Professional: Ethics

Professional Ethics
Corporate Finance Institute®

Course Introduction
Ethics need to be understood, thought

about, and embraced.
What to do when you are faced with an ethical dilemma?
How to respond and maintain your own ethical integrity?

Learning Objectives
Explain why ethics matter within Describe the elements of Understanding the ethical culture
an organization business ethics of an organization
Apply professional ethics and the Apply approaches to ethical Utilize sources of ethical guidance
moral principles of integrity decision making

Why Ethics Matter

Recent Public Lapses in Ethical Standards
Six companies that have had ethical lapses:
For each of the organizations listed, research

what the ethical lapse was and what the
resultant impact was on the company.
• How was the ethical lapse discovered?
• What was the impact of that lapse on the

company?

Exercise Answer
Charismatic but unethical Have a valuation of over

Unicorn companies
leaders $1BN during startup
• The claims made that the blood tests worked • Falsely inflated company value.
were false.
• CEO self-dealt in a number of different areas.
• Thousands of blood tests were inaccurate
• Collapse of IPO.
and some cost people their lives.
• CEO was fired and the company has been
• Whistleblower went to press.
trying to recover its reputation and financial
• Theranos was dissolved in September 2018, stability.
and the lawsuits continue.

Exercise Answer
• Two Boeing MAX 737 crashes prompted full • In 2005, an oil refinery explosion caused one of
Federal Aviation Authority investigation. the principal investigators to write a book
(“Failure to Learn”) about the lack of safety
• Leaked incriminating documents showed that
culture over profits.
the MAX was known to be unsafe.
• In 2010, Deepwater Horizon offshore oil rig
• However, Boeing chose profitability over safety
explosion killed 11 workers and destroyed a
and put a poorly-designed, unsafe airplane into
significant portion of the Gulf Coast.
service.
• Stock price took a sharp decline. Paid billions in
• Stock price took a sharp decline and may never
legal costs and fines.
recover.

Exercise Answer
• European car manufacturer that wanted to enter

the North American market.
• Installed a software chip into cars to cheat
emissions tests and advertised cars as “clean
diesel.”
• Accidentally discovered by research students

trying to replicate tests, and an insider revealed
the reason.

Exercise Answer

Exercise Answer
• European car manufacturer that wanted to enter • US retail bank with an aggressive sales culture
the North American market.
• Defrauded their customers by selling unwanted
• Installed a software chip into cars to cheat credit card accounts, opening unauthorized
emissions tests and advertised cars as “clean accounts, transferring funds from good accounts
diesel.” to bad/unauthorized accounts, and making
unauthorized credit inquiries.
• Accidentally discovered by research students
trying to replicate tests, and an insider revealed • Complaints to the Consumer Financial Protection
the reason. Bureau and anonymous tips by employees to
journalists helped uncover the fraud.
• Paid over $30BN in fines & legal fees, and many
of their executives have received jail sentences.

Exercise Answer
Initial scandal
Litigation - $1.6BN
in legal costs

A Measure of the World’s Most Ethical Companies
In 2020, 132 companies in 21

countries were considered to be
the world’s most ethical companies.
These companies outperform the
large-cap index by 13.5%.

The Need for an Ethical Workplace
Maintain Your Own Ethical

“Companies that invest in ethics reap an enormous
Integrity
return. Better workplace ethics cuts business risks by
reducing the chance that serious ethics problems will • Prepare to take a stand when
throw companies off course and distract them from needed
their core business.”
• Understand what the ethical culture
Ethics Compliance Initiative CEO, Patricia Harned and climate is in the organization
• Lawsuits • Company folded

• Fines • Lost trust
• Penalties • Lives were lost
• Jail time

What Are the Elements of Business Ethics

Defining Ethics
Ethics Moral Principles
A system of moral principles The principles of right and wrong

accepted by a social group that are accepted by an individual or
a social group
Different social groups will have different moral principles, and the rules
of conduct in each social group may be different.
• Religious organizations
• Social groups
• Sporting events

Business Ethics
Business or Corporate Ethics Conduct
A set of applied or professional The way people act, governed by the

ethics that are relevant to the group business ethics of that organization
The way people respond to moral or ethical problems will be indicative of

the ethical principles that the organization has adopted.
Essentially, it will be reflective of the corporate, or ethical, culture of the
business.

