NKUHLU DEPARTMENT OF ACCOUNTING

GOVERNANCE AND AUDITING 211E

ETHICS
• Unit 1 – Key Concepts in Business and Professional Ethics
• Unit 2 – Classical Ethical Theories
• Unit 3 – Ethical Decision Making
• Unit 4 – Applying the 5 Tenets of Ethical Decision Making
• Unit 5 – The Modern Corporation and its Moral Obligations
• Unit 6 – Managing Ethics
• Unit 7 – Accountants and Auditors as Professionals

Ethics 1
Unit 1
KEY CONCEPTS IN BUSINESS AND PROFESSIONAL ETHICS
After studying this topic you should be able to:
• Define the concepts of ethics, business ethics and
professional ethics;
Outcomes for • Identify the relationship between ethics and values;
this unit • Distinguish between personal and social ethical dilemmas;
• Discern the three levels at which ethics in economic activity is
being studied and identify the core issues that are studied at
each of these levels;
• Indicate why ethics needs to be addressed on both the
personal and organisational levels;
• Make a clear distinction between morality and legality; and
• Demonstrate why professionals need both professional
standards and professional virtues.

Overview of the Ethics will be explored through the three core concepts: the “self”, the
study topic “good” and “the other”. Ethical behaviour is characterized by the fact
that it is unselfish and balances what is good for oneself with what is
good for others.

The relationship between ethics and values will also be explored.

We will introduce concepts such as legality and moral dilemmas.

The difference between personal and organizational ethics will be

highlighted.

The relationship between personal, business and professional ethics

will also be explored.

By referring to the typical features of professions, it will be shown that

ethical standards and virtues count among the distinguishing features
of the accounting and auditing profession.

Course material The following course material has been provided to you:
• Ethics for Accountants and Auditors (4th Edition) – Chapter 2
• Lecture notes
• Key concepts in business and professional ethics – video
• Discussion board questions (Ethics week 1)

Manner of This topic can be assessed through the application questions though
assessment the following assessment types:
• Ethics quiz
• Integrated assignment
• Ethics test (written)

Ethics 2
 1) Introduction

In order to make to be able to identify, analyze and assess the ethical dimensions
of any situation we need to have a proper understanding of the key concepts in
ethics.

We need to make important distinctions and clarifications to the relationships

between ethics and the related concepts and values, virtues, moral dilemma and
the law.

2) Ethics and morality

The terms ethics and morality are often used interchangeably.

When we consider what is unacceptable or irresponsible behaviour we usually

refer to such behaviour as unethical or immoral.

What is unethical is immoral and what is immoral is unethical.

Ethics and morality refer to the character and manners of a person

Character: What kind of person someone is

Manner: How the person interacts with others

Character and manner show that ethics is about self and our interactions with
others.

The quality of our interactions between ourself and others needs to be considered.
This is the third essential element of ethics – the concept of good.

Using these three concepts good, self and others we can define an ethical action
as an action that is good not only for oneself but also good for
others.
Good

ETHICS

Self Others

Ethics 3
 3) Ethics and values

Values are our convictions (beliefs) about what is good, right or desirable.
Our values provide context and guide us in determining what is good in the
definition of ethics.

Example:
If we believe/value freedom, human dignity, equality or honesty as
being good, we use these standards to determine if an action is not
only good for us but also for others. If an action promotes only my freedom
but compromises the freedom of another, it cannot be considered good, and
therefore would be an unethical action.

People do not share the same value and we often find between ourselves and
within groups there are disagreements.

Disagreements can be in the form of:

- What is good; and
- What is more important.

Differences in people’s values are due to a variety of factors, such as culture,

religion, climate, social and economic status, personal experiences, age, genders,
etc.

The difference in value systems can therefore result in differences in ethical

judgements.

Just as an individual has personal values, an organization will have organizational

values. There are three difference values within an organization:

Strategic values: Usually reflect the vision and mission of the organization.
Work values: Priorities that employees should adhere to in their jobs.
Ethical values: Commitment to good interactions with stakeholders, which
includes honestly, fairness, respect.

4) Right, wrong and dilemmas

Disputes over what is right and wrong will result in difficult situations and can result
in questions over whether or not the action is ethical or not.

An ethical dilemma occurs when one is forced to choose between two or more
options that are all to some extent wrong or having to choose between competing
good values.

Dilemmas can either be interpersonal or intrapersonal.

An interpersonal dilemma is a social dilemma that occurs between groups of

people.

An intrapersonal dilemma is a personal dilemma that occurs within oneself.

Most ethical dilemmas can be resolved though compromises that are referred
to as “creative middle way solutions”, which is where conflicting parties
reach a compromise to accommodate the ethical concerns of both parties.

It is necessary that both parties are willing to discuss the dilemma and arrive at a

Ethics 4
 solution that will accommodate the moral concerns of both parties.

5) Ethics and the law

Is there a difference between ethics and the law?

Can an action be ethical but not legal?
Can an action be legal but not ethical?

There are distinct similarities between ethics and the law, but there are also
significant differences.

Both intend to determine what is right.

Law: Establishes what is right through the public and political process
to ensure that all people abide by the law.
Ethics: Values determines what is right.

Examples:
1) An entity publishing its financial statements accurately.
2) Exceeding the speed limit to ensure a seriously injured person gets to
hospital.
3) Dumping toxic waste in a river where there is no law preventing such
actions.

The law and ethics are not always aligned.

6) Business ethics

Business ethics focusses on what is good and right in economic activity.

Business transactions consist of the exchanging of a product/service for money.

If this exchange in fair to both parties the interests of both parties is served, and
the transaction can also be considered ethical.

Consider:
The exchange of an inferior/damaged product.
The charging of an unfair price to customers.
The buyer not compensating the seller.

When considering business ethics we need to consider the moral evaluation on

three levels:
- The economic systems level (macro-economic)
- The organizational level (meso-economic level)
- The intra-organisational level (micro-economic level)

1) Macro-economic ethics
Refers to the policy framework or economic system within which economic
exchange takes place.

