Introduction to Business Ethics

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 Behavior Ethics 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)

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)

Code of Professional Conduct Ideal standards of ethical conduct Minimum standards of ethical conduct stated as specific rules Interpretations of the rules by the AICPA division of professional ethics Published explanations and answers to questions about rules of conduct Principles Rules of Conduct Interpretations Ethical Rulings

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.

Professional Conduct AICPA Code of Professional Conduct State CPA Society Codes of Professional Conduct State Boards of Accountancy Individual CPA firm Codes of Conduct

The SEC rule describes the term “code of ethics” as written standards designed to deter wrongdoing and to promote: Full, fair, accurate, timely, and transparent disclosures in reports and documents filed or submitted to the SEC and in other public communications. 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. Accountability for compliance with the established code of ethics. Compliance with applicable regulations and professional standards. 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.

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

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.)

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: adopt and disclose a code of business conduct and ethics for directors, officers, and employees 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: integrity objectivity professional competence and due care confidentiality 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).

Framework for Reporting with Integrity Financial Reporting 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.

Introduction to Business Ethics