Week 05 - Notes

Pre-read
Chapter 10 – Ethical Decision Making: Corporate Governance, Accounting and Finance

Corporate Governance

Corporate Governance is the structure by which corporations are managed toward the
objectives of fairness, accountability, and transparency. The structure will determine the
relationships between BOD, shareholders, and the firm’s management.

Gatekeepers refer to some professions such as accountant that act as “watchdogs” which
means to ensure that players who enter into the marketplace are playing by the rules. These
roles provide a source for rules from which we can determine how professionals ought to
act. They are bound by ethical duties as well. They evaluate companies’ financial statements
so that investors’ decisions are free from fraud and deception.

Gatekeeper between stockholders and executives: board of directors

Conflict of interest exists where a person holds a position that requires him to exercise
judgement on behalf of others, but where her or his personal interests/obligation conflict
with those of others

Example: excessive executives compensation

Fiduciary duties are legal duty to act on behalf of clients in their best interests and even
ahead of the person personal interest.

Sarbanes-Oxley Act of 2002 (SOX or SarbOx) regulating safeguards against unethical

behavior. Made in response to the Enron scandals of 2001 and enforced by SEC. One of the
main changes is that management assessment of internal controls are required to be
reported each year (Section 404).

European Union 8th Directive is just like Sarbanes-Oxley but applies to company traded in
EU exchange

Internal Controls are processes made internally to ensure compliance with financial
reporting laws and regulations. Affected by people at every level of organization

COSO or Committee of Sponsoring Organizations is a voluntary collaboration of professional

of audit and accounting organizations that seek to improve financial reporting through
standards called “Internal Control-Integrated Framework”. Elements of control structure
includes:
 Control Environment sets the tone or culture of a firm
 Risk Assessment: risks that might hinder the achievement of corporate adjective
 Control activities: policies and procedures that support the control environment
 Information and communications: directed at supporting the control environment
through fair and truthful transmission of information
  Ongoing monitoring to assess capabilities and uncover vulnerabilities

Going beyond the Law: Being an Ethical Board Member

The three duties of BOD:

Duty of care involves the reasonable care by a board member to ensure that the corporate
executives carry out their management responsibilities and comply with the law in the best
interests of the corporation.

Duty of Good Faith requires obedience of board members to be faithful to the

organization’s mission and not act inconsistent with the central goals of the organization.

Duty of Loyalty requires BOD to give undivided allegiance when making decisions affecting
the organization as they are renumerated by the company. This means that conflict of
interests is always solved in favor of the corporation.

Beyond the Law, There is Ethics

BOD has fiduciary duty to corporation and stockholders. But many people argue that the
BOD is the guardian of the firm’s social responsibility as well. Even if the act by the
management is of a questionable one ethically but still legal, the board can prohibit actions
to protect the long-term sustainability of the firm. Since unethical acts can negatively impact
stakeholders such as consumers or employees.

Conflict of Interest in Accounting and Financial Markets

Finance professionals greatest asset is his credibility. Treating clients fairly and building a
reputation for fair dealing

Whistleblowing
Disclosure of illegal or unethical activities to someone who is in position to prevent or
punish wrongdoing.
Can make someone seem disloyal, harm the business, and come at a significant cost to the
whistleblower.

Internal whistleblowing is preferred.

Internal mechanism should be effective: confidentiality, protect the rights of the accused
party, ethics hotlines

Ethical Duties of Accountant

Professional Duties of Accountant
Fundamental Principles of An Accountant
- Integrity = to be straight forward and honest
- Objectivity = to not allow bias/conflict of interest/undue influence to override judgements
- Professional Competence and Due Care = to maintain professional knowledge and skill to
ensure clients receive professional services + act diligently up to professional standards
- Confidentiality = respect confidentiality of information and not disclose it without consent
unless there is legal or professional duty
- Professional Behavior = to comply with laws and regulations and avoid conducts that might
discredit the profession

Trust is integral in the profession

Reputation of fair dealing is often a corporation’s greatest asset. Real or perceived conflict
of interests erode trust.

EP100: Section 300.1 to 300.15

Section 300