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Ethics
In general, ethics mean.
What God commands What our society or group says is right or wrong What a persons conscience says is right or wrong The behavioral science of discerning right and wrong

Morality
Concerned with the norms, values and beliefs embedded in social processes which define right and wrong for an individual or a community. (Crane and Matten). Ethics is concerned with the study of morality the analysis of what is right and wrong and the development of rules and principles that determine right and wrong for any situation (ethical theories).

ETHICS
The science of right and wrong. That branch of philosophy dealing with values relating to human conduct, with respect to the rightness and wrongness of certain actions and to the goodness and badness of the motives and ends of such actions. Ethics: a set of moral principles to guide behaviour

Why ethics is important

As ethical issues become more important to society in general, and an organizations customers in particular; organizations need to recognize the value of ethics. An organization failing to appreciate the importance of ethical issues will be out synch with its customers. Re-assuring the outside world, that as accountants think ethic is important

Management accountability
Fiduciary responsibility: Duty of faithful service to serve some external purpose and their managers have a duty to run them in a way that serves that purpose, whether it be to relieve distress (a charity), to keep the peace and manage the economy (a government), to promote the interests of its members (a trade union) or to make a profit (a business).

The unethical behaviour of a firm could harm many stakeholders

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Business objectives and management discretion

The stakeholder view of company objectives is that many groups of people have a stake or legitimate interest in what the company does. The consensus theory of company objectives was developed by Cyert and March. They argued that managers run a business, but do not own it, and they do not necessarily set objectives for the company, but rather they look for objectives which suit their own inclinations. Objectives emerge as a consensus of the differing views of different stakeholders, but they are not all selected or controlled by management.

Ethical code of conduct

Duty of managers to act in the interest of all the stakeholders Safety issues Avoid bribery, corruption, excessive gifts Confidentiality of customers, suppliers, and employees Should not misuse the authority for personal gain

Approaches to ethics

Ethics
Shareholder view
Ethics is bad for business

Ethical Principles
Ethical absolutism (dogmatic) one set of rights and wrong which never changes. Right and wrong are objective qualities that can be rationally determined and do not change regardless of the person/culture/environment/time/situation. Ethical relativism (pragmatic) context dependent and subjective. wide variety of ethical beliefs and practices what is correct in any given situations will depend on the conditions at the time. What is morally unacceptable by one person, culture, environment may be totally acceptable by a different person, culture, environment.

Stakeholder view Enlightened selfinterest

Ethics is good for business

The moral view

Comply with the law Provide employment Generate wealth

Ethics is right thing to do

Competitive advantage Above and beyond the law Wider investor base Moral duty Leave the world better place

Ethical Principles
Pluralism accepts that whilst different views exist on morality, a consensus on basic principles and rules in a certain context can, and should, be reached. Pluralists pursue consensus (agreement) in order to accommodate the needs of both the majority and the minority The pluralist solution is to cater for the needs of more than one stakeholder group without seriously compromising the interests of any individual group.

Ethical Principles
Deontology (non-consequential) based on the concept of duty, principles of obligation, irrespective of the consequences that will follow. Many philosophers have argued that certain core duties are imperatives, and as such will always apply, regardless of circumstances. They often have their foundations in religion or deeply embedded values, universally accepted by society. Teleology (consequential) whether a decision is right or wrong depends on the consequences or outcome of that decision. The end result of the action is the sole determining factor of its morality. (ends justify the means)

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Ethical Principles
Egoism Sometimes thought of as the view 'what is best for me?'. An action is morally right if the decision maker freely decides in order to pursue either their short-term desires or longer-term interests. The egoist will also do what appears to be right in society because it makes them feel better. Egoism does not always work because actions on all members of society cannot be determined.

Ethical Principles
Utilitarianism Sometimes taught as the idea of 'what is best for the greatest number?'. An action is morally right if it results in the greatest amount of good for the greatest number of people affected by that action. It applies to society as a whole and not the individual. It is valuable in business decisions because it introduces the concept of utility or the economic value of actions. It is highly subjective.

