INTHEBLACK, a leadership, strategy and business podcast, brought to you by CPA Australia.

Belinda Zohrab-McConnell:
Welcome to INTHEBLACK. I'm Belinda Zohrab-McConnell. And today, we're talking to Brendan O'Connell FCPA, about ethical intelligence. Brendan is an expert in corporate governance, ethics and accounting with experience in both academia and industry. He's a member of the Ethics and Professional Standards Centre of Excellence at CPA Australia, and an academic who has done extensive research with over 2,900 citations listed in Google Scholar. He has consulted for governments and corporations. His research focuses on corporate scandals and ethical issues. Welcome to INTHEBLACK, Brendan. Brendan

Brendan O'Connell FCPA:
Thank you, Belinda. It's great to be here. And I'm looking forward to our session together.

Belinda Zohrab-McConnell:
Now we hear a lot about different types of intelligences these days, so can you give us an overview of what ethical intelligence is and explain how it's different to other types of intelligence?

Brendan O'Connell FCPA:
Sure. Belinda, so ethical intelligence is essentially your capacity to recognise and understand and apply ethical principles in decision-making processes and actions. So it's about navigating the complex situations that you might encounter in your workplace and making choices that are not just legally compliant, but are also morally sound and socially responsible. You can break it down into some key components. The first component that I'd break it down into would be what's called moral awareness or ethical awareness. So this essentially is you are able to recognise when a situation involves ethical issues and you might think that should be obvious, but there's a lot of grey things that occur on a day-to-day basis in your job. And some people won't see necessarily that there is an ethical issue at play or potentially at play. So it's that ability to be aware there could be an ethical dilemma that needs to be addressed.

Ethical intelligence is also linked to what we call ethical reasoning, which is essentially your ability to analyse situations from an ethical standpoint and weigh different moral principles such as fairness, justice, empathy, et cetera, to determine the right course of action in the given situation. A couple of other important components to ethical intelligence are moral motivation, so this is essentially you making a conscious decision to prioritise ethical over other things such as personal gain. And again, that might seem self-evident, but we know from looking at high-profile scandals that some people, hopefully the minority, are likely to actually put personal gain ahead of ethical behaviour. And this is a problem that manifests itself in some of the major scandals that we've seen and continue to see, I might add.

And then the other component there that I wanted to mention was moral action. And this is the ability to act consistently with your ethical beliefs even under pressure, because to act ethically, Belinda requires a lot of courage because sometimes you may have to say no to someone who's powerful in your organisation and that takes courage. It may even require you to blow the whistle on unethical behaviour, which again takes courage.

Now how it differs from other forms of intelligence. So if we take the most, well-known form of intelligence, which is your IQ, which is also known as cognitive intelligence that measures your logical reasoning, your problem-solving skills, your memory and your analytical abilities. There, we're focusing on problem-solving skills, logical reasoning, memory, analytical abilities, but that's quite different to intelligence that's focused on your ability to navigate moral dilemmas and make decisions that align with ethical principles and to understand the impact of those decisions on others. So you can see it's quite different, even though they're both requiring intelligence as such, the focus of ethical intelligence is much more on how to deal with moral dilemmas in the workplace.

Belinda Zohrab-McConnell:
You mentioned three aspects there, moral reasoning and moral action. I'm sorry, what was the first one?

Brendan O'Connell FCPA:
Moral awareness. So that's the one where you need to be aware, I am facing a moral dilemma here. I’ll just give you an example from my own work experience. I remember when after I first graduated, I had a role working in a public accounting firm, and it was in the last recession that Australia had. So there's a lot of companies being wound up, and I was put into the insolvency and reconstructions area of the firm, which was quite a learning experience.

And I remember one day I had this creditor call me up and I was in charge of administering a particular company that had gone insolvent and this chap had been the landlord of the business and he was owed quite a bit of money and he rang me up. He said, "I've got this debt owed by this company and I understand that there's not many assets, but the good news is I've got debtor's insurance." And what debtor's insurance is, is that essentially if you have a debtor that doesn't pay, you can make a claim on the policy and get a refund.

When he rang me, he said to me, "Oh, what's the amount that you've got on the books there that's owed?" And I told him the figure maybe it was $50,000, and he said, "Oh, okay, when you fill out the form..." Because he wanted a form from me that was signed saying that this was the amount owed. "When you fill out the form, can you make it $60,000, not $50,000?"

