Under Directive 2014/95/EU, large companies have to publish reports on the

policies they implement in relation to

 environmental protection
 social responsibility and treatment of employees
 respect for human rights
 anti-corruption and bribery
 diversity on company boards (in terms of age, gender, educational and
professional background)
Why is the independence of external auditors so important?

(a) Shareholders and other stakeholders need a trustworthy record of directors' stewardship to be able
to take decisions about the company. Assurance provided by independent auditors is a key quality
control on reliability.
(b) An unqualified report by independent external auditors on the accounts should give them more
credibility, enhancing the appeal of the company to investors.
(c) A lack of independence may mean that an effective audit is not done. Thus the shareholders are not
receiving value for the costs of the audit.

A lack of independence may lead to a failure to fulfil professional requirements. Failure to do this
undermines the credibility of the accountancy profession and the standards it enforces.

Question AAA model

Cadge is a clothing manufacturer based in Europe that supplies various large retail groups. Over the last
two years it has suffered falls in profits due to the loss of a couple of large contracts and a general fall in
demand for its clothes. Industry opinion is that Cadge has failed to innovate sufficiently in its clothing
designs.
A few days ago an unknown factory owner based outside Europe contacted Cadge's Design Director out of
the blue. He introduced himself only as 'Mr Sim', and offered to sell – for what appeared to be a
reasonable sum of money – the new up and coming season's designs belonging to one of Cadge's key
competitors who was using Sim's factories to manufacture its goods. If these designs could be purchased
by Cadge and launched onto the market before the competition could launch theirs, Cadge's profitability
for the coming year could significantly increase.
Required
Analyse, using the American Accounting Association model, the decision of whether to accept Mr Sim's
offer.

Answer

What are the facts of the case?

The facts are that the company has been offered some designs that appear to have been stolen.
What are the ethical issues in the case?
The ethical issue is whether to gain a business advantage by using designs that belong to someone else.
What are the norms, principles and values related to the case?
Accepting the offer is likely to be illegal in Cadge's home country or illegal under international design
protection laws. Even if the action could be justified as legal, it would demonstrate a lack of honesty and
 integrity if Cadge used designs that belonged to someone else whom it had not paid.
What are the alternative courses of action?
1 Reject Mr Sim's offer.
2 Accept Mr Sim's offer, pay Mr Sim money and use the designs.
What is the best course of action that is consistent with the norms, principles and values identified in
Step 3?
The best course of action is Option 1, as accepting the designs would be dishonest. The directors would need
to decide whether to have no further dealings with Mr Sim, or to whistleblow on him to the competitors.
What are the consequences of each possible course of action?
1 Cadge will not be able to gain a competitive advantage.
2 Cadge may be able to gain a temporary advantage, but the consequences if the transaction is
discovered could be severe. Cadge's customers are likely to view this activity unfavourably and this
could jeopardise existing contracts. The board may come under pressure from other shareholders
who find this behaviour unacceptable.
What is the decision?
The ethical decision in Option 1, to refuse Mr Sim's offer

Refuse Recycling (RR) is a large recycling company, which collects waste and recycles a large variety of
products. Its most profitable product for recycling is glass, although it also collects other materials
including plastics. Most of the plastics it collects are under local government contracts for domestic waste
collection and recycling. Because RR lacks facilities and expertise in the recycling of plastics, the plastic waste
it collects is sorted by item/type and transported long distances to specialised plastic recycling plants operated
by other recycling companies.
For some time now the board of RR has been concerned about reduced margins. As a result of a study
initiated by the finance director, the company has established that the collection and recycling of plastics
is proving unprofitable. Transportation costs have been extremely high, as many recycling operators have
not been accepting plastics collected by RR in the hope that this would make the contracts less profitable
for RR. They believed this would increase their own chances of winning future tenders.
The chairman of RR recently called a board meeting to examine the terms of the company's existing
contracts with local governments for domestic waste collection and recycling. At this meeting the finance
director stated that, though he felt strongly about the value of recycling to society as a whole, he also felt
that RR simply should not continue to perform unprofitable activities if there was 'a way out'.
On examining the contracts the board discovered that several specified an overall percentage of material
collected that must be recycled of 70% (others specified 80%). Based on the volumes of paper, glass,
metal and plastics collected over the past year, the board decided that in some locations RR could meet a
contractual obligation of 70% without recycling any plastics at all. Plastic collected under these '70%
contracts' could simply be dumped at landfill sites, with significant savings from reduced sorting and
Exam focus
point
318 9: Personal ethics  Part C Professional values and ethics
transport costs. Some board members had reservations about implementing this policy, but were swayed
by the strength of the finance director's reasoning.
The dumping of plastics is about to start. Although the board of RR feels the company's actions do not
breach the terms of their contracts, it was decided that the vehicles involved in the dumping process
would not carry the RR name.
Required
Analyse the board's decision to dump plastics at landfill sites, using Tucker's 5 question model.

Answer

Using Tucker's five question model, we have to ask, is the decision:

Profitable
The main justification for the decision is to increase short-term profitability and if the finance director's
figures are correct, that aim has been achieved. However, the effect on long-term profitability may be very
different if what RR has done becomes public. A recycling company, even one operating in a commercial
environment, must be seen as caring about the environment if it is to attract and retain customers. Some
local government customers may try to cancel existing contracts on the grounds that RR is not abiding by
the spirit of these contracts. In any case local government agencies are likely to be unwilling to renew
contracts and RR may be unable to win other new contracts.
Legal
Clearly RR is using legal landfill sites. Assuming the board has interpreted the contracts correctly, the
company has not breached the strict legal terms of the contract even if it has possibly breached the spirit.
Transporting the waste in unmarked vans may be questionable legally though.
Fair
If the view is taken that the customers are vital stakeholders, then what RR is doing is unfair to them, as
they may have made claims about the support they are giving to recycling which are unintentionally
misleading. Any loss of reputation that local authorities suffer in the fallout that follows discovery of what
RR has done may be particularly serious, as it may impact on re-election chances of local councillors. The
only mitigation for RR under this heading is that the problem has arisen because of other recycling
operators refusing to take RR's waste. They too appear to be putting their commercial interests ahead of
the objective of supporting recycling.
Right
The fact that the waste is being transported in unmarked vans is effectively an admission by the board
that what they are doing is indefensible on moral grounds. Any mitigation may be based on other criteria,
that RR is acting within the law and doing its best for its shareholders, but it is nearly impossible to defend
the actions on these grounds.
Sustainable
This is potentially the easiest criterion of them all, as what RR is doing appears to be going against
environmental best practice. Apart from anything else, RR's ability to continue doing this depends on the
availability of landfill sites. In some countries they are running out. The only environmental justification
is that by using the landfill sites, RR is cutting down the miles plastics are transported, and is reducing its
carbon footprint to that extent.