It is determined at a national level by the political power of the state.

When exchange is international it is determined by multilateral international

trade agreements.

Ethics 5
 Business ethics at a macro-economic level evaluates economic systems and
policies to determine if they are fair and just.

2) Meso-economic ethics
Refer to business organisations, such as corporations and firms and their
relationship to the rest of society.

Businesses have an impact on stakeholders, including society, customers and

suppliers.

The impact can be beneficial or detrimental.

Business ethics at a meso-economic level, evaluates the ethical impact that

business has on society.

3) Micro-economic ethics
Refers to economic activity within business organisations.

Focuses on the moral implications of business practices, policies, behaviours

and decisions within business.

Businesses have an impact on the people who work from them. Employees
may be faced with moral problems which arise at work when their personal and
professional values differ.

Other factors could be discrimination, harassment, physical and mental health

concerns.

Cultures and policies or systems within the workplace may also break trust
between employees in the organization.

7) Personal and organizational ethics

Business ethics considers not only personal ethics but also organizational ethics.

Consider the metaphor of the apples and barrels.

Unethical behaviour in organisations (barrels) is often associated with unethical

individuals (individuals). The unethical individuals are considered morally corrupt
and it is suggested that the solution to the unethical behaviour in business is to
remove the unethical individuals.

Individuals are affected by their settings in the same way that apples are affected
by the barrels in which they are kept. If the apple is placed in a dirty, unhygienic
barrel it will not last as long as an apple in a clean, hygienic barrel.

This principle applies to organisations as well. The setting within which an

individual works can have either a good or bad effect on the individual’s moral
character.

An unethical individual can affect the whole organization.

A but an unethical individual can also be restrained if unethical behaviour is not
tolerated within the organization.

Ethics 6
 This highlights the importance that ethical behaviour must always be considered at
both an individual and an organizational level.

8) Professional ethics

Professional ethics refers to specific groups within society that agree to adhere to
specified self-imposed ethical standards.

The self-imposed ethical standards are usually in the form of a professional code
of conduct and are in place to ensure all members within the profession act in
accordance with the spirit and purpose of the profession for the benefit of the
clients and community they serve.

A professional accountant must consider personal ethics, organizational ethics and

professional ethics, and ideally these three sets of ethics should be aligned.

9) Professional virtues

Virtues are character traits which pre-dispose one to do the right thing and are
developed over time.

As part of training to become a professional an individual will be required to

develop professional virtues that are aligned with those of the profession as a
whole.

The most important virtues of a professional accountant are integrity,

professional competence and objectivity.

10) Conclusion
You have been introduced to the core concepts of ethics, business ethics and
professional ethics.

You need to understand the key concepts from chapter in order to be able to apply
them within the remaining course material related to Ethics.

Ethics 7
Unit 2
CLASSICAL ETHICAL THEORIES
After studying this topic you should be able to:
• Explain what virtues ethics entails.
• Identify the distinguishing features of deontological ethics.
Outcomes for • Discern the approach taken by utilitarian ethics.
this unit • Demonstrate the relevance of ethical theories for accounting
and auditing.

Overview of the A number of ethical theories have been developed which provide
study topic guidance in judging whether or not an action or decision is ethical or
not.

Three theories will be discussed –

1) Virtues theory
2) Deontological theory
3) Utilitarian theory

Course material The following course material has been provided to you:
• Ethics for Accountants and Auditors (4th Edition) – Chapter 4
• Lecture notes
• Classical Ethical Theories – video
• Discussion board questions (Ethics week 1)

Manner of This topic can be assessed through the application questions though
assessment the following assessment types:
• Ethics quiz
• Integrated assignment
• Ethics test (written)

Ethics 8
 1) Introduction

In order to make a judgement as to whether an action is ethical or not, a standard or

criterion against which to measure the action is required.

Ethical theories provide the standard for measuring actions against.

Ethical theories therefore assist individuals in deciding if an action is ethical or not

and provide reasons as to why we consider such actions ethical or not.

The three influential theories discussed during this chapter are:

- Virtues theory (Aristotle)
- Deontological (Kant)
- Utilitarian (Mill)

2) Virtues theory

The focus of the virtues theory is the assumption that being moral is both necessary
and vital for human beings.

The theory revolves around an individual’s desire to reach their goal, which for
humans is the greatest happiness.

To achieve happiness requires that we live in a society that is characterized by

justice, to have friends that are good and support you, you have adequate material
resources and that you develop and cultivate your human potential.

Aristotle believed morality starts with self and relies on the character of the
individual. Morality requires people of good character.

Our character is developed through our virtues, and our character traits are what
allow us to reach our happiness.

According to Aristotle virtues are the activity of the soul and imply a rational
principle.

We are inclined to act in a certain way due to our natural dispositions, which are
controlled by our rational thoughts.

There is a difference between rational thoughts and natural instincts. Rational

thoughts can be taught and controlled whereas a natural instinct is a manner in
which we react without thinking or without hesitation.

Aristotle developed the ‘mean´ to indicate what is implied by rationally controlled

dispositions. Our natural dispositions generally tend to be either excessive or
defective. The mean is the mid-point of the two and can be achieved though
rational control.

Acting a virtuous way provides a sense of well-being a joy, which will provide
pleasure, which will result in happiness.

If we continue to behave in a virtuous manner it will become a habit and will be part
of your character.

Ethics 9
 3) Deontological ethics

The theory insists that moral actions require conformity to rationally founded moral
principles. The theory focuses on the quality of our actions.

Kant believed that to achieve constant moral behaviour that good will was needed.

Good will is the will that obeys the universal moral law and respects that evident
moral authority of this universal law and obeys it from a sense of duty.

Kant developed the law of “categorical imperative” against which our actions
should be measured.
- An action can only be considered ethical if one is willing to allow all
other people to perform the same action.

Two principles are used as a guide for the categorical imperative.

