Are We Acting Ethically?

By Jim Jordan

With the end of 2005 looming hard on the horizon, it's time for contractors to begin thinking about their year-end financial statements. It's these statements, after all, that determine whether surety companies and banks continue to have confidence in a contractor's ability to manage his or her operations and show a profit.

Jim Jordan is director of construction services for Dallas/Fort Worth-based Weaver and Tidwell LLP.

In the many years I have spent in the construction industry, I've found that most contractors are highly ethical and committed to doing the right thing. They stand by what they say and are fair in their dealings. However, all industries have their bad apples.

Unethical behavior is taking a growing toll on the reputation of our industry. There is plenty of data to support this. A survey released earlier this year by FMI, the largest provider of management consulting to the construction industry, in which 84 percent of respondents said they have experienced or observed industry-related acts or transactions they consider unethical. Not surprising, 63 percent of the respondents said they feel our industry is tainted by unethical acts. The most critical issues, they said, are change orders, bid shopping, claims, misreporting costs and "payment games."

In the FMI study, 35 percent of respondents said unethical behavior cost a project between 1 and 2 percent of the total cost, and 25 percent said the cost is 2 to 5 percent. That means anywhere from $5,000 to $50,000 of every million dollars spent on a project is lost due to unethical behavior.

Following the collapse of Enron, the integrity of financial practices in all industries began to be questioned. Of the more than 30 people charged in connection with Enron, most were CFOs and CEOs.

In the construction industry, executive officers should not forget how lawmakers responded to Enron's corruption. Passed in 2002, the Sarbanes-Oxley law created dramatic changes in how public companies are governed, and now makes officers accountable for their financial statements. Every public company in the country has been affected by Sarbanes-Oxley. Our industry needs to understand that although most contractors are privately held, what happens in the public arena will impact privately owned companies.

We should move fast to exorcise unethical behavior, beginning with a true code of ethics. Some of our national associations already have such codes.

It is not enough, however, for our trade associations to adopt formal codes of ethics. Until senior officers place a greater emphasis on ethics, many employees may not give the matter serious consideration. The promotion of ethics can begin with three key steps:

Adopt Formal Ethics Polices Top company officers need to adopt policies regarding ethical behavior and make certain they are communicated and enforced. An ethics policy should reflect the company's values and expectations and be easily understood. It should be written in concise, clear language with no room for subjective interpretation. Once a policy has been enacted, the company should take formal action to demonstrate its commitment.

In a discussion of ethics, company employees need to learn that they should speak out against unethical behavior wherever it occurs.

Create Independent Boards of Directors at many small private companies, including contractors, boards of directors often amount to little more than business swaps. That would be fine except it has nothing to do with oversight and self-regulation. If a company wants to truly adopt a code of ethics, it must make certain its board of directors is independent. Board members are supposed to be advisers and directors, not financial partners.

Improve Financial Management: On a nearly daily basis, the media continue to disclose corporate wrongdoings. Whenever inflated financial statements and misrepresentations are uncovered, innocent investors, banks and employees suffer financial losses. It is crucial then that CFOs and controllers record transactions correctly and in accordance with generally accepted accounting principles. Banks and sureties rely on this financial data and expect it to be correct. Significant misrepresentations cause an erosion of confidence in a company, and that in turn can lead to the loss of surety lines of credit and bank financing. Any ethics policy must include a provision that the company present accurate and honest financial records.

It's time we our industry adopts these and other steps that create a culture of ethical behavior. Our industry possesses unique accounting and project delivery practices that carry potential for malfeasance. Most contractors are reputable and ethical, but there are still some who need to realize that profitable contractors can be ethical contractors as well.