Did you ever cheat on an exam in school? You know… using the old side-eye while keeping your head down to read what Frank put down for question 3.
Have you ever stolen something? Perhaps something was hiding under your child’s diaper bag in the grocery cart and you didn’t realize it until you got to the car. There was no way you were taking your toddler back into the store, so you let it slide.
Or perhaps you have looked the other way when you noticed someone do something that you knew was wrong? Sure, you were in the room but weren’t participating. You don’t want to be a tattle tale.
So now for the big question: are you an ethical business owner?
I’m sure you are answering to yourself, “Yes! Of course!” Most people do.
Consider the 10-80-10 Rule, which says most people have the capability to embezzle given the right circumstances and opportunity. The breakdown of the rule is this:
- 10% of the population will NEVER commit fraud. This is the type of person that will pay for 4 oranges, see they actually have 5, then go out of their way to pay for the extra orange. That’s awesome! (And I hope more people strive to be like this in the world.)
- On the other hand, 10% of the population are actively looking for an opportunity to commit fraud. Yikes!
- That leaves us with the remaining 80%, and the reality that any generally trustworthy person can steal when under duress. Essentially 80% of the population might commit fraud given the right combination of opportunity, pressure, and rationalization.
(Source: National Association of State Auditors, Comptrollers and Treasurers (NASACT) and the Oregon State Controller’s Division)
Where do you fall within this rule? Top 10%? Middle 80? And I hate to ask…the bottom 10?
When I first became a licensed CPA and began my career, I was living in California. In order to get my license, I had to complete a three-part process:
- Take and pass a 2-day, 16-hour exam,
- Work with an already licensed CPA for a certain amount of hours and have them sign off that I was able to complete specific tasks and understood various concepts,
- and finally, I had to pass an ethics exam.
The ethics exam was interesting in that it was a take-home test – I could cheat if I wanted to. The questions were nuanced in nature, providing situations in which I would have to determine how they should be handled and state if certain actions were right or wrong. The reality is that ethics is subjective, and many people differ on what is ethical and what’s not.
As I am now about 25 years into my career as a CPA and Fractional CFO, I obviously passed the test. But ethics is an ongoing test in real life, where the stakes are much higher than a simple pass or fail. This is typically the point in the article where I make my case for why you should hire me as your Fractional CFO, but today, my charge is this: be an ethical business owner, even when it’s hard. It’s up to you to run an ethical business and make the world a better place because of it.
What is ethics and why is it important?
A simple business ethics definition is the standard of right and wrong used to guide business decisions.
Business ethics are important because they build the character and reputation of a business. Perhaps more importantly from a humanity perspective, ethics encourage the respect and honor of others.
Consider the story of Sally and the decisions she had to make when experiencing business growth:
Sally is President and Owner of Limelight Cleaners, a business that offers in-home cleaning services to senior level managers and executives in her area. Business is booming and she recently met a talented operations manager who could help usher her business to the next level of growth. When looking at the paperwork needed to hire John, she realizes that his out-of-state residence would result in more work than she expected, including new tax filings with his home state.
After giving it some thought, she has a brilliant idea. She’ll ask John to create an LLC for an operations business, and will hire him as a contractor. No additional state tax filings, no extra employee benefit costs, and John can say he’s now a business owner. It’s a win-win for everyone…right?
*Pretend you are now hearing the sound of a sad trombone: wah, wah, wah, waaaaahhhhh. If you really want to hear it, click here!
Sally made an unethical choice for her business and leadership. There are many red flags that arise as Sally makes her decision about hiring John.
First, she is misclassifying John as a contractor. If he only has one client and works on core business tasks for Sally (which he will), according to the IRS, he is an employee. Read more on this topic in our article, Employee Vs. Contractor | The Business Trap.
Second, she is evading taxes and not giving John what he’s owed. By misclassifying him, she is avoiding paying for social security and Medicare taxes that go towards John’s retirement. Ultimately, she is taking from not just the government, but from John.
As I mentioned before, the thing about ethics is that it is subjective. Some people will find Sally’s decision totally acceptable. Others will cringe at the thought of this work around solution to her problem.
Where do you fall on the spectrum? When there is a tough decision to make, do you fall on the side of “do the right thing” or on the side of, “doing the right thing is a hassle, I’ll just work the system”?
How do ethical issues affect a business?
If your organization does not have a strong ethical foundation, you may experience high turnover, employee fraud or embezzlement, a toxic workplace culture, or low employee morale.
For example, if you hire someone that is honest and ethical, and then they find out that your ethical standards are misaligned, you will lose that talented employee. Why would they stick around if you are building an unethical workplace culture?
On the other hand, people who have lower ethical standards will feel right at home.
The employees that:
- have access to your cash register…
- have a company credit card…
- open your mail…
- work on your general ledger…
- have signatory authority over your bank account…
- who drive your company car…
There isn’t much stopping them from taking $5 here and there, funneling money to their own account, or hiding damage to your assets so they don’t get in trouble. They may even start swindling your customers, which can lead to a brand reputation problem.
The best way to avoid ethical issues is to live by the “tone at the top” principle. You set the tone for how everyone in your organization will behave. If you give an employee instructions that avoid a hassle instead of doing the right thing, you are building a culture where unethical behavior is accepted. Things start to slide here and there. Not only are you cutting corners, but so are your employees. You have set the tone that ethics are not important here.
This tone of “cheating” makes employees more likely to cheat as well. If you are cheating the government out of taxes, or your business partners out of whatever they are due, don’t be surprised when your employees start stealing from you. Learn how to know if your business is a victim of fraud or embezzlement here.
How you treat others is indicative of how your employees will treat you. As a business owner, you must be willing to live by the rules and standards you want others to follow.
Rise To the Ethical Challenge
A great business book is Traction by Gino Wickman. In this book, you’ll learn about discipline, accountability, and vision casting. What are the top 5 values of your business? And with those as your guide, you’ll be able to hire for values, finding the right people to work for you. It’s a great way to get started building a business with ethical standards at the core.
If you are a business owner ready to rise to the challenge, I encourage you to be part of the 10% of people who will do the right thing, no matter what. In your business and in your life.