Principle of universalisability
We should be willing to make the principle of our proposed action into law that will
be followed by all people.

Principle of reversibility
We should be willing to live in a world where everyone else behaves in accordance
with universal law.

Example:
John Smith is a professional accountant who has discovered that Andrew
Jones has been manipulating the sales figures on a monthly basis in order to
meet the monthly targets set by the company as this affects his commission
earned. John Smith must decide whether the actions of Andrew Jones are
ethical or not and whether or not he would report the matter.

In applying the principle of universalizability, John Smith would need to

consider what the world would be like if all monthly sales figures could be
manipulated in order to meet targets.

In considering the principle of reversibility, John Smith would have to ask

himself if he would be happy to live in a world where manipulating sales
figures as a standard practice applied by everyone, which would result in no
monthly figures being able to be trusted as true.

Based on the two principles, considering the morality of the actions, we

should conclude that John Smith would decide that the actions of Andrew
Jones are not ethical, and he would report the matter.

Kant’s categorical imperative translates into three practical imperatives.

The first practical imperative:

Our moral actions should not be guided by our own inclinations but by guided by our
sense of duty to the universal moral law.

We should be concerned as to whether the principle of our actions might be made

into universal law.

Ethics 10
 The second practical imperative:

Our actions should not be for the sake of our own goals but for the sake of an
objective goal that applies to everyone.

Kant believed that the objective goal was that of dignity for all human beings.

The third practical imperative:

Kant believed that the categorical imperative was not something foreign/strange to
us, but rather something with which we can all identify.

There is a moral rule that guides all our moral decisions/actions and we need to
respect this rule and act on it from a sense of duty.

4) Utilitarian ethics

This theory claims that the morality of our actions should be judged by their
consequences.

Mill believed that actions are good when the contribute towards achieving the
ultimate goal of happiness.

Greatest happiness principle –

Actions should be considered good when they results in the happiness of the
majority of those affected by the specific action.

Simply put, when faced with a moral issue, we should calculate which of our
alternatives will result in the greatest amount of happiness for the greatest number of
people.

Mill’s theory was widely criticized however, he responded to the critics:

Criticism Explanation Response

The theory is Suggests that human beings have Mill argues that human beings have both
degrading to humans only one goal in life which is to attain bodily and mental pleasure and more
pleasure (happiness) importance is placed on mental
pleasures.

Happiness cannot be Critics list a number of noble people Mill suggests that they have sacrificed
the rational purpose of who sacrifice their own happiness in their own happiness for the sake of
life order to do good. happiness for a greater number of
people.

Utilitarianism is It is impossible to always act for the Our actions only affect a few individuals
unattainable general happiness of society who need to be considered.

Utilitarianism is self- The principle will be abused in order Mill argues that abuse of the theory is
serving to service the interests of the person incompatible with the theory of greater
making the decision good.

The theory is too time- It would take too much time to apply Mill argues that when confronted with
consuming the theory to each moral decision. ethical issues we know beforehand if it is
morally right or wrong so it would not be
time consuming

Ethics 11
 5) Conclusion

The theories discussed are used as a basis to determine whether a proposed

course of action can be considered ethical or not.

They emphasize that only people with decent moral character can be expected to
do good, that there should be certain objective standards that should guide us in
making moral decisions and that the consequences of our actions should be taken
into consideration in our ethical decision making.

Ethics 12
Unit 3
ETHICAL DECISION MAKING
After studying this topic you should be able to:
• Understand ethical decision making and its impact on
shareholders
Outcomes for • Understand the definition of ethical decision making
this unit • Understand the common sources of ethical decision making
and their strengths and weaknesses
• Understand the difference between an ethical problem and an
ethical dilemma
• Understand how the five normative ethical theories relate to
ethical decision making
• Develop the capability to use the Five Tenets of ethical
decision making to make better ethical decisions

Overview of the Ethical decision-making and how to evaluate decisions to determine

study topic if they are ethical or not will be addressed in this chapter.

The concepts of ethical decisions and ethical dilemmas will be

discussed.

An understanding of how to evaluate decisions using the Five Tenets

of ethical decision making will develop.

Course material The following course material has been provided to you:
• Ethics for Accountants and Auditors (4th Edition) – Chapter 5
• Lecture notes
• Ethical Decision Making – video
• Discussion board questions (Ethics week 1)

Manner of This topic can be assessed through the application questions though
assessment the following assessment types:
• Ethics quiz
• Integrated assignment
• Ethics test (written)

Ethics 13
 1) Introduction

Decision making is a complex and engaging process and all of our decisions have
implications and consequences.

Within business, decisions affect numerous stakeholders and therefore when

making good business decisions we need to take into consideration the best
interest of all stakeholders, as this could be vitally important for the long-term
sustainability of the business.

2) What is an ethical decision

An ethical decision can be considered one that results in trust, demonstrates

concern for others and upholds the values of responsibility, fairness and empathy
for individuals and groups.

Essentially an ethical decision is one which results in an outcome that is good for
self and others.

An unethical decision is one which favours self over others.

In considering what an ethical decision is we need to consider how do we define

what is good.

Defining the good

Universal ethical principles are ethical principles that most cultures agree on.

The golden rule is the principle of treating others as one would like to be treated.
However consideration needs to be given to the fact that good for self, might not
necessarily be good for others.

The platinum rule is the principle of treating other as they want to be treated.

Common ethical standards include:

- Religion
- Laws and regulations
- Individuals or group norms and value
- Rules and codes of conduct

Each of the common ethical standards has weaknesses which need to be

considered when using them as a basis for measure a decision against.

3) What source of ethical standards should we use?

In determining what ethical standard we should use to evaluate a situation we

need to understand the two board categories of ethical challenges we can be faced
with:

a) Making an ethical decision and

b) Facing an ethical dilemma

Making an ethical decision

Unambiguous decisions are ethical decisions where there is a clear distinction
between right and

Ethics 14
 The challenge when making an ethical decision is to make the right choice or
decision. This can occur when we do not know right from wrong, if we are being
pressured by others, when we do not feel responsible for the decision or when
there is little or no personal cost attached to making a decision.

