Ch4 Ethical considerations

2004 Fall ACCA Paper 1.3

Study guide Define business ethics Importance of ethics to the organisation and to the individualInfluences that determine whether behaviour are ethical or unethicalFactors distinguishing a professionRole of accountants in promoting ethical behaviourPurposes of IFAC and ACCAs codes of ethics(conduct)

2004 Fall ACCA Paper 1.3

1 Framework of rulesRules needed when individuals worked togetherIdea of what is right and wrongFurther rulesLawsBusiness law needed by Industrialisation

2004 Fall ACCA Paper 1.3

Sources of rules Rules that regulate behaviour of individuals and businessesLaws: minimum level of behaviour requiredNon-legal regulations: higher level of behaviourEthical behaviour: highest level of behaviour that society expects.The relations of the three levels: p141

2004 Fall ACCA Paper 1.3

2 Management accountabilityAll managers have a duty of faithful service to the external purpose of the organisation (fiduciary responsibility), especially managers at the strategic apex.There is a scalar chain of authority and accountability that runs hierachically up and down the organisation.Junior managers are accountable to senior managersStrategic apex is accountable to some external entity on behalf of which it manages the org(p142 question).

2004 Fall ACCA Paper 1.3

Objectives of commercial organisationGeneral objective of a commercial organisation is to make a profit.Its the duty of managers of a commercial org. to seek to attain the organisations goal.Managers need not be actually corrupt in order to fail in their fiduciary duty.

2004 Fall ACCA Paper 1.3

Business ObjectivesStakeholder view of company objectives: The interests of people other than owners should be servedCompromise or balance of various stakeholders interests is requiredConsensus theory of company objectives:Consensus of the differing views of shareholders, managers, employees, suppliers, customers and society at largeNot all selected or controlled by management.

2004 Fall ACCA Paper 1.3

3 Ethical environmentEthics is a set of moral principles to guide behaviour.Ethical environment consists of a set of well-established rules of personal and organisational behaviour.The certainty of legal rules does not exist in ethical theory.

2004 Fall ACCA Paper 1.3

Ethical principlesEthics based on consequences/Utilitarianism (Jeremy Bentham)Judges actions by reference to their outcomesChoose the action that is likely to result in the greatest good for the greatest number of people.Ethics based on duty/deontology (Kant) Behaviour should be governed by absolute moral rules that apply in all circumstances.Ethics based on rights and virtues If people cultivate virtue, their behaviour is likely to be inherently ethicalManagers should attempt to incorporate such virtues as firmness, fairness, objectivity, forethought, loyalty and so on in daily decision-making.*Kaplan: +motivation+ guiding principles

2004 Fall ACCA Paper 1.3

(Kaplan) how can ethics of a business decision be judged?If an action is illegal, it is almost certainly unethicalCriteria to be used:Is it legal?Is it contrary to companys code of ethics?Is it contrary to any other published official code of ethics?Would you mind other people knowing?Who is affected by the decision? Would they regard it fair?

2004 Fall ACCA Paper 1.3

3.5-3.7:Influences determining the ethical environmentSocial attitudePreserving and improving quality of life; reversing the spread of pollution; protecting social minorities; respect for environmentBusiness ethicsProducts and production payment by companies to government or officialsExtortion; bribery; grease money; giftsSocial responsibilitiesLikely to have an adverse effect on shareholders interests by additional cost, reduced revenues, diversion of effort and diversion of fundsBut in shareholders interests in long-term

2004 Fall ACCA Paper 1.3

(Kaplan) why business ethics is important?Important to the org.Good ethics should be seen as a driver of profitability rather than a burden on businessAn ethical framework is part of good corporate governanceInvestors are reassured about the companys approach to risk managementEmployees will be motivated in an good ethical environmentImportant to individualConsumers and employees

2004 Fall ACCA Paper 1.3

3.8Environmental responsibilitiesEnvironmental auditingEconomic actionAccounting actionEcological approachProductionquality

