24 Feb 2015 04:05pm

True and fair: why it pays to tell the truth in business

Mike Straw, CEO of Achieve Breakthrough, argues that companies need to have a genuinely open culture about setbacks. Otherwise people will ‘edit the truth’ about how projects are faring which can have implications for financial reporting.

When Max Reede in the 1997 film, Liar Liar tells his father, Fletcher (played by Jim Carrey), that his teacher told him that ‘beauty is on the inside’, he responds promptly and honestly (in his own view) that ‘this is just something ugly people say.’ Perhaps not an advisable approach for good parenting, but what if people in business always told the truth? Would this help the FD and the accountants auditing the books?

I believe that in business, outright lying is actually quite rare. It is more a case of editing the truth

In the past year alone the truth – or lack of it – has been a key component in a number of business scandals. From Tesco allegedly falsifying profits to Apple who are being sued for misrepresenting the amount of storage on iPhones and iPads, the truth – or the bending of it – is a key issue in business today.

Accounting scandals have become almost a regular feature of the news these days. The Tesco allegations sent shockwaves through industry. But there are other examples with alarming regularity – just recently for example Asia’s biggest commodities trader Noble rejected allegations of improper accounting practices to fabricate profits.

If anything in business is supposed to be true, it is a company’s accounts. They are meant to record the truth in black and white. But for me, while historical performance can be defined in this way (arguably!), everything becomes markedly more grey when considering future forecasts.

The problem is that forecasts are inevitably based on hopes and assumptions. And when people begin hoping, the scope for a degree of wishful thinking creeps in.

The FD and his/her finance team, and the accountants that scrutinise the accounts, have a real challenge on when our mechanisms for predicting and forecasting just don’t seem to work anymore. Everything has become unpredictable because everything is changing so much and so quickly – economic uncertainties, changing consumer spending patterns, the rapid evolution and impact of technology, geo-political shifts.

This uncertainty feeds right back through an organisation. Individuals and teams that have to report on the progress and likely future performance of a project can’t be certain and so err on the side of what they think their superiors want to hear. All too often, an inflated picture emerges – and once it begins to emerge, it becomes harder and harder to admit if there is a gap to reality…

That is why FD’s so often build in a ‘contingency’ to their numbers. They have to, because they can’t be sure. They need to give realistic figures to the City – but at the same time drive ambition in the organisation so that their predictions can be met.

A study by the University of Massachusetts found that 60% of adults could not have a 10-minute conversation without lying at least once. The same study found that 40% of people lie on their résumés.

I believe that in business, outright lying is actually quite rare. It is more a case of editing the truth – and this often stems from good intentions. Human beings, almost by design, don’t want to let other people down. This is especially true of people at work with their bosses.

The net result of this is that people often don’t tell the whole truth. They are not frank with each other. They almost fool themselves that something is under control, on track, on budget etc – and then perpetuate that belief in what they tell others.

The cost of this to business – and the finance function - is that it can take a long time for the truth to emerge. Leadership doesn’t get to problems quickly, because people have not been straight about them. By the time a solution is found, it’s often too late. The project has to be cancelled or shelved or targets won’t be met…and the company is forced to blame external factors such as the market, the economy, the weather…

In the worst cases, if the FD’s contingency doesn’t cover it, all too often it is him or her who pays the price and has to walk.

A common cycle is: hide the problem – put up with it – deny it – eventually wake up to it – panic – cancel/modify the project – blame everyone but yourself.

I believe that it’s essential companies foster a culture where it’s OK to acknowledge and talk about setbacks. The more ambitious a company is, by definition the more setbacks it will encounter. So businesses have to be straight about them. There should be no shame about admitting a target may not be met or a problem has been encountered. In fact, that is part of the process of overcoming it and making breakthroughs.

Having a genuinely open and honest culture will reduce the amount of “truth editing” that goes on within organisations.

For the FD and the finance team, and the accountants auditing the books, that can only make life easier and better. As they might say in their own words, it will give them a more “true and fair” view.

Mike Straw is CEO of award-winning consultancy Achieve Breakthrough


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