Resolving ethical dilemmas

An ethical dilemma is a situation where we are faced by two or more choices, all of
which may lead to unethical or less desirable outcomes.

The outcome is considered unethical as it can often do harm no matter what

course of action is taken, which results in no clear distinction between right or
wrong choices.

Refer to page 69 of Ethics for Accountants and Auditors (4th Edition) for a summary
of ethical challenges and dilemmas.

With respect the ethical dilemmas we need to consider options that will do the
least harm to the fewest people or which results in the least amount of negative
impact.

We should always evaluate our decisions for ethical challenges whether they are
unambiguous or result in a dilemma.

We can use the Five Tenets of ethical decision making as an evaluation tool.

There are 5 primary theoretical perspectives that can be used to make better
ethical decisions and to assist in dealing more effectively with ethical dilemmas.
1. The utilitarian approach
2. The deontological approach
3. The fairness and justice approach
4. The common good approach
5. The virtue approach

1 The Utilitarian approach

Uses the consequential approach to ethics – the possible outcomes of a decision

or action are very important in determining if the decision or action should be
taken.

The principle is to take the course of action that will result in the greatest benefit to
the greatest number of people. Ideally everyone should benefit from the decision.

TENET 1
Ask yourself, who will benefit and who will be harmed? Can we make a
decision that harms on one? If not, can I make a decision that will result
in the least harm to the fewest number of people and the most good for
the greatest number of people?

2 The deontological approach

Absolutism argues that we should do what is right because it is the right thing to do

Ethics 15
 and not for some other reason or outcome. We should not consider the possible
consequences of the decision as a justification.

The categorical imperative was developed as a logic test of ethical decision

making. In using the categorical imperative two primary decision making rules
need to be applied – universalizability and reversibility.

T TENET 2
Ask yourself, if I make a decision, or take a course of action can the
decision or action be made into universal law that applies to everyone?
Am I willing to have the decision or action done unto me? Which decision
f
or action protects the rights of everyone?

3 The fairness and justice approach

Giving each person what he or she deserves or giving each person their due.

The approach is all about fairness, however the weakness of this approach is in
determining what fairness is.

Should we apply different rules to different people yet still ensure that they are
treated fairly and equitably.

TENET 3
Ask yourself, if I make a decision, or take a course of action, is the
decision or action fair and equitable to everyone involved? If not, what is
the fairness alternative? If one group of person gains priority, can this be
justified?

4 The common good approach

This approach asks whether our actions or decisions are in the best interest of
ourselves and society as a whole.

TENET 4
Ask yourself, if I make a decision, or take a course of action, is the
decision or action furthering the common good? Does the decision or
action serve my community as a whole? If I should publish my decision
or action in a public forum, will people in my community support my
decision or action?

5 The virtue approach

That which is morally right is something that helps us and others reach our
purpose and to do what is mutually beneficial for everyone.

We develop a virtuous character by practicing good habits. The virtues approach is

very personal and is about an individuals character.

TENET 5
Ask yourself, if I make a decision, or take a course of action, does the
decision or action make me feel like the person I am meant to be? Does
the decision or action help me to meet my purpose or potential? Do I feel
good about my decision or action, or have I acted deficiently or in
Ethics
excess? 16
 4) Using the Five Tenets as a framework for making and evaluating ethical
decisions

When faced with an ethical choice or dilemma one must ask themselves the key
questions of the Five Tenets.

The perspective of others is also important when considering whether a decision is

an ethical one.

5) Conclusion
The framework for making ethical decisions should be utilized for working through
challenging ethical decisions.

The framework should be used to reduce or eliminate ethical problems and

dilemmas.

Ethics 17
Unit 4
APPLYING THE FIVE TENETS OF ETHICAL DECISION MAKING
After studying this topic you should be able to:
• Understand ethical issues in the context of real-life situations
• Use and apply the Five Tenets to real-life case studies in
Outcomes order to evaluate decisions or courses of action for the
forthis unit (un)ethical impact.
• Use the Five Tenets to make better ethical decisions.
Overview of the In this chapter we will review a practical, real-life ethical situation and
study topic will apply the Five Tenets to the decisions made and actions taken.

We will evaluate whether or not the Tenets could have assisted in the
situation.
Course material The following course material has been provided to you:
• Ethics for Accountants and Auditors (4th Edition) – Chapter 1,5
and chapter 6
• Lecture notes
• Applying the Five Tenets of Ethical Decision Making – video
• Discussion board questions (Ethics week 1)
Manner of This topic can be assessed through the application questions though
assessment the following assessment types:
• Ethics quiz
• Integrated assignment
• Ethics test (written)

Ethics 18
 1) Introduction

We will be applying the ethical decision making framework (The Five Tenets) to the
decisions made at KPMG SA which lead to the scandals in 2017/2018.

2) The Five Tenets

Refer back to Chapter 5 – Ethical Decision Making, relating to The Five Tenets of
ethical decision making, and be familiar with the key critical questions asked in
order to evaluate the ethical nature of a decision or course of action.

The Five Tenets should be applied to decisions or actions before they are
implemented for best results, however can be applied after the decision or action
has been implemented to learn from them.

3) Applying the Five Tenets to the Estina Dairy Farm scandal

A
Refer to pages 4 to 8 of your Ethics for Accountants and Auditors (4th
cEdition) textbook or the end of these summary notes for background
information relating to the scandal.
r

ical moment in the situation is that Jacques Wessels, KPMG SA Audit Partner, was
made aware of the possible financial irregularities regarding the Gupta wedding
expenses, by the tax manager.

Had Wessels followed up on the financial irregularities KPMG SA probably would

not have been negatively impacted and instead of being exposed in the
wrongdoing they could have exposed it.