Business Ethics
As business ethics are applied ethics, there are particular concepts that relate to them.
Use of Knowledge Take no Action

• Not to be used to exploit or • Won’t steal, abuse, harass,
coerce another to act slander, or any other action that
• Not to be used for your own could cause harm to another
AUTONOMY DOING NO HARM individual or the organization
personal gain
Preventing Harm Being Fair

• Protecting and defending the • Is the action that is being taken
rights of others relates to this right?
concept • Has or will justice be done?
DOING GOOD JUSTICE
• Are people being treated fairly?

2019 ECI Global Business Ethics Survey
Employees Who Observed Misconduct

Global Median
Conflicts of Interest 32% 31% 24% 30% 40% 27%
Abusive Behaviors 36% 23% 24% 27% 32% 25%
Violations of Health and

31% 25% 23% 20% 26% 24%
Safety Regulations
Corruption 27% 24% 14% 18% 23% 19%
Discrimination 32% 18% 13% 16% 20% 16%
Sexual Harassment 20% 16% 8% 14% 16% 13%
Africa & Middle East Asia Pacific Europe North America South America
Ethics & Compliance Initiative, “Global Ethics Survey®”, 2019

Fraud Triangle and Culture
What can cause misconduct to happen? Opportunity - Is there an opportunity to commit the act?
Opportunities would be managed by having the proper
preventive and detective controls.
Rationalization - Can the individual rationalize committing

the misconduct?
Rationalization is addressed by communicating corporate
values and emphasizing those values, one of which should be
respect.
Pressure - Is there some external pressure being put on the

Controls individual that would encourage that person to take
Opportunity advantage of the opportunity?
Pressure is addressed by having a strong ethical culture in the
organization.

Fraud Triangle…or Diamond
The fraud diamond theory came about in the post-

Enron WorldCom era back in early 2000.
All of the factors that form the triangle can be

present, but it takes capability for the fraud, or
misconduct, to occur.
Opportunity
• Understand your own moral principles
• Understand how you would react when faced with
an ethical dilemma
• Reinforce that through training and mindfulness
Capability/Character

Fraud Diamond and Culture
Types of pressures or incentives that can cause someone to compromise ethical business conduct:
Meeting reporting Working with partners
deadlines internationally from different
Compiling
cultures Compiling year-end
management
accounts
accounts
Working with colleagues
Awarding contracts to Reporting performance
from different functional
suppliers to external stakeholders
areas Dealing with
Allocating
customers Managing staff bonuses
24% 23% 21% 20% 20% 19% 19% 19% 18% 15%
CGMA Report. Managing responsible business. 2015
How likely are these situations to result in pressure on you to compromise your organization’s / your
standards of ethical business conduct?

Reducing Ethics Risk
Driver 1
Well-
implemented program
Driver 2
Strong ethical
culture
Outcomes
Reduced Decrease in Increased

Reduced pressure
retaliation for observed reporting of
for misconduct
reporting misconduct misconduct
Goals
Reduced ethics risk

From 2011 National Business Ethics Survey

Components of Strong Ethics Programs
• Written standards for ethical conduct.

• Training on company standards of ethical workplace
conduct.
• Provision of a mechanism for reporting misconduct

anonymously.
• Provision of a mechanism for seeking ethics-related
advice or information.
• Assessment of ethical conduct as part of employee
performance evaluations.
• Discipline of employees who violated the standards of

the organization or the law.
Opening a conversation is the first
step of awareness.

Code of Conduct & Ethics Policies
Examples:
An ethical code is adopted by an
organization in an attempt to assist those in • The AICPA has a code of conduct.
the organization called upon to make a
• CIMA has a code of ethics.
decision to understand the difference
Ethical code
between ‘right' and 'wrong' and to apply this • Professional engineers have a
understanding to their decision. code of ethics, as do attorneys.
• CFI certification program
candidates need to sign the
Honor Pledge.
A code of conduct is a set of rules outlining
the responsibilities of, or proper practices
Code of for, an individual or organization.
conduct

Code of Conduct & Ethics Policies
The topics that a code of conduct typically will cover:
Respect for the Confidentiality of

Personal Integrity
Law Information
Won’t knowingly break any Act in an ethically responsible Any information you receive
laws way must be kept confidential
Compliance with
Conflicts of Interest
the Code
Won’t take advantage of Failure of compliance will

your employment for a result in disciplinary action
personal benefit

The Ethical Culture of Organizations

What Comprises an Ethical Culture
Can a corporation be unethical?

