Business Management and Strategy (BMS): Chapter Summary Chapter No.

18: Bsuiness and Professional Ethics

CHAPTER NO. 18
BUSINESS AND PROFESSIONAL ETHICS
1 Professions and the public interest
1.1 The nature of a profession
The word ‘professional’ is associated with a highly-qualified group of individuals who carry out a particular
type of highly-skilled work.
The prime objective of regulating the profession of accountancy rests with the Institute of Chartered
Accountants of Pakistan (ICAP) which is governed through the Chartered Accountants Ordinance 1961.)
The professional body has the power to:
(i) admit new members to the profession
(ii) award qualifications to individuals who achieve a required standard of skill or competence
(iii) expel members from the profession, for unprofessional conduct.
Professionals and their clients
(i) There is a relationship of trust. The client can trust the professional to act in a proper way, in
accordance with a professional code of conduct.
(ii) There is an assurance that the professional has attained a minimum level of expertise and
competence.
(iii) The professional puts the client before himself.
1.2 Acting professionally
Professional behaviour means complying with relevant laws and obligations, including compliance with the
code of conduct
Professional behaviour is commonly associated with:
(i) acting with integrity, and being honest and straight-forward
(ii) providing objective opinions and advice
(iii) using specialist knowledge and skill at an appropriate level for the work
(iv) confidentiality: respecting the confidentiality of information provided by clients
(v) avoiding any action that brings the reputation of the profession into disrepute
(vi) compliance with all relevant laws and regulations.
1.3 Acting in the public interest
It is a responsibility of the accountancy profession ‘not to act exclusively to satisfy the needs of a particular
client or employer’.
Professional codes of ethics do not provide a clear definition, but it is usual to associate the public interest
with matters such as:
(i) detecting and reporting any serious misdemeanour or crime
(ii) protecting health and public safety
(iii) preventing the public from being misled by a statement
(iv) exposing the misuse of public funds and corruption in government
(v) revealing the existence of any conflict of interests of those individuals who are in a position of
power or influence
1.4 Influence of the accounting profession in business and government
Information about business and other organisations comes largely from accountants. Arguably,
accountancy has an influence on business and government that is both:
(i) continuous and
(ii) more extensive than any other profession.
Some of these professions are:
(i) Financial reporting
(ii) Auditing
(iii) Management accounting
(iv) Tax
(v) Consultancy
(vi) Public sector accounting
1.5 Public expectations of the accountancy profession
The general public has high expectations of the accountancy profession.
(i)
rely on accountants to ensure that financial reporting is reliable and ‘fair’, and that management
is not ‘cheating’ by presenting misleading and inaccurate figures in their accounts.

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Business Management and Strategy (BMS): Chapter Summary Chapter No. 18: Bsuiness and Professional Ethics

(ii) Auditors are also seen, by many members of the public (rightly or wrongly), as a safeguard
against fraud.
(iii) The public continues to believe that the accountancy profession is an ethical profession that
offers some protection to society against the ‘excesses’ of capitalism.
1.6 Accountants and acting against the public interest
A function of the professional accountancy bodies is to provide rules of conduct and ethical behaviour, with
the expectation that all members should follow the rules.
Employees come into a company bringing a notion of fairness and justice with them, which they expect to
see within the company.
Fairness and justice are abstract concepts and values that mean different things to different employees and
in different work situations. This is how different cultures (and different sets of rules) arise.

2 Corporate codes of ethics

Companies that acknowledge their ethical responsibilities and corporate social responsibility need to demonstrate
their genuine commitment to these ideals. To do this, they need to consider the implications of ethics and CSR for
their strategic planning and objectives.
2.1 Business ethics
The ethics of business conduct by individual companies depends largely on the ethical stance of the
company and its leaders.
Ethical issues: Ethics in business is generally associated with the following aspects of behaviour:
(i) Acting within the law.
(ii) Fair and honest dealing with suppliers and customers.
(iii) Acting fairly towards employees
(iv) Showing respect and concern for the communities in which the business entity operates.
(v) Showing respect for human rights, and refusing to deal with any entities that do not show
concern for human rights.
(vi) Showing concern for the environment and the need for sustainable businesses.
Ethical stance: An ethical stance is the extent to which an entity will exceed its minimum legal and ethical
obligations to stakeholders and society in general.
(i) Position 1: The company takes the view that its only interests should be the short-term
interests of its shareholders. Business decisions should be taken with satisfying shareholder
interests as the only objective.
(ii) Position 2: The company takes the view that the interests of its shareholders are the most
important concern
(iii) Position 3: The company recognises an obligation not only to its shareholders, but to other
stakeholder groups.
(iv) Position 4: The company has an ethical obligation towards society as a whole, and should be
a ‘shaper of society’, creating a fair and just society for everyone. Financial objectives should
be of secondary importance.
‘Ethical behaviour’ by companies is generally associated with an ethical stance around position 2 or position
3.
2.2 Consequences of unethical behaviour in business
Acting ethically reduces risk. There are several possible consequences of unethical behaviour.
(i) there is a risk of being ‘found out’.
(ii) When businesses act legally but in a way that the general public considers ‘immoral’, there is a
risk of action by the government to makes such action illegal.
(iii) Businesses that act in an unethical way are also exposed to reputation risk.
Reputation risk: Companies with a good reputation find it easier to win and keep loyal customers, and also
loyal employees. When a business reputation is damaged, there is a risk of losing customers to rival
companies. Companies that have been exposed to reputation risk include:
(i) companies accused of buying from suppliers in developing countries that use child labour or
slave labour
(ii) companies accused of polluting the environment
(iii) companies in the food and drugs industries accused of selling dangerous food products or
dangerous drugs.