Jacques Wessels had 3 choices:

1. He could have stopped the audit of Linkway Trading to investigate the
irregularity brought to his attention;
2. He could have given Linkway a qualified audit opinion indicating that most
of the Linkway’s finances were above board except for a single possible
financial irregularity which fell outside the scope of the audit.
3. He could have given an unqualified audit opinion indicating Linkways’s
finances were completely above board and that no financial irregularities
were encountered.

It is clear that Wessels opted for option three, giving Linkway an unqualified audit
opinion.

Let us review this decision based on the Five Tenets.

Ethics 19
3.1) Tenet 1

TENET 1
Who will benefit and who will be harmed? Can we make a decision that
harms no one? If not, can I make a decision that will result in the least harm
to the fewest number of people and the most good for the greatest number
of people?
We would need to ask if giving Linkway an unqualified audit opinion harmed anyone or
put anyone at risk?

It is the responsibility of the auditing and accounting professionals to be objective,

transparent and to safeguard the public and other stakeholders from financial
mismanagement.

Remember many financial investment decisions are made based on audit opinions.

By ignoring the irregularity, Wessels put the interests of his clients above those of the
stakeholders and additionally put the reputation of KPMG SA at risk, as he
contravened the auditing standards. Essentially Wessels ignored all other
stakeholders.

Had Wessels decided to issue a qualified audit opinion, Linkway would have been
placed under public scrutiny, which could have resulted in an investigation and the
money-laundering could have been identified. KPMG SA’s reputation may have been
safeguarded. This would have resulted in less harm to the fewer people when
compared to issuing an unqualified opinion.

Finally had Wessels decided to stop the audit and investigate the financial irregularity,
KPMG SA might have uncovered the wrongdoings of Linkway which would have
harmed Linkway but KPMG SA’s reputation for being objective and transparent would
have been reinforced. This could also have resulted in Linkway being fully exposed
which may have protected the stakeholder’s of Linkway.

Given that Wessels opted to issue an unqualified opinion, we can see that his decision
went against the First Tenet as he did not consider taking an action that would do the
least harm to the fewest people.

3.2) Tenet 2

TENET 2
Can the decision or action be made into universal law that applies to
everyone? Am I willing to have the decision or action done unto me? Does
the decision or action protect the rights of those involved?

We need to test the action taken by Wessels. If we made the decision taken by
Wessels into a universal principle which all auditing firms should follow, would this be
beneficial?

The answer should be NO. If all auditing firms were to ignore financial irregularities
and issue unqualified opinions, then no financial results could ever be trusted.

Ethics 20
 Investment decisions would not be based on true information and it would be easier for
financial irregularities to take place.

Wessels should have asked himself what if he was an investor in Linkway Trading
(reversibility)? Would he have wanted to be an investor in such an entity?

Providing an unqualified opinion goes against the Second Tenet.

Had Wessels investigated the irregularity this would have been made into universal
law – auditing firms must investigate financial irregularities. – and the world would be
more financially stable with more transparency. Investors would feel more comfortable.

3.3) Tenet 3

TENET 3
Is the decision or action fair and equitable to everyone involved? If not, what
is the fairness alternative? If one group of person gains priority, can this be
justified?

Wessels should have asked himself if “giving an unqualified opinion to Linkway, was
fair and equitable to everyone involved?”

The answer is NO. The decision was not fair to taxpayers or beneficiaries of the Estina
Project. It was also not fair or equitable to KPMG SA to receive a payment for audit
services, which were not rendered in terms of professional standards.

Any benefits received by KPMG SA and Linkway cannot justify the decision.

The decision put KPMG SA at great risk from a reputational point of view and further
put great risk on the interested stakeholders of Linkway.

Had Wessels investigated the irregularity, any further harm to stakeholders of Linkway
would have stopped. Although Linkway would have been harmed by the investigation
as they would have been exposed, this harm can be considered justified. It would have
been the most fair and equitable decision for all parties.

3.4) Tenet 4

TENET 4
Is the decision or action furthering the common good? Does the decision or
action serve my community as a whole? If I should publish my decision or
action in a public forum, will people in my community support my decision or
action?

Wessels should have asked himself whether or not he would feel comfortable with
publishing his decision to ignore the financial irregularity in the public, or to SAICA and
the IRBA or to his colleagues at KPMG SA. The answer to this question should have
been that he should have felt discomfort and should have indicated to him that the
decision was not in the interests of common good.

Additionally his decision to ignore the irregularity did not serve the community as a
whole. Wessels should have asked where the funds were received from, as the

Ethics 21
 possiblility always existed that Linksway may have obtained the funds from an
inappropriate means, which would indicate that the a stakeholder group was not being
appropriately served.

3.5) Tenet 5

TENET 5
Does the decision or action make me feel like the person I am meant to
be? Does the decision or action help me to meet my purpose or
potential? Do I feel good about my decision or action, or have I acted
deficiently or in excess?
We cannot answer for Wessels, however we can assume that the decision he made did
affect the purpose and potential of KPMG SA as a whole.

Wessels and other KPMG partners and executives either resigned or were fired after the
incident. From this we can assume that they had not met their own potential or lived up to
their purpose of their profession, organisation or personal lives.

Wessels must have known that his decision to ignore the irregularity would have
consequences for his own and his colleagues’ careers as well as KPMG SA’s reputation.

The purpose of the accounting and auditing profession is to safeguard stakeholder funds,
by ignoring the irregularity, this purpose was not met.

Had Wessels made the decision to investigate the irregularities he should have been able
to answer yes the Fifth Tenet questions.

4) Summarising the outcomes of the Five Tenets and making the ‘right’
decision

From the decisions available to Wessels, it is clear that the better decision was to
either:
1) Provide a qualified audit opinion or,
2) Stop the issuing of the audit opinion and investigage the irregularity

These two decisions would have reduced the risk to KPMG SA and ensured
that the majority of stakeholders benefitted in the long run.

5) Additional application of the Five Tenets

Refer to section 4.1 and 4.2 in your textbook for additional application relating to
the Five Tenets and KPMG SA.

