Introduction to Business

Ethics

Chapter III
Ethics Definition
Ethics Questions
• How do you approach issues of ethics and values?
• Are your approaches different in your personal and
professional lives?
• What are the ethical issues resulted from the current crisis?
• Have policymakers, regulators, businesses, educators and
even our society lost their value base?
• What is an ethical behavior?
• Are our ethical standards of public trust, honesty, sensitivity,
fairness and values absolute or do they change depending
on the context?
 Chapter Objectives:
• Present the definition of ethics in general and business ethics in particular.

• Recognize the need for a code of ethics that is upheld especially by setting the
right “tone at the top”.

• Become familiar with the SEC rules and regulations related to ethics.

• Provide an overview of listing standards and suggestions relating to ethics.

• Understand the board’s role in setting the company’s ethical codes.

• Recognize the benefits of and need for an ethical workplace.

• Identify incentive programs and their roles in promoting an ethical workplace.

• Illustrate that actions speak louder than words in promoting an ethical

workplace.

• Discuss the integration of business ethics into the business curriculum.

• Provide an example of proficient implementation of an ethical code by

examining the Defense Industry Initiatives on Business Ethics and Conduct.

Video ( Video)
 Key Terms
•Business ethics
•Code of Ethics
•Committee of Sponsoring Organizations
Of the Treadway Committee (COSO)
•Conference board
•Defense Industry Initiatives
on Business Ethics and Conduct
•Ethical Behavior
•Ethical Incentives
•Ethical Sensitivity
 Ethical Theories
There are several broadly accepted ethical theories.

- Consequentialist Theory

- Nonconsequentialist Theory

- The Individualist Dimension of Ethical Decision

- Collectivist Theory

- Metaethics

- Normative Ethics

- Business Ethics
 Definitions
• Business Ethics: The moral principles and ethical standards that
guide business behavior.
• Professional Ethics: A learning process of professional values,
ethics, codes of conduct and accountability to act in the best
interest of the profession, the public and the global society.
• Corporate Governance: An ongoing process of managing,
controlling, and assessing business affairs to create shareholder
value and protect the interests of other stakeholders.
• Forensic Accounting: the practice of rigorous data collection and
analysis in the areas of litigation support consulting, expert
witnessing, and fraud examination.
Ethics Triangle
Ethics
Sensitivity

Business
Ethics

Ethical Ethics
Behavior Incentives

Ethics sensitivity: Moral principles, workplace environment, gamesmanship,

loyalty, peer pressure, and job security that influence one’s ethical decisions.
Ethics incentives: Rewards, punishments, and requirements for ethical behavior
(e.g., tone at the top, AICPA code of professional ethics).
Ethics behavior: Doing “the right thing” rises above a rules-based mindset that
asks, “is this legal,” and adopts a more principles-based approach that asks, “is
this right?”
VIDEO (VIDEO)
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An Ethical Decision Process

• Define all facts and circumstances.

• Identify stakeholders.
• Identify stakeholders’ rights and
obligations in general and to each other.
• Identify alternatives and consequences.
• Choose superior alternative with respect to
consequences and/or rules.
Ethical Oath (VIDEO)
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Code of Professional Conduct
Principles • Ideal standards of ethical conduct

• Minimum standards of ethical

Rules of Conduct conduct stated as specific rules

• Interpretations of the rules by the

AICPA division of professional
Interpretations
ethics
• Published explanations and
Ethical Rulings answers to questions about rules
of conduct

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Principles
Basic tenets of ethical conduct:
• Responsibilities—Exercise sensitive professional and
moral judgment.
• Public interest—Honor the public trust.
• Integrity—Perform responsibilities with the highest
sense of integrity.
• Objectivity—Impartial, unbiased, and independent. Free
of conflicts of interest and independent in fact and
appearance.
• Due care—Diligent, competent, thorough, prompt.
• Scope and nature of services—Observe the principles
when considering the scope and nature of services
provided.
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 Professional Conduct
• AICPA Code of Professional Conduct

• State CPA Society Codes of Professional

Conduct

• State Boards of Accountancy

• Individual CPA firm Codes of Conduct

12
The SEC rule describes the term “code of ethics” as
written standards designed to deter wrongdoing and to
promote:

1. Full, fair, accurate, timely, and transparent disclosures in reports and

documents filed or submitted to the SEC and in other public
communications.
2. Honest and ethical conduct throughout the company including the
ethical handling of apparent or actual conflicts of interest between
personal and professional activities and relationships.
3. Accountability for compliance with the established code of ethics.
4. Compliance with applicable regulations and professional standards.
5. The timely and effective internal reporting of noncompliance and any
violations of the established code of ethics to an appropriate person or
persons designated in the code.