Ethical problems facing managers

Extortion. Foreign officials have been known to threaten companies with the complete closure of their local operations unless suitable payments are made. Bribery. This refers to payments for services to which a company is not legally entitled. Grease money. Multinational companies 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. Gifts. In some cultures (such as Japan) gifts are regarded as an essential part of civilized negotiation, even in circumstances where to Western eyes they might appear ethically dubious. Managers operating in such a culture may feel at liberty to adopt the local customs.

Social responsibility and businesses

Social responsibility action is likely to have an adverse effect on shareholders' interests:
(a) Additional costs such as those of environmental monitoring (b) Reduced revenues as a result of refusing to supply certain customers (c) Diversion of employee effort away from profitable activities (d) Diversion of funds into social projects

Specific environmental responsibilities

Environmental auditing: waste treatment, emissions Economic action: charges for environmental damage would be an incentive for mangers to avoid it. Accounting action: environmental reporting Ecological approach Quality management is applied using the principle of continuous improvement in environmental performance. Production is managed to minimize inputs of materials and energy.

Examples of social and ethical objectives

Employees:
A minimum wage Job security Good conditions of work Job satisfaction Promotion of diversity and equal opportunities A healthy and safe workplace

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Customers may be regarded as entitled to receive a safe product of good quality at a reasonable price. Suppliers may be offered regular orders and timely payment in return for reliable delivery and good service. Society as a whole
Control of pollution and use of sustainable resources Provision of financial assistance to charities, sports and community activities Not producing undesirable goods

CORPORATE CODES OF ETHICS

Corporate codes of ethics are published by private sector organizations in order to communicate their values and beliefs to stakeholders. These include:
customers, whose buying decisions may be influenced by ethical considerations shareholders, whose investment decisions may be influenced by ethical factors employees, who have to know the standards expected of them suppliers, who need to understand the expectations of their customers and also that they will be treated ethically during the course of the commercial relationship lobby groups, who may have specific interests in certain practices of the organisation the community in which the organisation is situated, which may seek reassurance that the organisation will act in its interest as an employer and as a good corporate citizen.

Contents of a code of ethics

Business ethics
The study of business situations, activities and decisions where (moral) issues of right and wrong are addressed (Crane and Matten) It is the application of ethical values to business behaviour.

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Personal ethics deriving from a person's upbringing, religious or non-religious beliefs, political opinions, personality and so on. Professional ethics (e.g. ACCA's code of ethics, medical ethics). Organisation cultures (e.g. 'customer first'). We discussed culture in an earlier chapter; culture, in denoting what is normal behaviour, also denotes what is the right behaviour in many cases. Organisation systems. Ethics might be contained in a formal code, reinforced by the overall statement of values.

Importance - Business
Increasing power and influence on society of organizations Stakeholder demands for greater accountability and ethical practice. Lack of formal business ethics training results in an inability to recognize ethical dilemmas and how to correctly manage the associated risks. Ethical practice must be seen as a driver for organizational and stakeholder wealth, profitability and resource management.

Importance - Business
Suggests a well run business. Ethical investment and fund management companies will only invest in ethically sound companies. Enhanced public profile. Easier to recruit and retain staff if they are working in an environment of good ethical behaviour. Easier to manage risk if ethics are top driven

Importance - Individual
Consumer and employee expectations have evolved over recent years Consumers may chose to buy ethical items 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

Leadership practices and ethics

Openness: Being full and complete in the provision and disclosure of information and reasoning behind decisions Trust: Relying on the judgments and information provided by other professionals, and embracing values that encourage others to rely on our judgments Honesty: Not only telling the truth, but being prepared to give complete information on which others can fully depend

Respect: Treating others with dignity and adopting a professional manner Empowerment: Ensuring that those who are entrusted with responsibilities have the authority to carry out the tasks necessary to fulfill their duties Accountability: Taking full responsibility for the outcomes of our work, including work carried out on our behalf by others

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The seven principles of public life

Selflessness Integrity Objectivity Accountability Openness Honesty Leadership

Managing Ethics
Compliance-based approach: primarily designed to ensure that the company acts within the letter of the law, and that violations are prevented, detected and punished. Integrity-based programmes: concern for the law with an emphasis on managerial responsibility for ethical behaviour. Integrity strategies strive to define companies' guiding values, aspirations and patterns of thought and conduct. Whistle blowing

Accountants and ethics

A responsibility to influence ethical behaviour at work. A duty to act in the public interest. As an accountant, your values and attitudes flow through everything you do professionally.