6) Conclusion

The Five Tenets can help individuals and organisations to make better ethical
decisions.

The process evaluates the proposed decisions or actions based on whether or not
they are ethical or not.

Ethics 22
Unit 5
THE MODERN CORPORATION AND ITS MORAL OBLIGATIONS
After studying this topic you should be able to:
• Explain why the moral status and obligations of corporations have
become prominent
Outcomes for this • Provide arguments for and against corporate social responsibility
unit • Articulate what corporate moral agency entails
• Discuss the different strands of stakeholder theory
• Distinguish between the company as property and the company as
an entity
• Explain the six capitals integrated reporting framework

Overview of the Corporations have an influence on the societies in which they operate.
study topic
This chapter will explore the theories relating to a corporation’s moral
obligations to the society in which they operate.

Course material The following course material has been provided to you:
• Ethics for Accountants and Auditors (4th Edition) – Chapter 8
• Lecture notes
• The modern corporation and its moral obligations – video
• Discussion board questions (Ethics week 3)

Manner of This topic can be assessed through the application questions through the
assessment following assessment types:
• Ethics quiz
• Integrated assignment
• Ethics test (written)

1) Introduction

Corporates have an impact on society, culture and the environment, which has led
to various concerns in recent years, leading to such questions as to:
a) Do corporations have a social responsibility towards society or do they only
have a responsibility to make a profit?
b) Should corporations be regarded as moral agents with moral obligations?
c) For whose benefit should corporations be managed?

Some theories have been developed in an attempt to answer these questions.

As accountants and auditors we need to have an understanding of these theories,

as corporations are expected to present an integrated report which highlights not
only the financial but also social and environmental performance of the
corporation.

We will look into social responsibility of corporations and then discuss whether or
not corporations should be considered moral agents and finally discuss the
different versions of stakeholder theory.

Ethics 23
 2) Corporate social responsibility

Do corporations only have moral responsibility to their shareholders or do they also

have responsibilities towards the societies within which they operate?

a. Milton Friedman
Friedman believed that businesses had any obligation other than making
profits for their shareholders.

Business executives are employees of the owners of the corporations and

therefore should serve the interests of the employers – making profits,
while conforming to the basic rules of society.

As an individual the executives may have moral responsibilities which they

can exercise privately. Corporations are not moral agents and therefore do
not need to utilize corporate resources on social responsibility. If executives
do so, they would be stealing company resources.

Friedman saw funds being spent on social responsibility as a tax on

shareholders.

Under certain situations social responsibility can be justified. The first being
when the owners decide to spend money on social responsibility as the
owner is essentially spending money that belongs to him as he wishes.

The second situation is when the corporation will stand to benefit from such
social responsibility. In this regard the company is acting for its own benefit.
Upskilling of local labour force would be an example of this.

b. Christopher Stone
Stone rejects the claims of Friedman, that managers only have a moral
responsibility to make profits for shareholders and that corporations have

no moral obligation to society.

Managers obligations towards shareholders:

There is no implicit promise from managers to shareholder’s to maximise
profits (promissory argument). Most shareholders never meet the
managers, so how can this promise exist.

The second point Stone makes is with regards to the agency argument.
Friedman believed managers act as agents of the shareholders –
managers have a responsibility to look after the interests of the
shareholders. Stone rejects this because both legally and factually it is
wrong. Legally the courts do not recognize managers as agents of
shareholders. Factually if this was the case managers would always seek
the wishes of their shareholders and act accordingly.

Corporations and the law:

Stone believed that in addition to being required to obey the law, managers
had a further obligation to act with moral responsibility towards society.

The adherence to law needs to be complemented by self-initiated corporate

social responsibility.

Ethics 24
 3) Corporate moral agency

A corporation is considered a legal person (juristic person). As a legal person a

corporation has specific rights and liabilities/obligations.

Friedman again did not see corporations themselves as moral agents but only that
the individuals within the corporation as such moral agents who can exercise their
moral obligations in their personal capacity.

a. Peter French

French disagreed with Friedman that corporations were not moral agents.

He considered the principles of moral responsibility

- An agent must be linked to an event
- The event must be intended by the agent

What needs to be considered with regards to corporations is whether

the event should be linked to the corporation or the individuals within
the organization.

French believed that corporations should be viewed as having

corporate intentions and that their actions should be linked to the
corporation.

Corporate Internal Decision (CID) structure:

Decisions within an organization, affecting the organization are made by
individuals within the organization based on an organizational flow chart
(organogram) and should comply with corporate policies. The decisions
taken should be linked to the purpose of the organization.

4) Stakeholder theory

Edward Freeman challenged Friedman’s shareholder primacy theory which is

the premise that corporations should be managed only for the benefit of
shareholders.

a. Edward Freeman

The shareholder primacy theory was rejected by Freeman on both a legal

and economic argument.

Legal argument:
In recent years, many court cased have found that corporations have a
duty towards stakeholders other than shareholders. Other stakeholders
have included employees, customers, suppliers and local communities.

Economic argument:
When corporations pursue their own goals they often do so by polluting the
environment or disrupting the local communities, which is not always
balanced out. For this reason corporations need to be regulated and
corporations need to become accountable for their corporate actions.

Ethics 25
 The stakeholder corporation:
Within Kant’s classical theory on ethics, he stated that no person should be
treated as a means to an end, but that all persons should be respected.
Based on this Freeman argues that corporations and managers may not
violate the rights of others while trying to achieve corporate objectives.
Effectively corporations have moral objectives to respect the rights of both
shareholders and all their stakeholders.

Freeman’s theory implies that all stakeholders should be treated equally,

however this opinion has resulted in division in terms of the equality of
treatment.

b. Kenneth Goodpaster
Goodpaster challenges Freeman with regard to treating all stakeholders
equally.

He believes managers have a fiduciary duty to shareholders to maximize

profits for shareholder benefit, which is similar to Friedman’s theory,
however he believes that managers also have a moral obligation to other
stakeholders of the corporation and that the fiduciary duty to shareholders
cannot be at the expense of other stakeholders.