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Business Management and Strategy (BMS): Chapter Summary Chapter No. 18: Bsuiness and Professional Ethics

2.3 The nature and purpose of a corporate code of ethics

A corporate code of ethics is a code of ethical behaviour, issued by the board of directors of a company. It is
a formal written statement, and should be distributed or easily available to all employees. The decisions and
actions of all employees in the company must be guided by the code.
If ethical codes are to be effective then:
(i) They must be strongly endorsed from the top of the company.
(ii) Training must be given.
(iii) The code must be kept up-to-date.
(iv) The code must be available to all
Reasons why companies might develop a code of ethics are progressive in nature.
Adherence to the code should be part of employees’ contracts and departure from the code should be a
disciplinary offence.
(i) Managing for compliance: The company wants to ensure that all its employees comply with
relevant laws and regulations, and conduct themselves in a way that the public expects.
(ii) Managing stakeholder relations: A code of ethics can help to improve and develop the
relations between the company and its stakeholders, by improving the trust that stakeholders
have in the company.
(iii) Creating a value-based organisation: A company might recognise the long-term benefits of
creating an ethical culture, and encouraging employees to act and think in a way that is
consistent with the values in its code of ethics.
Note on global organisations: A criticism of codes of ethics of global companies is that they often focus on
the company’s relationships with stakeholders in their ‘home country’ and do not give enough thought to
their operations in other countries.
2.4 The content of a corporate code of ethics
There is no standard format or content for a code of ethics, but a typical code contains:
(i) general statements about ethical conduct by employees
(ii) specific reference to the company’s dealings with each stakeholder group
General statements about ethical conduct
A code of conduct should specify that compliance with local laws is essential. In addition, employees
should comply with the policies and procedures of the company. The code might also include an
overview of business conduct.
It might also contain statements about the values of the company, such as:
(i) acting at all times with integrity
(ii) protecting the environment
(iii) the ‘pursuit of excellence’
(iv) respect for the individual
Dealings with stakeholder groups
(i) Employees: A code of ethics might include statements about:
(a) human rights
(b) equal opportunities for all employees
(c) refusal to tolerate harassment of employees
(d) concern for the health and safety of employees
(e) respect for the privacy of confidential information
(f) company policy on giving or receiving entertainment or bribes.
(ii) Customers: A code of ethics might include statements about
(a) fair dealing with customers
(b) product safety and/or product quality
(c) the truthfulness of advertisements
(d) respect for the privacy of confidential information about each customer.
(iii) Competitors: A code of ethics might include statements about:
(a) fair dealing with competitors
(b) the use of techniques for obtaining information about competitors
(iv) Shareholders: The key issue with shareholders is to maintain and develop trust and
confidence, which might be achieved through disclosure of information (openness and
transparency).
Breaching a corporate code of ethics
Breaching a company’s code of ethical conduct would be a disciplinary offence. An initial breach might
result in a verbal warning with subsequent breaches being addressed with written warnings and ultimately
suspension or redundancy. A problem arises however when:

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Business Management and Strategy (BMS): Chapter Summary Chapter No. 18: Bsuiness and Professional Ethics

(i) an employee’s supervisor or manager is involved in the illegal or unethical activity, or

