Republic Central Colleges

Governance, Business Ethics, Risks Management and Internal Control

Module 6 – Common Unethical Practices of Business Establishments & Ethical Dilemma
MODULE 6 – COMMON UNETHICAL PRACTICES OF BUSINESS ESTABLISHMENTS & ETHICAL DILEMMA
COMMON UNETHICAL PRACTICES OF BUSINESS:
1. MISREPRESENTATION - A misrepresentation is a false statement of a material fact made by one party which affects the
other party's decision in agreeing to a contract or agreement.
a. DIRECT MISREPRESENTATION – it is characterized by actively misrepresenting about the products or customers.
i. DECEPTIVE PACKAGING - In deceptive packaging the product is so packed that it misleads the customer
on various fronts (in terms of quantity, size, shapes, content etc.). It is generally used by the companies to
attract the consumers and make them buy their products by giving them a feeling which is opposed to the real
packaging of the products.
Ethical issues which may arise is the deceptive packaging is that the companies are taking their customers
for a ride by showing them something else than what they are selling. Secondly, a consum er ends up paying
more or less than they the amount they are supposed to pay.
ii. MISBRANDING OR MISLABELING – Misbranding is the practice of making false statements on the label of
a product or making its container similar to a well-known product for the purpose of deceiving the customer
as to the quality and/or quality of a product being sold.
iii. FALSE OR MISLEADING ADVERTISING - Misleading advertising occurs when, in the promotion of a product
or any business interest, a representation is made to the public that is false or materially misleading. If a
representation could influence a consumer to buy the product or service advertised, it is material. To determine
whether an advertisement is misleading, the courts consider the "general impression" it conveys, as well as
its literal meaning.
iv. ADULTERATION – is the unethical practice of debasing a pure or genuine commodity by imitating or
counterfeiting it, by adding something to increase its bulk or volume, or by substituting an inferior product for
a superior one for the purpose of profit or gain.
v. WEIGHT UNDERSTATEMENT OR SHORT WEIGHING – the weighing scale is tampered with or something
unobtrusively attached to it so that the scale registers wore than the actual weight.
vi. MEASUREMENT UNDERSTATEMENT OR SHORT MEASURMENT – the measuring stick or standard is
shorter than the real length or smaller in volume than the standard.
vii. QUANTITY UNDERSTATEMENT OR SHORT NUMBERING – the seller gives the customer less than the
number asked or paid for.
b. INDIRECT MISREPRESENTATION – is characterized by omitting adverse or unfavorable information about the
product or service.
i. CAVEAT EMPTOR – “Let the buyer beware”. Under this scheme, the seller is not obliged to reveal any
defect in the product or service he is selling. It is the responsibility of the buyer to determine for himself of
any defect in the product or service.
ii. DELIBERATE WITHHOLDING OF INFORMATION – it is when the seller deliberately withhold significant
information for the business transaction.
iii. PASSIVE DECEPTION – it involves withholding some of the information or incomplete disclosure of
information, with the intention of misleading clients about the product or service.
2. OVER PERSUASION – Persuasion is the process of appealing to the emotions of the prospective customer and urging him to
buy an item of merchandise he needs.
COMMON INSTANCES OF OVER PERSUASION
1. Urging customers to satisfy a low priority need for merchandise
2. Playing upon intense emotional agitation to convince a person to buy
3. Convincing a person to buy what he does not need just because he has the capacity or money to do so
CORPORATE ETHICS

1. SOME UNETHICAL PRACTICES OF THE BOARD OF DIRECTORS

a. PLAIN GRAFT – it is when the Board of Directors help themselves to the earnings that otherwise would go to other
stockholders. This is done by voting themselves and the executive officers huge per diems, large salaries, big bonus
that doesn’t commensurate to the value of their services. One more strategy is to approve a purchase of goods or
services with higher price. The portion or percentage of the purchase value will be given to them.
b. INTERLOCKING DIRECTORSHIP – it is often practiced by a person who holds directorial positions in two or more
company that do business with each other. This practice may involve conflict of interest and can result to fraudulent

