Small business CFOs need to educate themselves on ethics

Whether you work for a large public company or a small private company, the pressure to get results can be intense. Wall Street expects growth, the board expects annual plans to be realized, and homeowners expect a return on investment, especially those who have put their savings on the line.

After nearly two years of economic turmoil caused by COVID-19, many businesses, especially small and medium-sized enterprises (SMEs), are running out of cash and running out of hope. As a result, the incentive to cut corners, including those requiring questionable ethics, has never been greater. CFOs, known for having a strong work ethic, must play a leadership role in getting through these difficult times. CFOs need to support their CEOs, cross-functional partners, boards of directors, and owners by highlighting ethical blind spots and helping them protect themselves from potentially serious errors in judgment.

Higher risk of fraud

According to the 2020 report to the nations of the Association of Certified Fraud Examiners (ACFE), many fraud risks are higher in small businesses (less than 100 employees) than in large organizations. This is because the risk of billing fraud is twice as high, payroll fraud is twice as high, and check and payment forgery is four times higher. But why?

Unfortunately, a few small business owners, CEOs and other executives play in the gray or are not concerned with the ethics of their business practices. Being an idealist, however, I believe such people are the exception. Instead, I think the higher risk of fraud and unethical business practices is mainly due to a lack of awareness and the unique challenges that SMEs face.

Ethics awareness

CFOs and their teams of finance and accounting professionals have a tradition of integrity and trust. We begin to develop an ethical conscience in the classroom and consolidate this conscience by joining professional organizations which demand respect for their respective ethical codes, such as the IMA statement on ethical professional practices or the code of professional conduct of the AICPA. Indeed, if we do not respect these codes and participate in continuing education in ethics, we will lose our certifications. Professional ethics are in our DNA and are continuously strengthened over time.

Our transversal partners are experts in their respective fields. They lead operations, from lead development and sales to the delivery of products and services. Too often, however, they don’t think about the financial side of the house, and they don’t have the heightened ethical awareness of the CFO, especially if they aren’t subject to a formal code of conduct within their organization. profession or business. As such, they may encounter blind spots or moral gaps between their intended and actual behaviors.

Unique challenges

The management team and other employees wear many hats; some, but not necessarily all, fall within their area of ​​expertise. The founder or CEO, possessing a strong personality and great self-confidence, may not be open to comment. The board, if dominated by the founder or CEO, other internal leaders and personal friends, may not provide adequate oversight.

Many policies go undocumented, if they exist, opening the door to inconsistent enforcement and favoritism. Relationships with suppliers and customers can become friendly or too casual over time. Conflicts of interest can go unnoticed.

In addition, internal control tends to be minimal in small businesses. Segregation of duties is the norm. Many policies go undocumented, if they exist, opening the door to inconsistent enforcement and favoritism. Relationships with suppliers and customers can become friendly or too casual over time. Conflicts of interest can go unnoticed.

Finally, a lower salary often makes it difficult to hire and retain highly skilled and experienced talent. Unfortunately, by their nature, SMEs face a variety of unique challenges that increase the risk of fraud and unethical business practices.

What to do

CFOs must play a leading role in raising their organization’s ethical awareness and addressing its unique challenges, including taking into account the following:

The tone at the top. Define the values, operating philosophy and standards of conduct of the organization, expressing expectations in value statements, codes of ethics, company policies and communications. In addition, the CEO, CFO and other leaders must walk to ensure consistency between their actions and these expectations.

Code of conduct. To dramatically increase ethics awareness, formally document the company’s code of business conduct, train employees to apply it in real-life situations, and have them acknowledge that they understand and follow it.

Governance. Appointing a council of friends is bad governance and will likely hurt the organization in the long run. Instead, appoint directors with the expertise and independence to effectively challenge management, provide oversight, and act as a sounding board, especially when subject matter expertise is lacking internally.

Documented policies. Policies require clarity, communication and consistency. Key policies should be documented. If formal policies do not exist, prioritize where to start (eg, policies regarding segregation of duties, delegation of authority, conflict of interest, reimbursement for travel). Then fine-tune these policies as needed over time (e.g. policies impacted by technological advancements and the shift to remote / hybrid work should be reviewed).

Segregation of duties. Analyze roles and responsibilities, then address areas of higher risk. Consider investing in cross-training (for example, train your employee in payroll and ask for a replacement to run payroll at least quarterly).

Internal controls. Establish tighter controls, especially in high-risk areas such as treasury, payroll, and customer invoicing. To mitigate the risk of check and payment tampering, for example, resolve segregation of duties issues, use check journals, take advantage of your bank’s positive payroll checks, and quickly review account reconciliations.

Financial report. Ensure financial closings are completed on time and accurately. Take advantage of closing checklists. Lock out previous periods after closing is complete. Perform detailed reviews of financial results, including variance analysis. Issue reports quickly and ensure management understands them, including their responsibility. Finally, consider investing in a quality CPA firm to audit financial statements rather than hiring a family-friend practitioner to prepare audited financial statements.

Supplier and customer relationship. Consider having multiple points of contact for each major supplier and customer relationship to avoid the development of unhealthy relationships. Also, clarify the policies regarding the acceptance of gifts or the offering of gifts to these partners. Finally, clearly define conflict of interest policies and demand disclosure of all relevant personal relationships.

As CFO, you are the arbiter of ethical and efficient business practices. You need to shine a light on potential ethical blind spots in your organization, fostering accountability across the organization, right down to the CEO, cross-functional partners, and the board.

CFO, contributor, risk, Risk Management, Small Business

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