(ii) the supervisor or manager has taken no action and has ignored the matter
In these situations, the employee would have to report his or her concerns through a different reporting
channel. In practice, this could mean reporting the matter to a director or a committee of the board of
directors. Some companies have established procedures that allow employees to report their concerns.
These are called ‘whistleblowing’ procedures, or ‘blowing the whistle’.
2.5 Whistleblowing
‘Whistleblowing’ means reporting suspicions of illegal or improper behaviour to a person in authority.
Practical considerations
An employee considering ‘blowing the whistle’ should think about the following before deciding to actually
blow the whistle:
(i) Are all the facts correct?
(ii) Is there sufficient evidence to justify blowing the whistle?
(iii) double-check they have thought about the situation objectively and with neutral emotion
(iv) Consider discussing events in confidence with an independent confidential third party
(v) impact that blowing the whistle may have on the whistleblower’s career.
(vi) Double-check company policy and whistleblowing procedures in the staff handbook.
(vii) whether there is scope to discuss events confidentially with the human resources department.
(viii) Is there an internal audit department
(ix) Consider if there is a legal obligation to report
Problems with whistleblowing
There are several problems with whistleblowing.
(i) At work, colleagues and managers might treat the individual with hostility, making it difficult for
the individual to continue in the job.
(ii) The allegations might be made for reasons of malice and dislike, or because there has been an
argument at work.
A problem facing companies is therefore:
(i) how to encourage reports of illegal or unethical behaviour, by protecting honest whistleblowers,
(ii) how to discourage malicious and unfounded allegations

3 Codes of ethics for accountants

3.1 The need for a professional code of ethics for accountants
Every professional accountancy body has issued a code of conduct and code of ethics for its members and
student members. Even when an individual works for a company or a firm of accountants that has its own
code of ethics, there is a need for a professional code of conduct. This is because accountants have a
professional duty to act in the public interest, and this aspect of professional behaviour is not covered by
corporate ethical codes.
3.2 The IESBA (IFAC) Code of Ethics for Professional Accountants and ICAP Code
The IESBA Code establishes a minimum world-wide code of ethical conduct for accountants. The IESBA
Code is divided into three parts:
(i) general principles and application of the code
(ii) guidelines for accountants in public practice
(iii) guidelines for accountants in business.
Accountants in practice have to deal in an ethical way with issues arising from the client relationship.
Accountants in business have to deal with ethical issues where they are employees of the organisation in
which the ethical problem has occurred.
Principles-based ethics codes and rules-based ethics codes
It would be possible for a regulatory body to issue a code of ethics for accountants that contains specific
rules about how they should act in specific situations. This would be a rules-based code of ethics. Rules-
based codes have several weaknesses:
(i) it is impossible to plan for every type of ethical problem that will arise, and make a rule in
advance of what course of action the accountant must take.
(ii) Over time, the type of situations (ethical dilemmas) that an accountant might face could
change, as the business environment changes.
(iii) Ethical views differ between countries and cultures.

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Business Management and Strategy (BMS): Chapter Summary Chapter No. 18: Bsuiness and Professional Ethics

ICAP’s Code of Ethics for Chartered Accountants

ICAP’s ‘Code of Ethics for Chartered Accountants’ (‘the Code’) is the code of ethics applicable to members
and students of ICAP. The Code contains similar provisions to the IESBA Code of Ethics for Professional
Accountants (which you would expect because ICAP has adopted the IESBA Code).
3.3 Fundamental principles
Professional accountants are required to comply with the following fundamental principles:
(i) Integrity
An accountant must be honest and straightforward in his professional and business dealings. This includes
a requirement for ‘fair dealing’ and a requirement to be truthful. A very important aspect of integrity is that
an accountant should not be associated with reports or any other provision of information where he or she
believes that:
(a) the information contains a materially false or misleading statement
(b) the information contains a statement that has been prepared and provided recklessly
(c) there are omissions or the information is presented in a way that makes the relevant
information difficult to see, with the effect that the information could be seriously misleading.
(ii) Objectivity
An accountant must not allow his professional or business judgement to be affected by:
(a) bias (personal prejudice)
(b) conflicts of interest
(c) undue influence from others
(iii) Professional competence and due care
An accountant has a duty to maintain his professional knowledge and skills at a level that enables him to
provide a competent professional service to his clients or employer. This includes a requirement to keep up
to date with developments in areas of accounting that are relevant to the work that he does. Accountants
should also act diligently in accordance with relevant technical and professional standards when doing their
work for clients or employer.
(iv) Confidentiality
Accountants must respect the confidentiality of information obtained in the course of their work. The
requirement to keep information confidential applies:
(a) in a social environment as well as at work
(b) after the accountant has moved to another job
There are some circumstances when the disclosure of confidential information is permitted or even required
by law.
(a) if the client (or employee) has given permission.
(b) Confidential information must be disclosed to the authorities in certain circumstances.
(c) The law might also require the disclosure of confidential information to the appropriate authorities.
(d) when the accountant has a professional right or duty, and disclosure is not prohibited by law.
(v) Professional behaviour
Accountants are required to observe relevant laws and regulations, and to avoid any actions that would
discredit the accountancy profession.

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