Managers

Local
Shareholders
community

Corpration

Suppliers Customers

Employees

Network of corporate stakeholders

5) The company as an entity

Thomas Donaldson and James P. Walsh provide the view of the corporation as (1)
property and (2) an entity. These views provide for a different understanding of
moral obligations for corporations.

When we see a corporation as property, the company serves the interests of the
shareholders. Managers have moral obligations to ensure that the corporation
serves the best interests of the shareholders.

Ethics 26
 When we see a corporation as an entity we consider the network of relationships it
has with its various stakeholders and can see that the corporation will only be
successful if it maintains good relationships with all its stakeholders, which is the
responsibility of the managers.

Within corporate governance structures and in terms of the Integrated Reporting

Framework companies rely on six kinds of capital to operate and their operations
also affect the same capital structures.

Capital structures:
1) Financial capital (fund to run the operations)
2) Manufactured capital (infrastructure, equipment, etc. to run operations)
3) Intellectual capital (knowledge, ideas, etc. used in operations)
4) Human capital (competent and experience people to run operations)
5) Social and relationship capital (stakeholder relationships, trust and reputation)
6) Natural capital (environmental resources required for the operations)

A successful company effectively uses the capital structures together and it can
deliver on its mission and vision, which is acting in the best interests of the
corporation.

6) Conclusion

The various theories on social and ethical responsibility has shifted over time, to a
view where corporations a viewed as moral agents with obligations towards
society.

Ethics 27
Unit 6
MANAGING ETHICS
After studying this topic you should be able to:
• Explain why accounting and auditing professionals need a
proper understanding of the governance and management of
Outcomes for ethics
this unit • Identify the different elements of the ethics management
process
• Distinguish between different kinds of codes of ethics that
companies can opt to use
• Indicate what can be done to institutionalise ethics in
organisations
• Describe what the process and standards of internal and
external reporting on organisational ethics entails

Overview of the We will look at a framework for governing and managing ethics in
study topic organisations in a systematic and disciplined manner.

Course material The following course material has been provided to you:
• Ethics for Accountants and Auditors (4th Edition) – Chapter 10
• Lecture notes
• Managing ethics – video
• Discussion board questions (Ethics week 3)

Manner of This topic can be assessed through the application questions though
assessment the following assessment types:
• Ethics quiz
• Integrated assignment
• Ethics test (written)

1) Introduction

Recent scandals have proved that there is no guarantee that organisations will
behave ethically. It is very important that organisations closely manage their ethics.

There are four important reasons why accountants and auditors should be familiar
with organizational ethics management:

1) They need to ensure the organization they work for is ethical as it reflects on
their professional reputation
2) Integrated reporting has become far more relevant and accountants and
auditors need to be able to understand and advise clients in this regards
3) Auditors are expected to audit integrated reports
4) Accountants and auditors often serve on governing bodies which oversee
ethical performance of organisations.

The purpose of managing and governing ethics in an organization is to build a

culture which makes it easy and natural for employees of the organization to
behave ethically.

Ethics 28
 During this chapter we will discuss the various aspects of managing ethics in an
organization.

2) Leadership commitment

This is the most important aspect of managing ethics in an organization. If the

leaders are not committed to behaving ethically, those who work for them will also
not be committed.

The company leaders (usually the board of directors) should set the ethical tone for
the organization and should act with integrity and should not allow for personal
interests to override acting in the best interests of the company.

The commitment to ethics should be communicated to all stakeholders and

sufficient resources (time, money and employees) should be provided to ensure
ethics is effectively managed.

All levels of management and leadership should be aware of and communicate

ethical standards and values.

3) Governance structures

The governing body of the organization should determine a strategy for

determining and managing the ethical culture of the organization. The body should
also approve the codes and policies that will provide ethical guidance. The
governing body should also provide oversight of the ethical performance of the
organization.

This implies that management of the entity should provide regular reports relating
to the ethical performance of the company.

In accordance with the Companies Act of South Africa, it is a requirement for

certain companies to establish a Social and Ethics Committee.

4) Ethics management

The governing body and their sub-committees are very important in the oversight
of the ethics management however they are not involved in the day to day
operations of the corporation. The responsibility for the management of ethics
therefore needs to be tasked to a person or group of people within the
organization.

It should be written into their job description, and they should be referred to as the
ethics officer. The ethics officer is responsible for five ethics management
activities:
1) Ethics risk assessment
2) Ethics strategy
3) Code of ethics and policies
4) Institutionalisation of ethics
5) Monitoring and internal reporting

Ethics 29
 1) Ethics risk assessment
Risk – conditions or behaviours that effect a company either positively or
negatively

Ethics risk is potentially detrimental or beneficial outcomes cause by ethical

and unethical behaviours.

Both positive and negative ethical risks should be determined through

stakeholder engagement. Risks identified should be weighed up for
significance and probability of occurrence.

2) Ethics strategy
Once significant risks have been determined strategies need to be developed
in order to manage this risk (achieving or avoiding).

The entity will need to determine their desired state of ethics that they wish to
achieve. Thereafter they can determine which strategy they wish to apply.
Strategies include a compliance strategy and an integrity strategy.

Compliance strategy
Objective is to prevent unethical behaviour.
Codes of ethics and standards are set and the organization is measured
against these codes and policies.

When deviations from codes or policies are identified corrective action and
disciplinary action is taken.

A compliance strategy is a rules-based aapproach.

Integrity strategy
This is a value-based approach which focuses on raising the ethical
responsibility within the organization.

Instead of focusing on minimizing incidences of unethical behaviour, the

organization promotes ethical responsibility. This approach requires all
employees to take responsibility for ethical performance.

Once a strategic approach has been determined, areas of focus need to be

determined and then responsibilities and resources need to be planned.

3) Code of ethics and policies

Ethical standards need to be set to guide the organization. The standards are
normally laid out in a code of ethics or ethics policies.

