Ethics in business - doing the right thing

5th of October 2015
Ethics in business - doing the right thing

Much is said about the demise of ethics in business today. Well, the truth is business and ethics have always made for uneasy bedfellows, with ethics likely to be turfed out in favour of expediency at the first hint of a rift. Hartley Milner explores the pressures on this most brittle of relationships.

The theory goes that wedding your business to a strong ethical policy and always doing the ‘right thing’ helps raise your brand profile and enhances your reputation as a great company to do business with and work for. The fruits of the union are said to be increased long-term profits.
This relationship, however, can rapidly turn sour during difficult times when a business may suddenly find its margins severely squeezed and cash flow slow to a trickle.

“Human nature being what it is, business owners find staying faithful to ethical ideals easy when all is going well, but when the going gets tough they may be tempted to flirt with expediency and relax their principles a little,” said business consultant Paul Petherick. “After all, their ultimate goal is to make money and keep their investors happy, as well as pay their bills and staff salaries.”

Public trust in business is at an all-time low following a spate of scandals over the past decade or so. These range from the Enron scandal in the US to superstore predatory pricing aimed at forcing the competition out of business, which not only breaches competition law but also impacts on the rights of store workers.

“Ethics can be broadly defined as keeping to what is legal and doing what is right, even when no one is looking,” said Petherick. “It follows, therefore, that when we talk about unethical behaviour in business, we are talking about actions that do not conform to acceptable business practices, doing what is right in every situation.

Tough times

“But in tough economic times the boundaries of what is considered to be acceptable tend to become less rigid as businesses feel obliged to seek a more pragmatic route to maintaining revenue levels.

“When paying for services, for example, is it right for large multinationals to suddenly impose a payment regime of 60 or 90 days, or even longer in some EU states, on their much smaller suppliers? Such punitive payment terms can seriously impact on an SME’s cash flow and may even tip them over the edge if they are already struggling.”

The EU directs that business-to-business payments should be made no later than 60 days (30 days in the public sector), except under exceptional circumstances or with the agreement of both parties. If this period is exceeded without such an agreement, the supplier can claim interest for every day that the payment is overdue.

Treated unfairly

“In practice, though, the supplier rarely claims, for fear of a loss of goodwill or even the contract itself in some instances,” said Petherick. “The client company trades off the fact that coming over as bolshie or uncooperative is not in the vendor’s interest, so it is using a form of intimidation, or at least an implied threat, to keep them in line. The client may say it is merely doing what it needs to do to stay on a firm financial footing itself – the poor supplier may feel it is being treated unfairly, or even unethically. It depends on your viewpoint.

“The squeezed supplier may feel that the customer would be more accommodating were it to offer an early payment discount, but this usually has to be something fairly substantial to work its magic. And while it might help with the cash flow in the short term, it is a price cut and is likely to impact on the bottom line in the long term.

“The supplier may accept being pushed only so far before thinking ‘Fine then, this is a game that two can play’. Fearful that putting up its fees may lead to a less than happy outcome, the supplier could decide to seek creative solutions to maintain a healthy revenue base.

“This can range from outright fraud to subtle invoicing tactics or a combination of the two. Blatant invoice fraud is still relatively rare, but inventive invoicing has become more common in recent
years because suppliers felt they had to keep their fees pegged to pre-recession levels but can now no longer absorb their rising costs.”

The dangerous sport of extreme invoicing includes billing for more than the agreed price, charging for products or services never provided and even double billing in the hope that the customer
won’t notice.

Chancy tactics indeed, but it is surprising how often ‘accounts payable’ fails to pick up dubious claims. From what little evidence is available, it is estimated that around 10 per cent of all business invoices submitted in the UK have at least one dodgy element on them.

Fraud is notoriously difficult and costly to prosecute, but the recent recession has focused minds in accounts departments and more cases are being exposed.

Italy’s finance police recently uncovered a false accounting scam that defrauded the government out of a massive €1.7 billion. Two businessmen used false invoices issued by intermediary companies to bill the state for nonexistent services. The money was paid into the accounts of these ‘shell’ companies and the funds were then removed, in cash, and deposited in San Marino and Luxembourg. The two companies were subsequently declared bankrupt.

Decade of deception

The perpetrators started their racket in 2001 and managed to elude the authorities until now. More than a decade of deception passed in which the fraudsters prospered and the taxpayer suffered. Police seized 100 properties and two businesses, and revealed that the two ringleaders had more than 60 accomplices. Yet, it took almost 15 years for them to be caught and locked up for their greed.

Desperation is the more likely driver when a small business chooses to put its reputation and goodwill on the line. In the UK, the boss of a cleaning materials supplier that was struggling with chronic cash flow issues fraudulently obtained £93,000 (€127,500)  in one last attempt to keep the family business afloat. The fraud was centred on false claims for goods and services that the firm issued to customers through its bank’s invoice financing service.

In court, it was claimed that the intention was to credit back the money, but the cash supply situation worsened until the company was so deeply in debt that it had to be wound up. The fraud came to light when the bank visited the firm’s premises to carry out an audit. The business had been established for more than 35 years, but had been badly hit by the recession.

Blatant fraud

This was blatant fraud, but is ‘finessing’ your invoices for gain necessarily unethical. All businesses need to mark up their products or services to make a profit, by between 15 and 30 per cent on average. It is also seen as legitimate for a contractor to add an admin fee onto supplier charges that will eventually be passed on to the client.

“These practices in themselves are neither unlawful nor morally wrong,” said Petherick. “After all, you could say governments impose markups on products and services through the VAT system, ranging from 17-25 per cent across the European Union.

“A conflict with ethical practice is likely to arise when a contractor attaches clearly ‘over-the-top’ markups of 40, 50 or even 60 per cent to the supplier bills it passes on to the client. The contractor may argue that it is adding a price premium to compensate for not feeling able to raise its fees. Such hefty hikes are really not so unusual in Europe, but if uncovered they can lead to accusations of fleecing the customer. For this reason, we are increasingly hearing of commissioning businesses asking to have sight of original middlemen invoices before the contractor charges them on.

“If you keep inflating your bills, you are walking a very fine ethical line and it may not be long before your customers start thinking ‘Mmm, this seems excessively high’ and you may find yourself put on the spot, having to justify the charge. Simply saying you have added a little on top to cover admin costs may not cut the mustard when you are asked to hand over the original invoice and the client sees just how much that ‘little’ amounts to.

Be straight

“In my experience, it is always wisest to be straight with your customers. If you really need to put up your fees, then go to your clients, not cap in hand but as an equal partner, and explain to them face-to-face why you feel the increase is necessary. This way, you are more likely to get a sympathetic hearing and be able to negotiate a fee rise that is near to what you wanted.

“All said and done, there is no such thing as business ethics. Only people can have ethics and in all areas of our lives our mantra should be – do the right thing, because it is the right thing to do.”


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