THE ETHICS

ENVIRONMENT

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 - The ethics environment for
business in general
-A new mandate for business.

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 Meaning of Ethics

- What our society or group says about right

and wrong.
- Business Ethics is about right and wrong
or appropriate behavior in business. It is
the moral standards that apply to business
policies, institutions and business behavior.

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■ Various principles have been put forward to describe
ethics. These include:
■ The golden rule - do unto others as you would have
them do unto you.
■ The utilitarian perspective - take the action that
achieves the higher or greater value.
■ The aversion perspective - take the action that
produces the least harm, or the least potential cost.
■ The appearance perspective - the appearance of
unethical behaviour can do as much harm as actual
unethical behaviour.

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 ENVIRONMENTAL
CONCERNS
Growing Awareness …
• Environmental change
• Pollution
• Oil spills
• Equity for women: pay, fair
• Fair treatment of minorities
• Child labour
• Harmful practices & products
• Scandals
…that corporations can make
a difference

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 What are the impacts on the shareholders?

What are the impacts on the stakeholders?

Group of individuals who are able to affect and is
affected by activities and decisions of a firm in pursuit of
its objectives

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REASONS FOR INCREASING INTEREST IN BUSINESS ETHICS

Physical Quality of air and water, safety

Moral Desire for fairness and equity
at home and abroad
Bad judgments Operating mistakes, executive compensation

Activist stakeholders Ethical investors, consumers, environmentalists

Economic Weakness, pressure to survive, to falsify

Competition Global pressures

Financial malfeasance Numerous scandals, victims, greed

Governance failures Recognition that good governance and ethics

risk assessment matter
Accountability Desire for transparency, corporate social responsibility
(CSR)
Synergy Publicity, successful changes

Institutional reinforcement New laws – environment, whistle-blowing,

recalls, U.S. Sentencing Guidelines, OECD
anti-bribery regime, Sarbanes-Oxley Act (SOX)
reforms, professional accounting reform, globalization of
standards (IFAC, IFRS) and principles (Caux)
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Business Failures & Scandal Since 2000
Bear Stearns – sub-prime mortgage
Aurora Foods, Inc. – accounting fraud AIG – sub-prime mortgages *
Enron Corporation – bankruptcy * Banking crisis – bailouts by various governments
Sunbeam Corporation – accounting fraud * Fanny Mae – sub-prime mortgages
Waste Management, Inc. – accounting fraud Freddie Mac – sub-prime mortgages
* Merrill Lynch – sub-prime mortgage *
Adelphia Corporation – accounting Lehman Brothers – bankruptcy *
fraud*
Arthur Andersen – collapse * Bernie Madoff – Ponzi scheme *
Global Crossing –bankruptcy Ernst & Yong – tax shelters *
HIH Insurance – bankruptcy Galleon Group – insider trading
WorldCom – bankruptcy * *
Xerox Corporation – accounting fraud Nortel Networks – bankruptcy *
Ernst & Young – tax shelters * Satyam Computer Services –
bankruptcy * BP – oil spill *
KPMG – tax shelters DaimlerChrysler – bribery
* *
2001 2002 2003 2005 2007 2008 2009 2010

Sarbanes-Oxley Act IRS Circular 230 : Dodd-Frank Wall Street Reform

Tax Shelters and Consumer Protection Act

Legend: * indicates case in Brooks & Dunn, 2012

Financial Failures/Scandals has created;

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 New Expectations for Business
Change in business objectives:

•Expanding role of business within society beyond short-term

market paradigm
•Long-term vs. short-term profit
•Multiple goals: profit, quality, community ...
•Performance assessment now extends beyond what is
achieved to encompass how ethically those results were
achieved

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 New Expectations for Business

New Governance and Accountability Framework:

•Successful corporations would be best served by

corporate governance and accountability
mechanisms.
•Demand on increase accountability and
transparency.

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 New Expectations for Business

Reinforced Fiduciary Role for Professional

Accountants:

•The primarily fiduciary responsibility—Public.

•Erode the corporation’s credibility.
•Credibility and reputation of accounting
profession.

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 The response by business
and development in business
ethics.

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New mandate for business

Stakeholder-o
riented SUCCESS
framework

New
governance
and Reinforced
accountability fiduciary role for
frameworks professional
accountants

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MAP OF CORPORATE STAKEHOLDER ACCOUNTABILITY

Shareholders

Activists Employees

Governments Corporation Customers

Lenders &
Creditors Suppliers

Competitors Others, including the media,

who can be affected by or who can
affect the achievement of the
corporation’s objectives

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CORPORATE GOVERNANCE FRAMEWORK

Shareholders Stakeholders

Key Board Control Functions:

• Set Guidance and Boundaries
El - Policies, Codes, Culture,
ec Compliance – laws, regs, rules
t • Set Direction
- Strategies, Goals,
Board of Directors Remuneration, Incentives
& Subcommittees: • Appoints CEO, who appoints
Audit, Governance, other executives, and CFO
Compensation • Arrange for Resources
• Monitor Feedback
- Operations, Policy Compliance,
Audit Financial Reports
or • Reports to Shareholders, Govern.
• Nominates/decides on Auditor
Legend: Info Flow Actions

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 HYPERNORMS (BASIC VALUES) - UNDERLYING
STAKEHOLDER INTERESTS

A hypernorm is a value that is almost universally respected by

stakeholder groups. Therefore, if a company’s activities
respect a hypernorm, the company is likely to be respected
by stakeholder groups and will encourage stakeholder
support for the company activities.

Hypernorms involve the demonstration of the following basic

values:

Honesty Fairness
Compassion Integrity
Predictability Responsibility
Source: R. Berenbeim, Director, Working Group on Global Ethics Principles, The Conference Board, Inc., 1999

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 The 6 Types of Hypernorms
The universally-accepted basic moral principles respected by
stakeholders, known as Hypernorms as below:
1. Honesty – telling the truth, not cheating, lying or stealing.
2. Compassion – Means ‘to suffer with’, i.e. an emotional
response of sympathy; not just a feeling but combined with a
desire to help.
3. Predictability – The fact of always behaving or occurring in
the way expected.
4. Fairness – The quality of treating people equally or in a way
that is right or reasonable.
5. Integrity – The quality of being honest and having strong
moral principles.
6. Responsibility – Doing what it takes to do the right thing.

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DETERMINANTS OF REPUTATION

Credibilit
Reliability
y

Corporate
Reputation

Trustworthi Responsib
ness ility

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Developments in Business Ethics

• Stakeholders concept/theory:
- Those groups without whose support the organization
would cease to exist. Ecosystem of related groups, all of
whom need to be considered and satisfied to keep the
company healthy and successful in the long term.
.
• Corporate Social Contract
–Evolving the relationship between corporations and
society
- Unwritten and strictly hypothetical agreement not to
violate moral rules.

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Developments in Business Ethics

• Ethical Decision Making:

- Consequentialism, deontology, virtue ethics
.
• Ethical Decision Making approaches:
- Five Questions Approach
- Moral Standards Approach
- Pastin Approach

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The ethics environment for
professional accountants

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Role and Conduct
• New services provided
• Balance between management and shareholders
• Expectations gap

Governance
• Globally harmonized GAAP
• Code of Conduct (MIA By-Laws)
• Malaysia Code of Corporate Governance 2017

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END….

ATTEMPT before tutorial