SEC. 2003. Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002 (January).
Available at: www.sec.gov/rules/final/33-8177.htm.

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The established codes of conduct and ethics
programs address the following:
• Avoidance and resolution of conflicts of interest between the
company and employee.
• Compliance with all applicable regulations.
• Emphasis on customer relations to enhance the company’s
reputation.
• Avoidance of improper use of the company’s confidential
information.
• Encouragement of whistleblowers to reveal dishonesty,
wrongdoings, and improper behavior.
 Ethics In Workplace

There is increased interaction among the board of directors,

audit committees, internal auditors, external auditors,
executives, and employees in general regarding ethical
conduct in the workplace..

IS THIS A RESULT OF SOX IMPLEMENTATION?

SOX is reported to have a positive impact on business codes

of ethics; however, OTHER elements are required to promote
competency and integrity among all participants.
Findings of Deloitte&Touche 2007
Survey on Ethics and Workplace
Key factors in promoting ethical workplace:

management behavior

direct supervisors
behavior
positive reinforcement

compensation (bonus
+salary)
behavior of peers
Findings of Deloitte&Touche
2007 Survey on Ethics and
Workplace
Reasons why people make unethical decisions:

lack of personal integrity

job dissatisfaction

financial rewards

pressure to meet goals

ignorance of code of
conduct
Findings of Deloitte&Touche 2007
Survey on Ethics and Workplace
Aspects that cause incentives conflicts:

high levels of stress

long hours

fast-paced environment

inflexible schedule

highly competitive
environment
Findings of Deloitte&Touche 2007
Survey on Ethics and Workplace
Results pertaining to questionable
behavior in the workplace environment:
stealing petty cash

cheating on expense
reports

taking credit for another

person’s
accomplishment
lying on time sheets
about hours worked

other results
Findings of Deloitte&Touche 2007
Survey on Ethics and Workplace
The majority believes that the following actions are
acceptable:

use company technology

for personal use
take a sick day when not
actually ill
date a subordinate

ask a colleague for

personal favour
THUS:
All organizations, regardless of their mission (e.g., profit oriented,
nonprofit) and size (large vs. small), should establish an
“organizational ethical culture”. The phrase “organizational
ethical culture” consists of three words:
(1) organization, which is defined as a group of individuals or
entities bound to achieve a shared goal;
(2) ethics, which is honorable behavior conforming to the norm of
the group; and
(3) culture, which is a pattern of shared beliefs adopted by the
group in dealing with its internal and external affairs.
 Business Ethics
Four different levels of business ethics have been identified based
on what type of business and how their actions are evaluated.

1. The society level, which defines ethical behavior and assesses

the effect of business on society
2. The industry level, which suggests that different industries
have their own set of ethical standards (e.g., chemical industry
vs. pharmaceutical industry)
3. The company level, under which different companies have their
own set of ethical standards
4. The individual manager level, at which each manager and other
corporate participants are responsible for their own ethical
behavior

CONSEQUENTLY, one feasible way to judge ethical behavior is

to focus on determinants of business ethics and behavior such
as corporate culture, incentives, opportunities, and choices.
 Business Ethics (Cont.)
Corporate Culture Companies should promote a spirit of integrity that
goes beyond compliance.

Incentives Individuals within the company tend to act according to

incentives provided to them in terms of rewards and
the performance evaluation process.

Opportunities Effective corporate governance, internal controls, and

enterprise risk management can reduce the
opportunity for unethical conduct.

