Policing Ethical Behavior in Small Business

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Policing ethical behavior is difficult to do. Simply jotting down some honorable standards for an employee to sign – thereby stating they are in agreement – is painfully shortsighted and obviously ineffective. Common ethics begins at home. It is a way of life that is taught from the time a child can sit up. A person has to believe that ethic is in his own best interest as well as that of the group. Moreover, ethics can’t be painful; it must be a choice that parties arrive at naturally and easily, without excessive coercion or internal personal conflict. While small businesses may be the backbone of the American economy – they can also be places where unethical behaviors occur without oversight or consequence. Limited resources sometimes make breaches in ethics appear to be unavoidable while managers miss crucial opportunities to insist upon an organization-wide, incorruptible ethical standard that considered the needs of the customer, community, and staff in all company practices. Essentially, ethical lapses are poison in the well of small businesses and they can prove to be cancerous because small oversights promote major ethical breaches in various (perhaps unintended) ways.

A few years ago, while working for a small business who served as a contractor for a project for another company, I witnessed what I considered to be three extremely egregious types of behavior from the owner and from employees. The first week I was employed with this small business, the supervisor over our small team who was the lead project manager on the account spoke with us in closed quarters during a working lunch. He encouraged me and fellow workers to take an extra half hour for lunch and just ‘fudge’ the timesheet – indicating that it was a common practice among contractors and the employing agency has even low-balled the hourly rate in anticipation of these types of adjustments.

When I later voiced my concerns with employees, they indicated to me that our direct hire (the boss) was a tightwad with money and had never had any intention of compensating workers for lunches, gas, tolls, or other business-related expenses. This left a lot of disgruntled staff feeling underpaid and underappreciated so their response was to fudge the timesheet. They expressed a belief that this was standard practice and that the reason reimbursements were not occurring and employees were underpaid is because the owner assumed that they were all dishonest, taking excessive breaks, sleeping on the clock and fudging their timesheets so that the reality (in his view) was that they were all overpaid.

I was shocked that this culture of dishonesty and mistrust had been allowed to prevail but that was not the worst. It was even suggested that ‘in order to get along I needed to go along.’ I was very uncomfortable because I realized that there could be some serious legal repercussions to these actions. The ethical, financial and legal infractions were so many. It was not long before I handily realized that this activity severely compromised my morals and personal ethics, I could not remain with the company beyond two pay periods. I could only assume that the poor business ethics of the employees bolstered (or perhaps was bolstered by) the owner regularly overcharging clients in order to meet payroll needs. The ethical breaches were obviously occurring at every level of the organization upon my resignation.

Because of a number of high-profile business failures and the criminal prosecution of some personnel in companies, it has become more important for businesses to seek the counsel of forensic accountants. In this case, the forensic accountant has the responsibility to provide advice and investigative skills to prevent serious legal and financial errors in a business, but also an obligation to report illegal activity. Companies now often have established systems to monitor the effectiveness of internal controls on corporate governance and on external reporting. In this system, a forensic accountant would make a contribution to corporate governance by helping to formulate and establish a policy for controls that reinforces ethical behavior on the part of owners, the board of directors and the management and employees of the company. The forensic accountant would be responsible for preventing fraud in the company by making sure that a strong and effective system of controls is in effect and working properly. The system should ensure correct and proper recording, classification and reporting and that all authorizations, audits, and documentation are completed according to requirements. The forensic accountant should assist with creating a work environment where employees are not tempted to engage in abuse or fraud, or high-risk behaviors that might lead to damage to the company interests.

One high-profile case that illustrates the value of forensic accounting is the Enron scandal which came to public notice in 2001. The Enron case was not only a huge bankruptcy but also considered to be the largest audit failure in the history of United States (US) business (Bratton, 2002). Enron employed 20,000 people and was considered one of the world’s leading companies with holdings in natural gas, electricity, communications and pulp and paper companies. The company posted revenues of nearly $101 billion in 2001. However, at the end of that year, it became clear that its financial condition was maintained by systematic accounting fraud and that the company assets existed mostly as accounting numbers. Vice president Sherron Watkins became known as the whistle-blower because of her report on financial irregularities. Former Enron CEO, Kenneth Lay, would show poor leadership in his dishonesty about Enron despite a clear stance in Enron’s Code of Ethics that: “All officers and employees of Enron are responsible for conducting the business affairs of the company in accordance with all applicable laws and in an honest and moral manner” (Lay, 2000; Wallace, 1998).

In summation, the scandal that led to the Sarbanes-Oxley Act of 2002 set new standards for public companies and public accounting firms and clear guidelines for ethical reporting that all companies should aspire to. Dishonesty in business affects a number of different stakeholders – not just owners, employees, and shareholders – but also, families, children and the community. The forensic accountant should help to establish effective lines of communication to ensure that all stakeholders in the company are aware of their responsibilities and rights. Information on the ethical and governance policies must flow freely throughout the company and be available to interested parties outside the company, as well. The forensic accountant must provide vigilant oversight for the company’s interests with constant monitoring and evaluation for compliance with legal and ethical requirements. The forensic accountant must also participate in establishing consequences for violations of rules and policies regarding proper conduct and abuse of company interests. In the case of suspected abuse, the forensic accountant must ensure the integrity of financial information through a fraud investigation. The forensic accountant is a suggested addition to a company’s accounting staff and is also in demand for legal cases and fraud investigation (Ramaswamy, 2009; Telpner & Mostick, 2003; Davis, Farrell& Ogilby, 2009).


Bratton, W. (May 2002). Does corporate law protect the interests of shareholders and other stakeholders?: Enron and the dark side of shareholder value. Tulane Law Review, 76:1275.

Davis, C., Farrell, R. & Ogilby, S. (2009). Characteristics and skills of the forensic accountant. American Institute of Certified Public Accountants.

Lay, K. (2000, July 1). From Enron’s Code of Ethics. Accessed on 23 November 2013 from http://www.agsm.edu.au/bobm/teaching/BE/Cases_pdf/enron-code.pdf

Ramaswamy, V. (2009). Corporate governance and the forensic accountant. CPA Journal. Retrieved from http://www.nysscpa.org/cpajournal/2005/305/essentials/p68.htm/

Telpner, Z. & Mostek, M. (2003). Expert witnessing in forensic accounting: Handbook for lawyers and accountants. Boca Raton, FL: CRS Press.