And I thought for a minute, and I thought, "This chap is asking me to commit fraud here, insurance fraud, isn't he, to misrepresent the amount owed." So that's moral awareness, isn't it? Because someone else might say, "Oh yeah, that's not a problem. I'll put 60,000 and not think too much about." So moral awareness is pretty important.

Belinda Zohrab-McConnell:
Yes, it was such a challenge for someone early in their career. Of course, finance professionals and accountants are expected to always act ethically and of course most do. But how can such professionals use and develop that ethical intelligence that you've just discussed to become ethical leaders and thereby influence the behaviour of their clients, perhaps akin to the situation you just described, but also their employees, their colleagues?

Brendan O'Connell FCPA:
Sure. Well, I think it's really important, Belinda, that we keep up to date with ethical standards, and we're going to talk a little bit later about APES 110, which is the main ethical standard that CPAs have to follow. But the thing that people have to realise is that these standards change over time. So when you do the CPA programme, you learn about the standard. And I think unfortunately, a lot of people think once they've studied that once, they never need to look at it again.

But we do know that there's been a lot of changes made to that standard over the years. So it's really important to keep up to date on ethical standards as they progress. And as I speak, this change is being made to the ethics standards around the use of technology and artificial intelligence that perhaps a lot of accountants are blissfully unaware of at this stage. So keeping up to date I think is really important with the standards because they really do set the benchmark and the guidance, if you like, for CPA to undertake their job in an ethical fashion because they really focus on key principles, which we'll talk about later.

So keep up to date with changes in laws and regulations and best practice. That's really important. Train yourself to recognise potential ethical dilemmas that occur in the workplace. There was one survey done a few years ago of CPAs in Australia, and it found that 50% of them had encountered an ethical dilemma in their career to date. So the chances are very high, one in two that you in your day-to-day work at some point will come across an ethical dilemma.

So you need to train yourself to recognise those training yourself would be doing things like understanding what potential conflict of interests might look like in your job or understanding what a breach of confidentiality might look like in your job. Some of the other things you could probably do is reflect a bit on your past decisions that you've made and be your own worst critic if you like. And also to think about things from a multiple stakeholder perspective as well, because when we make a decision, we affect a lot of different stakeholders.

So if you're a management accountant working in a company and you are analysing whether the company should close a factory, then there are going to be multiple stakeholders affected by that, and you need to recognise that when you’re doing that analysis and take all of their considerations, their impacts into play when you do your analysis. And in terms of leadership, I think it's really important to promote an ethical workplace to have high ethical standards.

Most organisations that are reasonably large will have actually an ethical code of conduct, but ethical codes of conduct are only useful if they're actually followed and the staff get the message right from the top of the organisation that ethics matters, and it's the top priority. Because if they get a feeling that perhaps making money is more important than ethical conduct, then that can become a situation that really will over time eat away at the ethical conduct of the organisation.

You also should, as a leader, try and create a safe environment. So what we mean by that is if someone's got an ethical dilemma, there should be policies and procedures in place about how to deal with that. So for example, having a whistleblower hotline is quite common now in a lot of organisations. And the whistleblower hotline should be manned by an independent party, ideally someone external to the organisation. Because people want to feel that if they do report unethical behaviour, that they will not be subject to revenge if you like, from the party who they're reporting. So we need to create a safe environment for them. So these are some of the things that we should be looking to do.

Belinda Zohrab-McConnell:
From a perspective. Are there tools or techniques that people can use for ethical decision making, particularly while they're perhaps early in their career and they're developing the ethical intelligence? Now I've heard of the American Accounting Association ethical decision-making tool. Would you be able to speak to that?

Brendan O'Connell FCPA:
Yeah, sure. Well, I think the American Accounting Association ethical decision-making model is a really good one because it's simple and easy to apply, but it really works. So essentially, Belinda, it consists of seven steps. So when you face what you might think is an ethical dilemma, you just walk yourself through the seven steps. So just to give you a brief overview of the seven steps, the first thing you need to focus on are what are the facts of the situation that you're looking at. So you need to get a thorough understanding of the situation you're facing, including all relevant facts, and it's a good idea to write that down. Not just formulate it in your head. So the first step, get your facts right. Then the second is to write down what are the ethical issues related to this situation.