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J. Sigua, CPA
 Republic Central Colleges
Governance, Business Ethics, Risks Management and Internal Control
Module 6 – Common Unethical Practices of Business Establishments & Ethical Dilemma
transactions. Being directors of both companies who are parties in the transaction, his decisions may involve
personal interest and could lead to betrayal or dishonesty on the eyes of the shareholders.
c. INSIDER TRADING – it occurs when a person with access to confidential information uses that information to
transact with other businesses and may be used due to personal interest.
d. NEGLIGENCE OF DUTY – A failure of the members of the Board of Directors than breach of trust is neglect of
duties.
2. SOME UNETHICAL PRACTICES OF EXECUTIVE OFFICERS AND LOWER LEVEL MANAGERS
a. CLAIMING PERSONAL EXPENSES AS BUSINESS EXPENSES – expenses of Managers or Top Level Managers
may ask for reimbursement of expenses which they claimed as business expenses but were actually used for their
personal interest and benefit.
b. HAVING EMPLOYEES DO WORK UNRELATED TO THE BUSINESS – Managers and executive officers may ask
employees to do personal things for them on company time.
c. LOOSE OR INEFFECTIVE CONTROLS – Managers do not provide adequate controls to remove temptation and to
prevent or discourage employees from engaging in unethical practices. A manager indirectly betrays the trust places
on him by higher executive officers if the administrative and accounting controls in his office are so weak or
ineffective.
d. UNFAIR LABOR PRACTICES
e. MAKING FALSE CLAIMS ABOUT LOSSES TO FREE THEMSELVES FROM PAYING THE COMPENSATION
AND BENEFITS PROVIDED BY LAW
f. MAKING EMPLOYEES SIGN DOCUMENT SHOWING THAT THEY ARE RECEIVING FULLY WHAT THEY ARE
ENTITLED TO UNDER THE LAW WHEN IN FACT THEY ARE ONLY RECEIVING A FRACTION OF THEY ARE
SUPPOSED TO GET.
g. SEXUAL HARASSMENT – when a person having authority influence or moral ascendency over another in a work
place demands, requests or otherwise requests sexual favor from the other regardless of whether the demand,
request or requirement for submission is accepted or not by the object.
3. SOME UNETHICAL PRACTICES OF EMPLOYEES
a. CONFLICTS OF INTEREST – a conflict of interest arises when an employee who is duty bound to protect and
promote the interests of his employer violates this obligation by getting himself into a situation where his decision or
actuation is influenced by what he can gain personally from it rather than what his employer can gain from it.
b. DISHONESTY – It involves the employee’s honesty as he carries out his assigned duties un the office.
ETHICAL DILEMMA – is a situation a person faces in which a decision must be made about the appropriate behavior.
RESOLVING ETHICAL DILEMMA APPROACH
1. Obtain the relevant facts
2. Identify the ethical issues from the facts
3. Determine who is affected by the outcome of the dilemma and how each person or group is affected.
4. Identify the alternatives available to the person who must resolve the dilemma
5. Identify the likely consequences of each alternative.
6. Decide the appropriate action.
CASE STUDY:
FACTS:
Bert Cruz has been working for 6 months as a staff assistant for a law firm Alvendia and Castro. Currently he is assigned to the case of
Ryan Manufacturing Company under the supervision of Carlos Reyes, an experienced senior lawyer. There are three junior legal
assistants assigned to the case, including Carlos and more experienced assistant, Martha Sy.
During lunch on the first day, Carlos says, "It will be necessary for us to work a few hours on our own time to make sure we come in on
budget. This case isn't very profitable anyway, and we don't want to hurt our firm by going over budget. We can accomplish this easily
by coming in a half hour early, taking a short lunch break, and working an hour or so after normal quitting time. We just won 't write that
time down on our time report.”
Bert recalls reading in the firm's policy manual that working hours and not charging for them on the time report is a violation of Alven dia
and Castro employment policy. He also knows that seniors are paid bonuses, instead of overtime, whereas staffs are paid for o vertime
but get no bonuses.