It’s not the organization that’s unethical. Rather, it’s the people within the organization that drive its
culture.
Culture is another way of saying Providing direction and setting

“the way things are done expectations – “tone at the top”
Leadership
around here.” - ERC
Reinforcement of ethical behavior

Supervision – “mood in the middle”
Supporting each other in

Peer commitment doing the right thing – “buzz
at the bottom”

Symptoms of a Weak Ethical Culture
The best way to gain a sense of what the ethical culture is in an organization is to listen to what people
are saying.
Watch out for rationalizations:
This is the way it has

This isn’t bad! You should always been done.
have seen…
It doesn’t really hurt

Everybody does this.
anyone.

Symptoms of a Weak Ethical Culture
The best way to gain a sense of what the ethical culture is in an organization is to listen to what people
are saying.
Watch out for signals:
I don’t care how you

do it.
Find a way!
Whatever it takes. So long as it’s legal.

2019 ECI Global Business Ethics Survey
An organization with a weak ethical culture will tend to have a greater amount of misconduct that both
occurs and goes unreported compared to others.
Global Median
Observed Misconduct 60% 47% 43% 50% 60% 45%
Did Not Report 23% 33% 41% 31% 31% 34%

Whistleblowing
Whistleblowing is the act of raising concerns about one or more acts that
co-workers, superiors, or others connected to the company are performing
that are essentially illegal.
This usually is attributed to fraud, corruption, or a health or safety concern
that would threaten the public as a whole.
Who are the whistleblowers? Who investigates?

Company insiders; employees who have a Internal audit will be tasked with a
strong moral compass preliminary investigation
Who receives the report? How do whistleblowers remain

An independent party (e.g., the chair of anonymous?
the audit committee) Use a confidential whistleblower hotline

The Whistleblower Dilemma
People may be reluctant to report misconducts. 34% of

the observed misconduct went unreported.
What do you think are the reasons people don’t

“blow the whistle”?
For those who do, what do you believe are the

protections in place for them?

Why People Don’t Blow the Whistle
One of the most common reasons that employees choose not to report misconduct is fear of retaliation.
Employees who experienced retaliation after reporting misconduct:
Global Median
Sexual Harassment 72% 60% 51% 50% 33% 46%
Corruption 63% 54% 46% 39% 44% 44%
Discrimination 62% 61% 51% 37% 38% 43%
Conflicts of Interest 62% 47% 37% 28% 39% 36%
Abusive Behaviors 55% 55% 35% 29% 32% 34%
Violations of Health and

53% 49% 30% 23% 27% 30%
Safety Regulations

Why People Don’t Blow the Whistle
Whistleblowers want anonymity, but rarely have it.
You have to be prepared that if you do blow the whistle, there may
be consequences.
• Pay attention to your moral compass.
• Consider what you would do if faced with a similar same situation.
If you believe the company you work for does not have a strong
Pay attention to the
ethical culture, it may be in your best interest to look for a different
signals
work environment before you’re faced with an ethical dilemma.

Professional Conduct

A Word About Integrity
Professional conduct is a companion concept to workplace ethics but is often associated with
professionals.
In all instances, a professional must act with Am I doing what a person of integrity
integrity. would do?
Honest and candid Have I retained my integrity?
Free from personal gain and advantage

If the answer is not yes, you should either refuse
the work or the client and disclose the reason.
Consider objectivity, independence, and
due care

Independence and Objectivity
Independence Objectivity
(Relates to Environment) (Relates to Individual or Team)
A state of mind in which biases do not
Freedom from material conflicts of interest that threaten
inappropriately affect assessments,
objectivity
judgments, and decisions
Independence Independence
Actual Perceived
in Fact in Appearance
No influences to impair your Others to perceive that you Example:

ability to make independent can make independent By accepting gifts from clients, you may feel
decisions. decisions. obliged to make an assessment or decision
• Having close personal or • Previously worked for the you otherwise wouldn’t have made.
financial ties to the client client
• Being paid a commission • A family member is Therefore, independence means the ability
or a contingent fee connected to the client to act with objectivity and integrity.