So you need to really clearly identify and define the ethical issue or problem and specify all individuals and other stakeholders who might be impacted by this situation. Then the third step is what are the norms, principles and values related to the case. So we need to think about the standards, rules and beliefs that will help us be guided in making ethical decisions. So we get these mainly in our case as accountants from the APES Code, code of ethics, because we look at the fundamental principles of the code, but we can also bring into that some of the philosophical aspects of ethics. So for example, one of the most common ethical theories, if you like, is called utilitarianism, which sounds very impressive, but it's actually pretty simple.

What utilitarianism means is that we should take the ethical action that provides the greatest good for the greatest number of people. So you might bring that into your analysis. If I make this decision this way, is that consistent with the greatest for the greatest number of people? So if I was to give you an example, let's say in order to receive a bonus, I decided to artificially boost the reported profit. If I took a utilitarian approach to that, I would be saying that that's not appropriate because although I personally might benefit, my benefit will be at the expense of all the users of the financial statements, all the shareholders and others who are relying on me to provide accurate and true and fair accounting to them. So that's the third step, what are the norms, principles and values related to the case. Then the fourth one is what are the alternative courses of action.

So I should write down what are the different actions I can take, and there might be quite a few of these might be six or seven different actions I could take given a certain dilemma. Then the fifth one is, what is the best course of action out of those alternatives that is consistent with those norms and principles and values that I mentioned earlier. Once I've written that down, I can then move to considering the consequences of each possible course of action, and the consequences are not only for me as a individual, but for the organisation and perhaps even wider society. And then the last step, and of course this is the most important step, Belinda, is what is the decision that I'm going to take? And I should be looking obviously to choose out of all those options, the most ethically appropriate action. It should be driven by your ethical principles, your professional standards, and your concern for the stakeholder interests. So that's the AAA model in a nutshell.

Belinda Zohrab-McConnell:
Sounds like that final step would probably be the hardest one. Would that be fair?

Brendan O'Connell FCPA:
I think it is, Belinda, but also it should naturally follow from the thought process that you've worked through with those first six steps. And if you think about those first six steps, it's forced you to think about all the issues. It's forced you to think about the different stakeholder impacts. It's forced you to think about the principles, rules, and other aspects that are important. So really it should logically, in my view, flow with the seventh step given that previous six steps.

Belinda Zohrab-McConnell:
Several times, you have mentioned what we notionally know as APES 110, so the Accounting Professional Ethical Standards Code, the code of ethics for professional accountants. For our listeners who are not accountants, could you give a sort of a 30 second overview of what that is and how it intersects with what we've been speaking about?

Brendan O'Connell FCPA:
Sure. So the APES 110 Code is the primary code of ethics that we have in Australia, and it's borrowed, if you like, from the international ethics code that is set by the International Ethics Standards Board. And if you are an accountant who's a member of a professional body such as CPA Australia, Chartered Accountants Australia New Zealand, IPA, then you are compelled as part of your membership to follow this code because these bodies are all members of the International Federation of Accountants.

And so as part of being a member of the International Federation of Accountants, these bodies have agreed to follow this code. So that's how the code has come about. And in terms of the code itself, I think the important thing to really understand are the five key principles. So we've got integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. So whenever you face an ethical decision, you should think about those five principles. Am I in danger of breaching any of those five?

In fact, it might be that I'm in danger of breaching more than one of those principles with a particular action. So you need to really think through them, and the Code goes into great detail about each of these five principles and what you should do when confronted if you like, with a potential breach of one of those principles.

Belinda Zohrab-McConnell:
Now, your substantial academic research has focused on corporate scandals and ethical issues. Can you give us some examples of how people have gone awry and ended up in trouble? And I guess most importantly, do you have any tips on how people and our listeners can be on the lookout so they can avoid ending up on the front page?

Brendan O'Connell FCPA:
Yeah, sure. Thanks, Belinda, for that. And having studied this area now for probably close to 30 years, there's some real common themes that come through. So I'd just like to share with you some of them. The first one, often your major accounting frauds actually start off being small mistakes if you like. So say an accountant makes a small mistake and then they try and cover up that small mistake.

