The study of ethics is a subjective discipline that can be easily confused. Some feel ethics are governed by religious beliefs, while others believe they are governed only by the law. However, it is important to remember that, while a particular action or behavior may be perfectly legal, this does not necessarily make it ethical. A panel of experts at the Markkula Center for Applied Ethics at Santa Clara University maintain that ethical behavior consists of behavior which is, “supported by consistent and well-founded reasons.”
History of Ethics in Financial Management and Business
The study of ethics in the context of financial management is a relatively new discipline. While ethical issues have been a factor in business as long as there has been commerce, the academic study of ethics in the business setting has only been around for approximately 40 years. The origins of the discipline are generally traced to Raymond Baumhart's groundbreaking studies in the 1960s. The field’s first academic conference was held in 1974.
Ethics in Finance and Accounting and Enron
The recent re-examination of ethics in financial management can likely be traced to the 2001 Enron scandal. Few in academia would argue the significance of the scandal in regards to ethics and financial management. Prior to 2001, Arthur Andersen was considered one of the “Big Five” accounting firms in the United States. A 2002 Bloomberg Businessweek special report details the role of Arthur Andersen in the scandal and the pitfalls of allowing financial auditors to work in partnership with the corporations which it is paid to audit.
Because of the grossly unethical actions of these and other organizations of the time, ethics in finance and accounting has been brought to the forefront of financial management processes.
Sarbanes-Oxley and the SEC
The passing of the Sarbanes-Oxley Act of 2002 (SOX) was a direct result of these ethical crises in financial management. SOX made provisions for the formation of additional checks by the Securities and Exchange Commission, which now oversees financial auditors in the United States. SOX also implemented stiffer penalties for fraud and requires that chief financial officers sign off on their organization’s financial statements. This places greater responsibility on the CFO, holding the CFO directly accountable in cases of fraud.
Everyday Ethics in Financial Management
While Enron and Arthur Anderson are thorough examples of how an organization may be brought down due to a gross lack of ethics in finance and accounting, it is important to remember that ethics should be practiced on a day-to-day basis in even the smallest financial management capacities. Perhaps the most effective way to ensure adherence to ethical principles on a daily basis is to consider the needs of all of the organization’s stakeholders, from employees and vendors to shareholders and CFOs, and attempt to balance those needs throughout the decision making process.