Independence and objectivity relate to client work. Conflicts of interest will impair independence and
objectivity, but they relate to everyone.
A conflict is a difference between one’s private interest and his or her fiduciary responsibilities.
Examples:
• An employee’s supervisor is a family member and
has control over his or her job responsibilities,
Individual salary, and any promotions that might come up.
• An employee works part time for a competitor.

Conflict between the employee and the
organization. • An employee receives personal payment for
services provided to customers during their time
off.

Examples:
• A contractor having access to confidential
information, allowing them an unfair competitive
advantage to future contracts.
Organization
• Where a contractor or supplier establishes the
requirements of rules surrounding a request for Conflict between the organization and a
proposal, and then bids on that RFP. They have the third party (e.g., customer, supplier,
contractor).
opportunity to ensure the requirements will only
be a fit for them.

Individual Organization
Conflict between the employee and the Conflict between the organization and a
organization. third party (e.g., customer, supplier,
contractor).
There can also be a relationship between individual and organizational conflicts of interest.

The Consequences of Conflicts
There are a number of risks that can surface where conflicts of interest arise:
Creation of an
Misuse of confidential Erosion of corporate
Poor decision making inappropriate work
information culture
environment

Areas Where Conflicts Occur
Consider the following areas where conflicts of

interest can occur:
• Direct or indirect financial interest in an enterprise

• Loans / guarantees to or from an enterprise
(including officers, directors, principal shareholders) You were involved in an M&A deal and had to
conduct due diligence on a company that you had
• Business, family, and personal relationships
an indirect financial interest in.
• Serving as director or officer of an enterprise
• What impact could this have on your ability to
• Long-term association make an unbiased report?
• Personal use of corporate property • How could others perceive your objectivity if
• Corporate opportunities they knew of your financial interest?
• Gifts and entertainment
Conflicts of interest must be disclosed as soon
as they are known.

Approaches to Ethical Decision Making

Ethical Decision-Making Framework
When faced with an ethical dilemma, you will want to apply a framework in deciding the right course of
action to take.
Laws, regulations,
01 What are the facts? 02 Available alternatives 03 policies, and procedures
Stakeholders and Values of yours and of Relationships between

04 consequences 05 the organization 06 the stakeholders
Link with organization’s Possible influences and Make decision and take
07 mission and reputation 08 personal interests 09 action
10 Verification

Ethical Considerations
How can ethical decisions be influenced?

Decision making involving ethical considerations are influenced significantly by the personal
characteristics of the decision maker.
Level of moral Organizational

Personal values Level of control
development culture and rewards
They serve to evaluate The extent to which Takes into account one’s Includes current
situations and others’ one feels control moral obligations practices and policies,
behavior. over life events. towards others and beliefs, values, and
one’s personal self- assumptions that
interest. influence daily conduct.

Theories of Ethical Decision Making
There are essentially five basic approaches related to ethical decision making:
The utilitarian The rights The justice The common The virtue
approach approach approach good approach approach

Utilitarian Approach
According to the utilitarian approach, ethical actions are

those that provide the greatest balance of good over evil.
1 Identify the various courses of action available.
Ask who will be affected by each action and what

2
benefits or harms will be derived from each.
Choose the action that will produce the greatest

3
benefits and the least harm.
The utilitarian approach overall assumes that the right action

to take is the one that provides the greatest good for the
greatest number.

Rights Approach
The rights approach starts with the right to choose freely.

• The right of privacy - We have the right to do, believe, and say
whatever we choose in our personal lives so long as we do not
violate the rights of others.
• The right to the truth - We have a right to be told the truth
and to be informed about matters that significantly affect our
choices.
• The right not to be injured - We have the right not to be
harmed or injured unless we freely and knowingly do
something to deserve punishment or we freely and knowingly
choose to risk such injuries.
• The right to what is agreed - We have a right to what has
been promised by those with whom we have freely entered Does the action respect the
into a contract or agreement. moral rights of everyone?

Justice Approach
The justice approach considers the fairness of an action.