2004 Fall ACCA Paper 1.3

Social and ethical objectivesEmployeesMinimum wage, job security, good working condition, job satisfaction, equal opportunitiesCustomersSafe product of good quality, reasonable priceSuppliersRegular orders, timely paymentSociety at largeControl of pollution, charities and community activities* (Kaplan) ethical issues can be found throughout al aspects of business operations, such as accounting, production, sales and marketing, HRM issues

2004 Fall ACCA Paper 1.3

R-36: #6Which of the following would raise ethical issues for a manufacturer of fast-moving consumer goods?A. the materials used in manufacture of the goodsB. the quality of the goodsC. how the goods are advertisedD. how much its raw materials suppliers pay their staffE. how the goods are packaged

2004 Fall ACCA Paper 1.3

4 Ethics in organisationEthics in organisations relates to social responsibility and business practiceEthical systemsPersonal ethicsProfessional ethicsOrganisation culturesOrganisation systemsSenior managers have a role in setting the ethical standard; they decide priorities; they set an example.

2004 Fall ACCA Paper 1.3

Approaches to managing ethics(Lynne Paine)Compliance-based/rule-basedCompany acts within the letter of the lawViolation are prevented, detected and punishedSuggesting that bureaucratic control is necessaryIntegrity-based/principle-based Emphasis on managerial responsibility for ethical behaviourMoral thoughts and actions integrated into the day-to-day operationsRelying on cultural control

2004 Fall ACCA Paper 1.3

5 Accountants and ethicsReasons for accountants to behave ethically:Ethical issues may be a matter of law and regulationEthical issues may be requirement of professionEthical behaviour serves to protect the public interestApproaches to accountancy ethicsCode of ethics/codes of conduct: guidance clarifying what behaviour is ethical and what is not.*(Kaplan) At many boards of directors, it is only the professional accountant who belongs to a profession and therefore has a special role in promoting ethical behaviour throughout the business.

2004 Fall ACCA Paper 1.3

(Kaplan) How is a Profession distinguished from other occupation?Mastering of specialised skillsGovernance by professional associationCompliance with an ethical codeProcess of certification before going into practise

2004 Fall ACCA Paper 1.3

6 Code of ethics for accountantsIFAC its mission is to develop the high standards of professional accountants and enhance the quality of services they provideIts ethics committee established a code of ethicsACCA released its own code of ethics, designed to align to the IFAC code* (Kaplan) All registered students, affiliates and members of the ACCA are required to comply with the Code. An ACCA member breaching of any of the ethical principles may be admonished, fined, suspended or excluded from membership.

2004 Fall ACCA Paper 1.3

Five fundamental principles of the ACCA Code of Ethics and ConductIntegrity: honesty, fair dealing and truthfulnessObjectivity: free from biasProfessional competence and due care: having accepted an assignment, you have an obligation to carry it out to the best of your ability, in the clients best interests and within reasonable timescales, with proper regard for the standards expected of you as a professional.Confidentiality: not using or disclosing information given to you by clients in the course of your workProfessional behaviour: upholding the reputation of your profession

2004 Fall ACCA Paper 1.3

R-37:#9While out to lunch, you run into a client at the sandwich bar. In conversation, she tells you that she expects to inherit from a recently deceased uncle, and asks you how she will be affected by inheritance tax, capital gains tax and other matters- which you have not dealt with, in detail, for some years.Which of the principles of the ACCA Code of Ethics is raised by this scenario?

2004 Fall ACCA Paper 1.3

Personal qualities expected ReliabilityResponsibilityTimelinessCourtesy Respect

2004 Fall ACCA Paper 1.3

Professional qualities expectedIndependence: both Independent in mindIndependent in appearance: be seen to be independent, demonstrate your independence ScepticismAccountabilitySocial responsibility

2004 Fall ACCA Paper 1.3

R-37:11You have been asked to work on a major investment decision that your company will be making, and discover that your brother-in-law is the managing director of a firm that may benefit from the outcome of the decision. You have no intention of allowing this to influence the advice you give your firm, and you know that your brother-in-law will not try to influence you in any way.What professional quality would make you consider handing this task to a colleague, or otherwise raising questions with your superiors?

2004 Fall ACCA Paper 1.3