Chapter 15Business ethics and ethical behaviour

Chapter Outline

Meaning of business ethics

How a professional accountant accepts the

responsibility to act ethically at all times

Relevant codes of ethics issued by the ACCA, IFAC,

etc

Framework of rules

There are three main sources of rules that regulate behaviour of individuals and businesses: The law Non-legal rules and regulations Ethics

Management accountability

Organisations are not autonomous, they exist to serve some external purpose, usually manifested in a group such as shareholders in a company or trustees of a charity.

In particular, the strategic apex must not lose sight of this accountability.

All mangers have a duty of faithful service (fiduciary responsibility) to the external purpose of the organisation and this lies most heavily on the shoulders of those at the strategic apex.

Definition of business ethics

Ethics is the analysis of right and wrong, and associated responsibility.

Business ethics is the application of ethical values to business behaviour .

Ethics can be divided into 3 areas: Meta-ethics (study of what is ethical behaviour) Normative ethics (how to arrive at practical standards of

ethical behaviour) Applied ethics (applying ethical ideas to specific

controversial issues)

Ethics

Ethics: a set of moral principles to guide behaviour Western thinking about ethics tend to be based on ideas

about duty and consequences. Unfortunately, such thinking often fails to indicate a single clear course of action.

Ethical thinking is also influenced by the concepts of virtue and rights.

Ethical principles

Ethics based on consequences Utilitarianism (Bentham): choosing the action that is

likely to result in the greatest good for the greatest number of people

Ethics based on duty Deontology (means much the same thing as ‘duty’ in

Greek) Kant: behaviour should be governed by absolute

moral rules that apply in all circumstances (categorical imperative)

Ethical principles

Rights and virtues Individuals have natural inherent rights that should

not be abused This way of thinking led to the development of law to

protect certain ‘human rights’ Virtue ethics:

if people cultivate virtue, their behaviours is likely to be inherently ethical

Managers should incorporate virtues such as firmness, fairness, objectivity, charity, forethought, loyalty

Example

You discover that a colleague at work has been stealing from the company. What do you do?

Do you report them to management which might lead to their dismissal and the loss of a friend? Do you keep quiet and risk being punished yourself if your knowledge of the situation later becomes clear? Do you urge the colleague to confess what they’ve done? Does it depend on the size of the theft? Does it depend on how friendly you are with the colleague?

Business ethics

Deciding what is right or wrong include discussion of following:

1. The consequences – ‘the end justifies the means’2. The motivation of the parties concerned3. Guiding principles – e.g. ‘treat others as you

would like to be treated’4. Duties – e.g. based on religious codes5. Key values – e.g. importance of human rights

Often, but not always, incorporated into legislation

Ethical problems facing managers Payments by companies to government or

municipal officials

1. Extortion: foreign officials have been known to threaten companies with the complete closure of their local operations unless suitable payments are made

2. Bribery: refers to payments for services to which a company is not legally entitled

Ethical problems facing managers Payments by companies to government or

municipal officials

3. Grease money: MNCs are sometimes unable to obtain services to which they are legally entitled because of deliberate stalling by local officials. Cash payments to the right people may then be enough to oil the machinery of bureaucracy.

4. Gifts: in some cultures (Japan) gifts are regarded as an essential part of civilised negotiation

Test your understanding

Is the adherence to ethical practice always a cost to business, or can it bring profits into the business?

Why business ethics is important

Society expects its individual to behave properly, and similarly expects companies to operate to certain standards.

Business ethics is important to both the organisation and the individual.

Why business ethics is importantFor the organisation: Good ethics should be seen

as driver of profitability rather than a burden on business.

An ethical framework is part of good corporate governance and suggests a well-run business

Investors are reassured about the company’s approach to risk management.

Employees will be motivated in the knowledge that they operate in an environment of good ethical corporate behaviour.

For the individual: Consumer and employee

expectations have evolved over recent years.

Consumers may choose to purchase ethical items (e.g. fairtrade coffee and bananas, even if they are not the cheapest).

Employees will not blindly accept orders to act in a manner that they personally believe to be unethical.

Test your understanding

Is the study of business ethics purely concerned with legal requirements?

How can the ethics of a business decision be judged? Ethics goes beyond the legal requirements of a

business. Managers have to use their discretion in

deciding on an ethically questionable matter. If an action is illegal, it is almost certainly

unethical.

Two approaches to managing ethics Compliance-based approach

Company acts within the letter of the law Integrity-based programmes

Combines concern for the law with an emphasis on managerial responsibility for ethical behaviour.

Strive to define companies’ guiding values, aspirations and patterns of though and conduct

Whistleblowing Disclosure by an employee of illegal, immoral or

illegitimate practices on the part of the organisation

This may appear to be in the public interest, but confidentiality is very important in the accountants’ code of ethics

How can the ethics of a business decision be judged? Organisation can draft sets of criteria:

Is it legal? Is it contrary to our company’s adopted code of

ethics? Is it contrary to any other published official code

of ethics (e.g. ACCA Code of Ethics and Conduct)?

