In recent posts, I’ve argued that non-compliance is a common response when people are required by law or rule to do something, such as when executives are required to submit periodic financial disclosures for their corporations.
To help readers develop a clearer understanding, I’ve frequently used traffic speed limits as an example. In the U.S., non-compliance with traffic speed limits is the rule rather than the exception. Of the last 500 people I’ve asked, only two have said that it is their intention to never, ever exceed the speed limit. The other 498 admit that it is frequently their intention to exceed the speed limits, sometimes by a lot. Not one of the 498 has ever apologized for his/her behavior. A study by the Ohio Turnpike Commission reports that the average speed on its highway is 14 mph over the speed limit.
In just a minute, I’ll present another example: advertising about blueberries in breakfast cereal.
It is that way in the business world. Corporations (and the people that run them) are charged with accurately complying with required information disclosures (and other rules). Non-compliance is common. How common? We’ll never know for sure, because it is impossible to monitor every action all the time for every person, let alone monitor the monitors.
I had an argument with another professor over it. She argued that corporate compliance with the rules that govern financial statements (and by implication) was almost absolutely perfect. She contended that compliance was far in excess of 99%. I disagreed. I think the numbers are fudged (sometimes in a small way, sometimes in a major way) in a majority of corporate financial disclosures. It is, after all, a part of the corporate mentality.
I’m presenting two video clips by Mike Adams of FoodInvestigations.com which I hope will help you understand the prevalence of the corporate mentality. In these two clips, it is alleged that certain breakfast cereal producers make misleading claims in their advertising–about the presence of blueberries in their blueberry cereal. I do not know if these allegations are true. Since advertising is the product of someone’s corporate mentality, I wouldn’t be surprised if some advertising is in fact misleading. However, I don’t know and I’m not saying that these allegations are true or false. All I’m doing is presenting an example of the public perception of the accuracy of some breakfast cereal advertising.
Wouldn’t it be something if an auditor’s opinion was designed to help us only imagine accuracy in corporate financial statements?
Debit and credit – - David Albrecht
In my country (the UK) there appears to have been a redefinition of truth that has now become standard in corporate and political life. It divorces itself from a wider concept of right and wrong. The mantra runs thus “If I have broken no law I have done no wrong. If I have done no wrong I must have done right. If I have done right it is fair.” As a result there is an industry that develops business and tax strategy based on interpretation of what the law/regulation means and this often results in the intent of the law being usurped. The cynicism engendered spreads through society and a gradual decline in ethical and moral standards is adopted.
Perhaps it is time for legislation and regulation to be based on principles rather than a narrow definition of offence this would also allow penalties to be proportionate.
Speeding and fraud are exactly the same behavior, complying with the fraud triangle……
Need/pressure/incentive: “I don’t want to be late” vs. “My 200 employees (non-public company) or thousands of stockholders (public) depend on me”. Why do you think salespeople make uncollectable/unprofitable sales? Because they’re behaving exactly the way they’re being paid to behave.
Opportunity: “There aren’t many cops around” vs. Poor internal controls” both result in “I’m probably not going ot get caught”.
Rationalization: “I’m a safe driver/Everyone else does it”.
As you’ll note, the only difference is that one is driving while the other is fraud, but exactly the same psychology. Why? Because people only comply with rules (controls in accounting) that they think are fair. Why do you think Prohibition didn’t work? And why the vast majority of business owners charge personal expenses to the company? And when auditors let such amounts go, they’ve aided and abetted fraud. Fraud of ANY amount is material. Just because the amount is immaterial does NOT make it legally OK.
There’s an uneasy relationship between ethics and compliance. If compliance rules go too far toward delimiting and proscribing precise behaviors in ways that people feel are excessive, there are two natural human responses.
The first is an increase in non-compliance, as you point out.
The second is a decrease in the power of ethical values in governing behavior. So ironically, compliance rules introduced to enforce ethics can end up destroying ethics.
Auditors are required to vouch management’s integrity, ie, ethics. How is it ethical for a CPA firm to have a client that lies to make sales? If the client has lied to generate revenue, how can a CPA issue a clean opinion? CPAs forget that just because the money is in the client’s checking account does NOT mean it was legally earned. That’s why CPAs are required to comply with Statement on Auditing Standard No. 54, Illegal Acts by Clients. For example, Pfizer agreed to pay a $2.3 BILLION fine for off-label marketing of drugs, which is absolutely illegal. I wonder if Pfizer’s auditors ever brainstormed (required by SAS 99) how Pfizer’s compensation system drove the sales force to break the law to make sales?
If management will lie to sell cereal, why wouldn’t they lie on financial statements?
So true. You get it, Gary.