And then over time, that small mistake escalates as the accountant becomes more desperate. So essentially a small mistake and trying to cover it up ends up being a major fraud, a major cover up. So it's a gradual process often. And so I think the lesson out of that kind of situation is don't ever try to cover up your mistakes, own up to them. If they're small mistakes, they can be easily fixed anyway, and then you won't risk going down that slippery slope of major fraud. So that's the first one. The second one, which I think is really important is the culture of an organisation, the ethical culture.

And this really comes from the top. It's really about tone at the top. What is the ethical culture of the organisation like? For example, is unethical behaviour ignored or tolerated? If this is the case, then these are real red flags. And we know from some of the most high profile frauds and corporate scandals, corporate collapses that the organisational ethical climate or culture is not up to standard, and this is a real problem. So really the leadership of the organisation must put ethics right at the top of what they expect of not only themselves, but all of their employees. And if someone breaches it, they shouldn't just get a slap on the wrist. They should be made very accountable for their actions. So culture is really important. Another one that really comes at I think when we look at a lot of scandals is a focus on short-termism in organisations, especially when it comes to pressure, for example, to meet profit targets, to achieve bonuses, or to please your superior.

If you are feeling pressure to say, cook the books as an accountant, which is to misrepresent the financial performance, then you need to do something about it. You shouldn't just accept this. Organisations do have mechanisms such as whistleblower hotlines to report these matters to. And I can remember in the wake of the major accounting scandals that happened in the US a number of years back, talking to a chief financial officer about this. And he was telling me of a phone call that he'd had, and he was in quite a responsible job, obviously as the CFO. And he had a call that came from the chair of the audit committee of his company, and his company was a huge company. It still is today. It was a publicly listed company. And he never really talked to the chair of the audit committee before much. And the guy rang him up and said, "Look, I'm just calling you to say that we've got a really strong focus on having our financial statements not misrepresent how we're doing. And so if anyone in the organisation puts any pressure on you to do something with the accounting that you're uncomfortable with, I want you to come straight to me.

Here's my number. Call me direct. Don't tolerate it. Come straight to me." And I thought that was a really good example of a senior person in the governance area of an organisation who's sitting on the board of directors who is saying ethics really matters right at the top of this organisation. So I think that's another interesting lesson. Another one that is kind of sad really, and I've seen evidence of this myself. Accountants who might develop say a gambling problem or a drug problem are highly represented in white collar crime cases. So if you as an individual feel that any of these types of areas are becoming a problem for you, you should seek out professional help. You do not want to ruin your life by doing the wrong thing to feed, say a gambling or a drug problem.

This can end up in the worst possible situation for you, even jail. Another one is that creative accounting and cooking the books are often associated with efforts to try to conceal embezzlement by individuals. So in other words, someone might be trying to steal assets from the business. And the way they try and cover that up is by cooking the books. So if you become suspicious that there is some cooking of the books going on, you might need to dig a bit deeper because the cooking of the books may actually be designed to conceal embezzlement, and you need to investigate that. And then the last one I thought I'd mention in terms of my own lessons, if you like from studying this area, is that many accounting scandals that we know of come to light via whistleblower hotlines.

And interestingly, Belinda, more often than not, those whistleblowers are women accountants. Women accountants are overrepresented as whistleblowers. So I find that kind of interesting from a gender perspective. And the lesson, I think when we think about the importance of whistleblowers is that we really do need to provide a safe haven for whistleblowers to report bad conduct, given that that is a major source of uncovering scandals. So yeah, there's some of the lessons I've learned from my research, Belinda.

Belinda Zohrab-McConnell:
Great, well thank you. Thank you for those very practical insights, and thank you very much for speaking with us today. It was very informative and practical to talk to you.

Brendan O'Connell FCPA:
My pleasure, Belinda. Really enjoyed it.

Belinda Zohrab-McConnell:
And thank you for listening to INTHEBLACK. Don't forget to check the show notes for resources mentioned in this episode.

Garreth Hanley:
If you've enjoyed this episode, help others discover INTHEBLACK by leaving us a review and sharing this episode with colleagues, clients, or anyone else interested in leadership, strategy, and business. To find out more about our other podcasts, check out the show notes for this episode. And we hope you can join us again next time for another episode of INTHEBLACK.