Why should an accountant behave ethically?

(a) Ethical issues may be a matter of law and regulation and accountants are expected to apply them (b) The profession requires members to conduct themselves and provide services to the public according to certain standards. By upholding these standards, the professions reputation and standing is protected (c) An accountants ethical behaviour serves to protect the public interest

Profession or occupation?
A profession refers to an occupation (the principle activity that one does to earn a living) which involves has the following characteristics:
- Significant period of academic qualification. - Requirement to pass prescribed examinations. - Extensive theoretical knowledge and skills. - Technical training and practical experience. - Certificate or license to practice. - Membership to a professional body. - Code of professional conduct and ethics.

THE ROLE OF REGULATORY AND PROFESSIONAL BODIES

Have laws at supra-national level Laws against discrimination in the workplace and selling high interest consumer loans to vulnerable people. Most professional bodies set ethical standards to which all their members are expected to adhere. Failure to adhere may result in censure or even removal from membership. IFAC and ACCA

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Fundamental principles of the ACCA Code of Ethics and Conduct

Integrity: Members should be straightforward and honest in all professional and business relationships. Objectivity: Members should not allow bias, conflicts of interest or undue influence of others to override professional or business judgments.

Professional competence and due care: Members have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. Members should act diligently and in accordance with applicable technical and professional standards when providing professional services.

Confidentiality: Members should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority, or unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of members or third parties.

Professional behaviour: Members should comply with relevant laws and regulations and should avoid any action that discredits the profession. The ACCA Rulebook goes further, and states that members should behave with courtesy and consideration towards all with whom they come into contact in a professional capacity. Should respect laws and regulations and not do anything that could discredit the accountancy profession.

IFAC Code of ethics

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Personal qualities expected of an accountant

Professional qualities expected of an accountant

Conflict of interest
A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other Members and firms should not accept or continue engagements in which there are, or are likely to be significant conflicts of interests between members, firms and clients. Should apply safeguards such as disclosure against the threat.

Self-interest threat
The threat that auditors act in their own personal interests (or are believed to be doing so). This may occur as a result of the financial or other interests of a professional accountant or of an immediate or close family member Examples include:
owning shares in their client receiving excessive gifts or hospitality from clients receiving excessive fees from a single client having personal or business relationships with clients audit fees that are calculated in a way that might encourage unethical behaviour by the auditor.

Self interest threat

Financial interest Close business relationships Employment with client Partner on client board Family and personal relationships Gifts and hospitality Loans and guarantees Over due fees High percentage fees Lowballing recruitment

Self review threat

When an assurance firm provides services other than assurance services to an assurance client Recent service with assurance client, general services, preparing accounting records and financial statements, valuation services, tax services, internal audit services, corporate finance and other services such as IT, temporary staff cover, litigation support, legal services etc Book-keeping, financial information systems design and implementation, appraisal, valuation services, internal audit, actuarial service, management functions, human resource, broker-dealer services, legal services (SOX)

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Advocacy threat
Where the assurance firm is in a position of taking the clients part in a dispute or somehow acting as their advocate By taking this position, they may be seen to be on the client's side, rather than being independent Representing an audit client in a legal case or tax enquiry Taking legal action against a client, or being sued by a client

Familiarity threat
Where independence is jeopardized by the audit firm and its staff becoming over familiar with the client and its staffs Auditors might deliberately or accidentally put too much trust in their client and not be skeptical enough, leading to under-auditing Where there are family and personal relationships between client/firm Employment with assurance client Recent services with assurance client Long association with assurance client

Intimidation threat
When members of the assurance team has reason to be intimidated by client staff Close business relationship Family and personal relationship Litigation Assurance staff members move to employment with client

