Over a rainy London weekend I caught up on some reading, including dipping in and out of Malcolm Gladwell’s recent book What the Dog Saw, a collection of his New Yorker essays from the last several years.  It seems even relaxing at home I am never far from business ethics, as one of the pieces, The Formula from 2007, focuses on the Enron collapse in a section looking at “flawed ways of thinking”. It may be old news, but the story remains instructive.

Gladwell recalls the prosecution in the Enron case argued that we “are entitled to be told what the financial condition of the company is”.  He asserts, however, that  Enron had not hidden the truth per se.  It all was there - just lost in too much information overload.   As a top line, most people just bought into what they understood to be a “great” bottom line.  Few factored in the tangled complexities of the “SPEs” and “mark to market”  deals.  As no-one really understood them.  Overall  Enron, and their auditors, were guilty of extraordinary recklessness and incompetence - certainly not reflecting application of the Code of Ethics.

One startling fact to me was if any analyst, investor or regulator had cared to look at Enron’s tax returns they may have figured out that it “paid no income tax in four of its last five years”.  The internal accounting , reliant on complex financial instruments, made the company look as if it was earning more than it was.  Enron wasn’t paying taxes as in the eyes of the IRS it wasn’t making any money.  Why?  Because, quite simply – Enron wasn’t making any money.  So much for sustainability while stock soared.

As far back as 1998, just shy of 3 years before Enron’s downfall , a group of six students at Cornell University decided to do their term project on Enron for an advanced financial-statement-analysis class.  The group analysed each of Enron's businesses using statistical tools, designed to find telltale patterns in the company's financial performance and made their way through pages and pages of footnotes.  The students' conclusions were clear.  Enron was pursuing a far riskier strategy than its competitors  and “may be manipulating its earnings."  The students found the stock, then at $48, overvalued.  (It went on to double!). The report was posted on the university website  with their recommendation  in bold: "Sell."  

The recent financial crash, was also on the basis of truth lost in too much information or impossible information.  So the lesson we can learn is, lessons weren’t learned. And, it may not be surprising to some reading this , in some quarters, such lessons are still ignored.

This is what I think about when reading IFAC’s current consultation on their revised educaitonal standard on professional values, ethics and attitudes.  To me the document identifies the ongoing dilemmas faced by professional accountants.   CIMA sees its role in encouraging and supporting its members in upholding these principles.  For those studying, it is important to be honing your skills and recognising and reflecting on the dilemmas you face and how to apply your professional values and integrity.  For experienced members mentoring those around you and influencing your organisation to act ethically and in the public interest is part of your duty.

In a newly released video Council members from businesses around the world re-iterate how important application of the Code is.  As PD Karkaria from India puts it “the Code has a universal appeal, and it should ultimately come from within.  It needs to be practiced on a day to basis, to make sure it has an infectious affect throughout the community”.

Within the global community of CIMA all should strive to be sure that facts are not lost in the “information”.   Just as the Cornell students figured out what wasn’t in the long term interest of Enron (or any of its shareholders, employees or stakeholders), management accountants are best placed to sift through what is “real” and advise the business in real time what is wrong.   So that lessons are learned.  And applied.

See other videos on the global application of the code here: Ethics videos