A few years ago, Japanese digital imaging company Olympus was embroiled in an accounting scandal. The company had hidden decades of losses, totaling $1.7 billion. When CEO Michael Woodford, brought in from the U.K., learned of it, he was shocked and brought the problem to the board of directors. The board promptly fired him because, after all, who likes to air dirty laundry.

But eventually it catches up. At the time, I wondered whether this was an issue of a more widely spread corporate culture and if it were the tip of a national iceberg. As we now see from the current Toshiba scandal, Olympus was anything but a one-off.

Toshiba has overstated profits for years. An outside report found attempts to boost the bottom line and please investors (and keep bonuses coming) were “deliberate” and “systematic.” Employees were pressured to change numbers to make them more palatable and those at the top were more than aware of the practice: They endorsed it. Toshiba CEO Hisao Tanaka has already stepped down.

And it’s not as though Japan were the only country with such corporate shenanigans. Major advertising agency holding company MDC Partners sacked founder Miles Nadal and Chief Accounting Officer Michael Sabatino. At the center was an SEC investigation over accounting irregularities, “including millions in illicit corporate expenses taken by Nadal,” according to MediaPost.

These are high-profile cases, but accounting scandals don’t require massive corporations. Smaller companies can go through similar issues, even if on different scales. No matter what the size, there are steps entrepreneurs, CEOs, directors, and others responsible for the business can take to avoid the problems.

Stretch goals should be possible

A popular management tool is to set stretch goals. These are supposed to get employees to try really hard and achieve some difficult accomplishment. But setting a stretch goal is tricky. Companies often decide to aim for something that is objectively impossible, often because they’re under scrutiny and worried about their jobs or bonuses. Doing so is a bad idea. To push people to perform at a level that they can’t accomplish is to set them, yourself, and the company up for failure. And don’t even start down the road of “everything is possible.” If you’re honest with yourself, you’ll recognize that it’s easy to set goals that probably can’t be accomplished, like growing a company 2,000 percent in a year without any capital to fuel the activity. Be aggressive, but understand the difference between stretching muscle and ripping it. And don’t predicate the effort on assuming that employees live only for the company. That is immoral and imbecilic. You want well-balanced people who have the energy and interest to bring their best to work, not employees who will burn out and leave.

Don’t ask people to lie for top execs

Anyone can make a mistake. Perhaps top executives were unrealistic when setting company goals. Maybe they made strategic mistakes or perhaps market conditions changed quickly, undercutting previous assumptions that were the basis of plans. Maybe execution was bad. The company might not have invested the way it should have or expected too much from employees. The employees might even have been at fault. Missing goals is ugly, but asking people to lie and cover up problems is even uglier. To do so is to create a culture in which those at the top can no longer expect the honest information they need, because they’ve set the expectation that lies are fine.

Even when painful, truth is better than fiction

Truth is always better for a few reasons. Investors, management, employees, and customers all deserve to hear what they need to make their own decisions. You can’t effectively run a company from lies, and people shouldn’t be asked to plan their futures on falsehoods, as it is both immoral and unseemly. If you can’t succeed while living an upright life, you’re not winning, you’re cheating. Expect employees to take their lumps when they make a mistake? Then set the example. Better yet, operate from the premise that people make mistakes and should learn from them. If you scare people away from admitting errors or fire them, you lose the value of the lesson that the company just spent money to learn.

Top execs have to be separate from the company

To be an executive of a company, to be part of the business, does not mean that the company is part of you. Create clean processes so that executives, as true for other employees, get the pay and benefits they need and deserve. But the company is not a private bank account or a mechanism for someone to get whatever he or she wants. Set compensation and benefits up front, but with an OK from accountants and lawyers, and then let people live within their means. If the janitor is expected to do so, the CEO should as well.

Put the business first

Problems happen when, despite the best of intentions, things go wrong and a company doesn’t make its numbers. That should always be a bigger issue than whether executives get bonuses or fear for their jobs. Reduce the fear by welcoming the chance for people to learn while understanding that bonuses for performance depend on honestly hitting numbers. But stress that anyone who looks after their own interests ahead of the company’s won’t be around long.

Published on: Jul 21, 2015