Would you mind other people knowing what you have decided (news, your mother)?

Who is affected by this decision? Would they regard the decision as fair?

How is a profession distinguished from other occupations?

Mastering of specialised skills during a period of training

Governance by a professional association Compliance with an ethical code Process of certification before being allowed to

practise

Exp. accounting, law, teaching, medicine; but also unqualified accountants who are not professional accountants

Test your understanding

Professional football

Is football a profession?

How is a profession distinguished from other occupations?

Professionals owe an obligation to society above their duty to their client

Members have to possess adequate insurance so that members of the public can successfully sue the professional if they are harmed by the professional’s negligence (ACCA => Professional Indemnity Insurance PII)

The accountant’s role in promoting ethical behaviour

Accountants have a special role in promoting ethical behaviour throughout the business

At many business meetings, or on many BOD, it is only the professional accountant who belongs to a profession and therefore has a duty to act in the public interest as well as in the interests of his employer and shareholders

The accountant’s role in promoting ethical behaviour

Ethical dilemma: situation where a decision-maker has to decide what is the ‘right’ or ‘wrong’ thing to do

The accountant’s role in promoting ethical behaviour

Examples of ethical dilemmas throughout all aspects of business operations Accounting:

Creative accounting to boost or suppress reported profits

Directors’ pay arrangements – should they continue to receive large pay packets even if the company is performing poorly?

Should bribes be paid to facilitate contracts, esp. in countries where such payments are commonplace?

Insider trading

The accountant’s role in promoting ethical behaviour

Examples of ethical dilemmas throughout all aspects of business operations Production:

Should the company produce certain products at all, e.g. guns, pornography, tobacco, alcoholic drinks aimed at teenagers?

Should the company be concerned about the effects on the environment of its production processes?

Should the company test its products on animals?

The accountant’s role in promoting ethical behaviour

Examples of ethical dilemmas throughout all aspects of business operations Sales and marketing issues:

Price fixing and anti-competitive behaviour may be overt and illegal or may be more subtle

Is it ethical to target advertising at children, e.g. for fast food or expensive toys at Christmas

Should products be advertised by junk mail or spam email?

The accountant’s role in promoting ethical behaviour

Examples of ethical dilemmas throughout all aspects of business operations Personnel (HRM) issues:

Employees should not be favoured or discriminated against on the basis of gender, race, religion, age, disability, etc

The contract of employment must offer a fair balance of power between employee and employer

The workplace must be a safe and health place to operate it

Codes of ethics and codes of conduct

Most companies (esp. large companies) have formulated internal policies and instruct employees to follow them

Ethics or compliance officers monitor the application and discuss ethical dilemmas with employees

Policies can be broad generalisations (corporate ethics statement) or specific detailed rules (corporate ethics code)

Codes of ethics and codes of conduct

Codes of conduct as a cynical attempt by companies to escape legal liability when an employee is caught doing something wrong??

Codes of conduct as a marketing tool that companies use to highlight to the public how well they behave

Codes of conduct must be supported by management

IFAC and ACCA codes of ethics

Fundamental principles of IFAC and ACCA Integrity Objectivity Professional competence and due care Confidentiality Professional behaviour

IFAC Code of Ethics

IFAC ‘Codes of Ethics for Professional Accountants’ lays down ethical standards to be applied by practising accountants worldwide

Some jurisdiction may have specific requirements and guidance that differ from its Code, in which case professional accountants should comply with the more stringent rules unless this is prohibited by local laws or regulation.

ACCA Code of Ethics and Conduct

All registered students, affiliates and members (whether in practice or not) of the ACCA are required to comply

Members must identify threats to compliance with the Principles and apply safeguards to eliminate the threat or to reduce it to an acceptable level such that compliance with the Fundamental Principles is not compromised

Failure to observe the standards => call before the ACCA’s Disciplinary Committee

Qualities expected of an accountant

Personal qualities Professional qualities

Reliability Independence

Responsibility Skepticism

Timeliness Accountability

Courtesy Social responsibility

Respect

Chapter summaryDefinition of business ethics

The analysis of right and wrong in business operations, also looking at personal and

corporate responsibilities in the business world.

What makes an occupation into a profession?

-Training to develop skills- Governance by a professional body

- Compliance with an ethical code- Certification before being allowed to practise

Examples of Codes of Ethics1. IFAC Codes of Ethics 2. ACCA Code of Ethics and Conduct

Determining whether a decision is ethical:

-Is it legal?- Is it contrary to a published code of ethics?

- Is it a fair use of power?- Would you be embarrassed if you had to justify the decision to your mother?

Review Questions

Which of the following are ethical propositions?

1. David is a good man.

2. Someone broke into my car last night.

3. Taxpayers should pay their taxes on time.