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J. Sigua, CPA
 Republic Central Colleges
Governance, Business Ethics, Risks Management and Internal Control
Module 6 – Common Unethical Practices of Business Establishments & Ethical Dilemma
Later. when discussing the issue with Martha, she says, "Carlos does this on all of his job. He is likely to be our firm's ne xt manager. The
partners think he is great because his job always come in under budget. He rewards us by giving us good engagement evaluations,
especially under the cooperative attitude category. Several of the other senior staff follow the same practice."
ETHICAL ISSUE:
Is it ethical for Bert to work hours and not them as hours worked in this situation?
WHO IS AFFECTED AND HOW IS EACH AFFECTED?
There are typically more people affected in situations in which ethical dilemmas occur than would normally be expected. The following
are the key persons involved in this situation:
WHO HOW
1. Being asked to violate firm policy
2. Hours of work will be affected
BERT 3. Pay will be affected
4. Performance evaluations may be affected
5. Attitude about firm may be affected.
1. Being asked to violate firm policy
2. Hours of work will be affected
MARTHA 3. Pay will be affected
4. Performance evaluations may be affected
5. Attitude about firm may be affected.
1. Success on engagement and in firm may be affected.
CARLOS
2. Hours of work will be affected.
1. Stated firm policy is being violated.
2. May result in under billing clients in the current and future engagements.
ALVENDIA AND CASTRO
3. May affect the firm's ability to realistically budget engagements and bill clients.
4. May affect the firm's ability to motivate and retain employees.
1. May result in unrealistic time budgets.
STAFF ASSIGNED TO RYAN
2. May result in unfavorable time performance evaluations.
MANUFACTURING IN THE FUTURE
3. May result in pressures to continue practice of not charging for hours worked
1. Following the practice of this engagement may motivate others to follow the
OTHER STAFF IN FIRM
same practice on other engagements.

AVAILABLE ALTERNATIVES
1. Refuse to work the additional hours.
2. Perform in the manner requested.
3. Inform Carlos that he will not work the additional hours or will charge the additional hours to the engagement.
4. Talk to manager or partner about Carlos request.
5. Refuse to work on the engagement.
6. Quit working for the firm.
Each of these options includes a potential consequence, the worst likely one being termination by the firm.
CONSEQUENCES OF EACH ALTERNATIVE
In deciding the consequences of each alternative, it is essential to evaluate both the short- and long-term effects. There is a natural
tendency to emphasize the short term because those consequences will occur quickly, even when the long -term consequences may be
more important. For example, consider the potential consequences if Bert decides to work the additional hours and not report them. In
the short term, he will likely get good evaluations for cooperation and perhaps a salary increase. In the longer term, what w ill be the effect
of not reporting the hours this time when conflicts arise?
Consider the following similar ethical dilemmas Bert might face in his career as he advances:
1. A supervisor asks Bert to work 3 unreported hours daily and 15 unreported hours each weekend.
2. A supervisor asks Bert to initial certain procedures as having been performed when they were not.
3. Bert concludes that he cannot' be promoted to manager unless he persuades assistants to work hours that they do not record.
4. Management informs Bert, who is now a partner, that either the company gets a P400,000 legal fee or the company will change
lawyers.
5. Management informs Bert that the legal fee will be increased P50,000 if Bert can find a plausible way to increase probability or
writing the case.
APPROPRIATE ACTION
Only Bert can decide the appropriate option to select in the circumstances after considering his ethical values and the likel y consequences
of each option. At one extreme, Bert could decide that the only relevant consequence is the potential i mpact on his career. Most of us
would conclude that Bert is an unethical person if he follows that course. At the other extreme, Bert can decide to refuse to work for a
firm that permits even one supervisor to violate firm policies. Many people would consi der such an extreme reaction naïve.

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J. Sigua, CPA