Self-interest threat - when the auditor on the engagement team could benefit in some way or form (financially for example) with the client Familiarity threat - when the auditor has some form of a close relationship with the client (be it the top management or employees, or the firm) which may cause them to be generous and sympathetic when assessing the client Intimidation threat - when the auditor is deterred from acting in an objective, professional manner as a result of threats (real or not) from the client Self-review threat - when the auditor is hired to review/evaluate any product or judgment that they themselves were responsible for preparing (from a previous engagement) in order to reach a conclusion Advocacy threat - when the auditor promotes the client (their business, the client themselves, etc) to the point that objectivity may be (perceived) to be impaired

Actual and threatened litigations

When the client threatens to sue or actually sues the assurance firms for work done previously. This could result in:
Risk of losing the client Bad publicity If they were found negligent would result in more problems

To avoid such litigations, following factors could be considered:

The materiality of litigation The nature of assurance engagement Whether litigation relates to a prior assurance engagement

Safeguards could be:

Disclosing to audit committee nature and extent of litigation Removing specific affected members from team Involving additional professional accountant on the team to review work

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Second opinions
When the audit client is unhappy with a proposed audit opinion, and seeks a second opinion from a different firm of auditors Second audit firm cant give a formal audit opinion If a different firm of auditors indicates to someone elses client that a different opinion can be acceptable, then appointed auditors may be under pressure to change their opinion The second firm should ensure they seek permission to communicate with the existing firm

Conflicts of interest arise from various sources. The accountant may be asked to:
take a decision on a matter in which the individual has a personal involvement, such as where the accountant has a family or personal relationship with the client advise a company that is in direct competition with an existing client support two clients who are in competition with one another.

In times of such a conflict:

The ACCA Code provides clear guidance members should not accept engagements in which such conflicts arise, or even where there is a possibility of such conflicts arising. Members should evaluate the threats arising from conflicts and apply relevant safeguards against the threats materializing. If in doubt, the accountant should disclose the conflict to relevant parties.

Safeguards
Education, training and experience requirements CPD requirements Corporate governance codes Professional standards Strong internal controls Disciplinary processes Quality control procedures Consultation with another appropriate professional accountant

WHY HAVE A CODE OF ETHICS?

to define accepted/acceptable behaviours; to promote high standards of practice; to provide a benchmark for members to use for self evaluation; to establish a framework for professional behaviour and responsibilities; as a vehicle for occupational identity; as a mark of occupational maturity.

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CONSEQUENCES OF UNETHICAL BEHAVIORS

Criminal charges and/or fines; Lawsuits; Ruined careers; Injured organization reputation; Wasted time; Low morale; Recruiting difficulties; Oppressive legislation; Fraud and scandals.

Ethical dilemmas
These are situations where two ethical values or requirements seem to be incompatible. They can also arise where two conflicting demands or obligations are placed on an individual There is no one situation that is ethical or morally right Such situations could be very difficult to solve

Ethical dilemmas
Ethical dilemmas arise when the accountant has to consider two or more seemingly incompatible ethical obligations. For example:
he may be asked by a manager to remain silent about certain matters that would have an adverse impact on the financial accounts of an organisation, thereby testing the accountants loyalty to his manager on the one hand, and his responsibilities as a professional accountant on the other he may consider that the policies of his employer are unethical and may find it difficult to reconcile personal values with those of the organisation he may be advising a long-standing client who is also a personal friend, only to discover that one of the clients family is behaving dishonestly, thereby playing the bond of friendship against the professional duty to give objective, truthful advice.

Reasons for ethical dilemma

As a result of tension between:
Societal values: the law Personal values: values and principles held by an individual Corporate values: values and principles held by organization Professional values: values and principles of the professional body that the individual is a member of

ACCAs conflict resolution procedures

Under the ACCAs Code of Ethics and Conduct, professional accountants should consider: The relevant facts The ethical issues involved Related fundamental principles Established procedures of the firm The action that can be followed and the probably outcome The alternative courses of action and their consequences The internal and external sources of consultation (e.g. ethics partner; audit committee) available

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