Warren Buffett has told his managers to step up their efforts to stop unethical practices, according to the latest news reports.

In his memorandum, written the week before Hewlett-Packard chairwoman Patricia Dunn's indictment, Buffett has warned his execs that questionable practices can't be justified simply because ''everyone else is doing it".

Buffett puts out memos all the time. But this one comes just days after four of his former executives were indicted for participating in a scheme to rig AIG's accounts. So the timing is significant.

With his former employees in deep trouble, Buffett has told his managers that there is a difference between what's legal and what's ethical. "Let's start with what is legal, but always go on to what we would feel comfortable about being printed on the front page of our local paper."

Let's take it one step further: tougher laws don't make people behave more ethically. Indeed, it could even have the opposite of the intended effect.


That message comes through loud and clear in a white paper released this week by the Institute of Chartered Accountants in Australia.

The white paper Accountants and ethics says regulation is no guarantee of ethical behaviour. Prescriptive regulation had contributed to a lowering of ethical standards and piling on more laws just made it easier for people to get around the rules.

"Poor or excessive regulation may actually reduce adherence to ethical standards ... Obeying the law is not always the same as acting ethically. Indeed, in terms of the outcomes they seek and the processes they employ, they are completely different."

What's more important than regulation, the accountants say, is leadership from the CEO and board.

With his memorandum, Warren Buffett is acknowledging that point.

The Sage of Omaha knows that a fish rots from the head.