Scenario 7: Environmental Reporting

The Enron scandal led to the closure of not only a giant multinational company in a matter of weeks, but also of their auditors Arthur Anderson. By the use of accounting loopholes, special purpose entities and poor financial reporting, a number of senior executives were able to hide billions of dollars in debt from failed deals and projects. The board and accounting committee were misled and pressure was put on the auditor to ignore red flags. Unfortunately scandals involving misleading accounting continues today despite the potentially disastrous consequences. For instance, Japanese electronics giant Toshiba made global headlines in 2015 after a $1.9bn accounting scandal from years of illicit accounting practices and systematic inflation of profits. The chief executive and president of the company resigned as a result, along with nine high-level executives and directors. Another example is of UK supermarket chain Tesco, who was under fire in 2014 for overstating its profits by £250m. In November 2014, the company announced a $12m deal to settle one of two US shareholder class action suits over its accounting scandal.

Focus on the supply chain has intensified in recent years as both the media and consumer attention on wrongdoing has increased. Supply chain issues create a wide spectrum of risk including labour rights and relations, health and safety and quality. In the early 2000s, a global campaign against Levi Strauss producing jeans in Chinese sweatshops led to Levis becoming one of the first companies to develop a code of conduct for the supply chain and to advocate for better conditions. Some twenty years on, the garment industry in Bangladesh still faces poor labour standards as well as health and safety failings. The spotlight in 2013 on Rana Plaza, a garment factory where many global brands had association, which collapsed with the cost of over one thousand lives, has escalated such issues. Child labour also remains a big issue even in 2015, when the Fair Labor Association reported that children younger than 15 continue to work at some cocoa farms connected to Nestle, the global food and beverage giant. As a response to the report, Nestle has taken various actions to tackle child labour by increasing access to education, stepping up systems of age verification at farms and increasing awareness of the company's code of conduct.

In September 2015, the German car manufacturer Volkswagen was caught using a device in many of its vehicles that could cheat emissions tests in the US. Being one of the most successful in the industry and traditionally well-respected for its high quality vehicles, the company has faced huge backlash from the public and investors. This has resulted in loss of public trust, recalls of millions of cars worldwide, the resignation of the chief executive and its first quarterly loss for 15 years of €2.5bn in late October, among many other serious consequences. In 2014, American car company General Motors (GM) recalled nearly 30 million cars worldwide due to faulty ignition switches which could shut off the engine during driving and has been linked to 124 deaths. The company's failure to alert regulators and the public despite staff knowing for nearly a decade about the defect resulted in a $900 million settlement to avoid criminal conviction of its executives. Food safety continues to be a major concern in China, where over half a billion dollars' worth of smuggled frozen meat was seized in June 2015. Some of the meat was thawed, rotting and more than 40 years old.

The financial crisis and the subsequent scandals in the banks demonstrated the failure of organisational culture. Ethical malpractice is mostly due to behaviours of individuals. The CGMA 2015 report Managing Responsible Business showed a disparity between policy and actual behaviour, which heightens risk. In 2013 the Salz review into Barclays Bank blamed cultural shortcomings for problems which led to the LIBOR scandal. It was found that an overemphasis on the short-term was detrimental and senior management were not open to hearing 'bad news'. Now a global cultural change programme 'Transform' is underway and already parts of the business seen as higher risk have been disposed of. It is not just the banking sector, but every sector has its failings and all the cases and scenarios featured in the tool are related to weak culture and shortfalls in leadership and governance. Such gaps come with high cost in the longer term.

According to the CGMA 2015 Managing Responsible Business report, 94% of management accountants surveyed selected security of information as a relevant ethical issue to their organisation, making it the number one ethical concern. Accountants often have responsibility for both high volumes of customer and sensitive corporate information. All companies need to carefully consider how data is both used and protected and how they are abiding by relevant policies and the law. This will bring new and testing challenges as technology transforms at a rapid pace. In October 2015, TalkTalk, the British telecoms firm, suffered a major cyber-attack compromising the data of more than four million customers. Earlier in the same year, US health services company CareFirst BlueCross BlueShield reported that it was been hit by a data breach compromising about 1.1 million members' personal information. Ultimately, employers have to take the responsibility for cyber security and building staff awareness and conduct by providing ongoing training and a strong ethical culture.