Businesses behave unethically in pursuit of profits: Top academic
View(s):Businesses behave badly in the pursuit of higher profits and shareholder value. Even though the fines and penalties appear large, they are often easily absorbed by the sheer volume of revenue generated by such unethical actions, according to a top Sri Lanka-born, Australia-based academic.
Prof. Janek Ratnatunga speaking at the event.
“The company’s management accountants are assessing the profitability of law breaking by weighing – the benefit to be gained against the cost of being caught, multiplied by the probability of being caught. Further, the penalties for misconduct, given the likelihood of detection, are comparatively weak,” according to Prof. Janek Ratnatunga, FCA and currently the CEO of the Institute of Certified Management Accountants (ICMA-Australia) and an Adjunct Professor of Accounting at Swinburne University, Melbourne, Australia.
He was speaking at the graduation ceremony of ICMA (Australia) last week at the Galadari Hotel in Colombo.
Excerpts from his speech:
“I know that there are many bankers from amongst the graduands today, so it will be interesting for them to know that a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (in Australia) has uncovered an amazing amount of misconduct – including bribery, fraud and outright lying – by Australia’s largest four banks. The work of the Royal Commission is still ongoing, but scandal after scandal involving all players in the industry has shocked the general public.
Some of the examples are:
- The Commonwealth Bank confessed to charging fees to dead people
- AMP, a large insurance, pension and financial advice company has admitted it misled the corporate regulator ASIC on its overcharging with a “fees for no service” to clients of its financial advice business
- Westpac (Bank) admitted it paid bonuses to a financial adviser it knew was churning clients into high-fee investments.
The breadth and seriousness of the crimes revealed in these businesses has led to calls for radical reforms forcing banks to sell these financial advisory and wealth management businesses. The main problems appear to stem from issues that arise when banks veer away from their main activity of banking into financial advice, insurance, and others.
In Sri Lanka one can see examples of such non-banking practices creeping into banks, sometimes in conflict with the businesses of their customers. It is probably time for the banking regulators in Sri Lanka to keep a check on these activities. It is even better if the banks themselves can self-regulate themselves.
The key is for the government to legislate that companies undertake compulsory strategic audits to evaluate business practices beyond simply the financial reporting of the past. Many firms invest heavily in their brand reputation, to signal that they can be trusted.
The greater the likelihood that bad behaviour will be exposed and made public, the more companies will do to guard against such behaviours that significantly diminish brand reputation. Alongside hefty fines, a statutory strategic audit, alongside strong whistle-blower protection, will increase the chance of bad behaviour being exposed and fined, and their executives sent to jail. No company should be ‘Too Big to Jail’.”