• Does it treat everyone in the same way, or does it show
favoritism and discrimination?
• Favoritism gives benefits to some people without a

justifiable reason for singling them out.
• Discrimination imposes burdens on people who are no
different from those on whom burdens are not imposed.
Both favoritism and discrimination are unjust and wrong.
How do you justify the decision that you make?
Is there an alternative decision that will protect the stakeholders

from favoritism and/or discrimination?

Common Good Approach
The common good approach assumes a society of individuals

whose own good is linked to the good of the community.
Will your decision ensure that the social policies, social

systems, institutions, and environments are beneficial to all?
How can the action you wish to take positively impact

society?
What good to the community will it bring?
Will it help improve the health or safety of the community?
Will it improve the environment?
Will it encourage fairness?

Virtue Approach
The virtue approach to ethics assumes that there are

certain ideals toward which we should strive.
• Virtues are attitudes or character traits that enable us to be
and to act in ways that develop our highest potential.
• Virtues allow us to pursue the ideals we have adopted.
• A person who has developed virtues will be naturally disposed
to act in ways consistent with moral principles.
Will the decision you wish to make cast Will you feel that the decision has helped
you as a virtuous person? you promote the person you want to be?
Would others perceive you as virtuous for

making that decision?

Obstacles to Ethical Behavior
The decision to act ethically, or unethically, is influenced by a person's surroundings and experiences.
Significant obstacles include:
Understanding Competing
Competing Goals
the Issue Stakeholders
Observed Immediate
Competing Ethics
Behavior Gratification

Making Ethical Decisions
Most decisions made on a daily basis are routine ones.
“Analysis frozen into habit.”
When faced with ethical decision making, you want to

create that same habitual way of responding by:
• Sensitizing yourself to ethical scenarios
• Receiving training
• Talking to others
• Following those who demonstrate ethical leadership
Organizations with a good corporate culture are willing to question established practices to ensure that
decisions are made based on ethical considerations.

Sources of Guidance
Sources of ethical obligation include:
Policies,
Professional
Laws procedures and
standards
guidelines
Personal conscience – the most morally superior source of

ethical obligation.

Professional: Ethics

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Professional Ethics

Corporate Finance Institute®

Ethics need to be understood, thought

What to do when you are faced with an ethical dilemma?

How to respond and maintain your own ethical integrity?

Corporate Finance Institute®

Corporate Finance Institute®

Corporate Finance Institute®

Six companies that have had ethical lapses:

For each of the organizations listed, research

• What was the impact of that lapse on the

Corporate Finance Institute®

Charismatic but unethical Have a valuation of over

Corporate Finance Institute®

Corporate Finance Institute®

• European car manufacturer that wanted to enter

• Accidentally discovered by research students

Corporate Finance Institute®

Corporate Finance Institute®

Corporate Finance Institute®

Corporate Finance Institute®

In 2020, 132 companies in 21

Corporate Finance Institute®

Maintain Your Own Ethical

• Lawsuits • Company folded

Corporate Finance Institute®

Corporate Finance Institute®

Ethics Moral Principles

A system of moral principles The principles of right and wrong

Corporate Finance Institute®

Business or Corporate Ethics Conduct

A set of applied or professional The way people act, governed by the

The way people respond to moral or ethical problems will be indicative of

Corporate Finance Institute®

Use of Knowledge Take no Action

Preventing Harm Being Fair

Corporate Finance Institute®

Employees Who Observed Misconduct

Abusive Behaviors 36% 23% 24% 27% 32% 25%

Violations of Health and

Corruption 27% 24% 14% 18% 23% 19%

Discrimination 32% 18% 13% 16% 20% 16%

Sexual Harassment 20% 16% 8% 14% 16% 13%

Ethics & Compliance Initiative, “Global Ethics Survey®”, 2019

Corporate Finance Institute®

Rationalization - Can the individual rationalize committing

Pressure - Is there some external pressure being put on the

Corporate Finance Institute®

The fraud diamond theory came about in the post-

All of the factors that form the triangle can be

Corporate Finance Institute®

CGMA Report. Managing responsible business. 2015

Corporate Finance Institute®

Reduced Decrease in Increased

Reduced ethics risk

Corporate Finance Institute®

• Written standards for ethical conduct.

• Provision of a mechanism for reporting misconduct

• Discipline of employees who violated the standards of

Corporate Finance Institute®

Corporate Finance Institute®

The topics that a code of conduct typically will cover:

Respect for the Confidentiality of