Choices Individuals, in general, are given the freedom to make

choices and usually choose those that will maximize
their well-being.
SEC Rules on Corporate Code
of Ethics (Cont.)
The SEC extended code of ethics requirements are geared
toward both the company’s principal financial officers (SOX’s
Section 406) and principal executive officers (SOX’s Section
407). The SEC rules in implementing Section 406 of SOX
require public companies to disclose whether they have
adopted a code of ethics for their principal officers, including
principal executive officers, principal financial officers,
principal accounting officers, controller, or other personnel
performing similar functions in the annual report filed with the
SEC.
If the company has not adopted such a code of ethics, it must
disclose the reason for not doing so.
 Listing Standards
The listing standards of the NYSE further expanded on the
SEC rules by requiring listed companies to:
(1)adopt and disclose a code of business conduct and ethics
for directors, officers, and employees
(2) promptly disclose any waivers of the adopted code for
directors and executive officers.

Example: The NYSE listing standards recommend that each

company determine its own business conduct and ethics
policies, but provide an extensive list of matters that should
be addressed by the company’s code.
NASD ethics rules for Nasdaq-listed companies are similar to
those of the NYSE and further require the company’s adopted
code to provide for an enforcement mechanism and any
waivers of the code for directors or executive officers to be
approved
by the board and disclosed no later than the next periodic
report.
 Ethics Teaching in Business
School

The emerging corporate governance reforms have had a

positive impact on academic programs.

The goal of corporate governance and business ethics

education is to teach students their responsibilities and
accountability to their profession and society. Almost all
states require CPA candidates to pass an ethics exam before
licensing and report the ethics component in their continuing
education requirements. Almost all states require a minimum
amount of ethics education for their practicing CPAs.
Ethics in Institutions of Higher
Education
Academic integrity and ethical conduct by students and
faculty are important to the sustainable well-being and
reputation of institutions of higher education. This academic
integrity can be achieved when:
(1) there is an effective and fairly enforceable academic honor
code;
(2) faculty are willing to take proper action against suspected
cheaters;
(3) adequate research is conducted to identify factors that
affect academic integrity, including fundamental ethical
values; and
(4) ethics are integrated into the business curriculum, and
pedagogies are developed to teach and encourage adherence
to ethical values and conducts.
 Personal Ethics
In June 2005, the International Ethics Standards Board for
Accountants (IESBA), part of the International Federation of
Accountants (IFAC), issued its revised Code of Ethics for use
by professional accountants worldwide.

The key principles of the IESBA’s code of ethics are:

(1)integrity
(2)objectivity
(3)professional competence and due care
(4)confidentiality
(5)professional behavior
 Reporting Business Ethics and
Conduct

Section 406 of SOX requires public companies to disclose in

their annual financial statements the establishment (or lack
of) a corporate code of conduct.

Nevertheless, public companies may choose to report their

business ethics and conduct as a separate report to their
shareholders or as part of their regular filings with the SEC..

Hint: Look for the survey conducted by the Ethics and

Compliance Officer Association (ECOA) and salary.com (2006).
FINANCIAL REPORTING
INTEGRITY

Framework for Reporting with Integrity

 Conclusion
• Ethics are broadly described in the literature as moral
principles about right and wrong, honorable behavior
reflecting values, or standards of conduct. Honesty, openness,
responsiveness, accountability, due diligence, and fairness
are the core ethical principles.
• Business ethics are a specialized study of moral right and
wrong.
• An appropriate code of ethics that sets the right tone at the
top of promoting ethical and professional conduct and
establishing the moral structure for the entire organization is
the backbone of effective corporate governance.
• SEC rules require public companies to report significant
amendments or any waiver affecting specified officers
pursuant to the filing of their first annual report on their code
of ethics.
 Conclusion
• Corporate culture and compliance rules should provide
incentives and opportunities for the majority of ethical
individuals to maintain their honesty and integrity and provide
measures for the minority of unethical individuals to be
monitored, punished, and corrected for their unethical
conduct.
• Attributes of an ethical corporate culture or an integrity-
based culture are a sense of employee responsibility, freedom
to raise concerns, managers modeling ethical behavior and
expressing the importance of integrity.
• The company’s directors and executives should demonstrate,
through their actions as well as their policies, a firm
commitment to ethical behavior throughout the company and
a culture of trust within the company. Although a “right tone
at the top” is very important in promoting an ethical culture,
actions often speak louder than words.