A code of ethics identifies the standards of ethical behaviour that all employees
need to adhere to. They are also used to assess the ethical performance of the
organization as a whole.

Codes of ethics can either be directional or aspirational.

Directional codes:
Very specific codes which clearly prescribe what behaviour is unacceptable
and what is expected of employees.

Ethics 30
 Strengths:
- They are very specific
- The clearly state what should or should not be done

Weaknesses:
- There is very little discretion allowed for employees (leads to “if its not
forbidden it must be allowed).
- Can result in too many rules, which makes them difficult to recall and
enforce.

Aspirational codes:
Codes that are less directive and identify with ethical values, norms and
principles that should guide employees in their actions.

Employees can use discretion in their jobs.

Strengths:
- They are short codes which make them easy to recall therefore more
easy to live by

Weaknesses:
- Can be considered vague with not enough guidance.
- Can be considered to lack in authority
Determining which code to use is aligned to the ethics strategy of the organization.
Directional codes are more appropriate for compliance strategies while aspirational
codes are better for integrity strategies.

4) Institutionalisation of ethics
The process that has followed above needs to be instilled within the
organization – made real.

The process of institutionalizing ethics within the organization is done as

follows:

1) Communicating the organisation’s ethical expectations clearly with all

stakeholders.
2) Training stakeholders on the ethical expectations so that they may better
understand how to achieve them.
3) Selection and promotion involve selecting (hiring) and promoting key
people within the organization who display integrity to ensure ethical
expectations can be maintained.
4) Reward and discipline involve ensuring that good ethical behaviour is
rewarded and unethical behaviour is punished.
5) Safe reporting system involves ensuring that stakeholders feel safe when
wanting to report unethical behaviour.
6) Information management system must be established to collect data
relating to ethical matters so that it may be monitored, investigated,
reported on and additional strategies developed.

5) Monitoring and internal reporting

Using the information from the information management system the
organization can use the information to analyze and interpret their ethical
performance and then to report thereon within Integrated Reporting or in Social
and Ethics Committee meetings.

Ethics 31
 5) Independent assessment and external reporting
It is important for an organization to assess their ethical performance however it
should be done independently either through internal audit functions or by an
external party.

Internal auditors usually assess adequacy and effectiveness of ethics

management. This will determine whether or not the organization has achieved its
desired ethical outcomes.

Organisations are expected to report to their stakeholders regarding ethics as part

of the external reporting (triple bottom line or integrated reporting). Stakeholders
should be able to understand and interpret the reports.

6) Ethical culture

Ethical culture is about making ethical conduct a norm within an organization. We

can distinguish between fear-based and conviction based ethical cultures.

Fear-based are those where people behave ethically because they fear the
consequences.

Conviction-based is motived by the people themselves and their belief in doing the
right thing, which results in less monitoring being required.

7) Conclusion

The process of governing and instilling ethics within an organization requires

careful planning and consideration and monitoring.

Accounting and auditing professional need to understand how ethics is

institutionalised within their own organizations and those of their clients.

Ethics 32
Unit 7
ACCOUNTANTS AND AUDITORS AS PROFESSIONALS
After studying this topic you should be able to:
• Discuss the difference between personal ethics and
professional ethics
Outcomes for • Understand the concepts of profession and professionalism
this unit • Demonstrate an awareness of the background and
development of professions
• Discuss the characteristics that are useful in distinguishing
professional from non-professional occupations
• Discuss whether accountants and auditors are members of a
profession
• Illustrate the dimensions of professionalism with specific
reference to the accounting and auditing professions
• Discuss the desirability of licensing of individuals to perform
professional services
• Explain the key roles of the professional accounting bodies
operating in South Africa

Overview of the We will look at the professional ethics of accountants and auditors as
study topic well as establish how to distinguish professionals from non-
professionals.

Course material The following course material has been provided to you:
• Ethics for Accountants and Auditors (4th Edition) – Chapter 12
• Lecture notes
• Accountants and auditors as professionals – video
• Discussion board questions (Ethics week 3)

Manner of This topic can be assessed through the application questions though
assessment the following assessment types:
• Ethics quiz
• Integrated assignment
• Ethics test (written)

1) Introduction

In chapter 2 we established the ethics and morality are used interchangeably and
refer to whether behaviour is acceptable or responsible.

Personal ethics was identified as the ethics of the individual and can be affected by
religion, beliefs and experiences.

Organisational ethics is the ethics which focuses on the behaviour relating to an

organization.

Professional ethics is the set of standards adopted by professionals.

Ethics 33
 2) What is a professional?

A profession is established because of a social need for services which require

specialized knowledge and skills. Such professionals wish to gain from their
specialized knowledge and skills and wish to control the market by creating an
education and training system which results in only accepting those into the
profession who are competent.

It is important to be able to distinguish professionals from non-professionals

through the key characteristics of professionals:

1) Entrance into the profession requires an extensive period of education and

training.
2) Professional knowledge and skill are essential to the well-being of the larger
society.
3) Professionals usually have a monopoly on the provision of professional
services.
4) Professionals often have an unusual degree of autonomy when rendering
services.
5) Professionals claim to be regulated by ethical standards

3) Types of professionals in society

ALTURISM ADVOCACY
LICENCED CLASSIC TRUST-SEEKING
EXPERTISE - Doctor - Financial planner
- Engineer - Lawyers
- Investment
bankers
SOCIAL EFFICIENCY BARRIER
ESOTERIC PROFESSING OWNER-AGENT
KNOWLEDGE - Academics - Management
- Policymakers - Advertising
- Consultants
PUBLIC SPHERE PRIVATE SPHERE

Horizontal axis is work performed for the benefit of the public or private.

Vertical axis is there a need to license professionals to distinguish their

level of knowledge

The social efficiency barrier indicates where social welfare is enhanced if

professional groups are pre-certified as the public would not be required to
establish the competence of the service provider.

Above the social efficiency barrier we would expect services providers to be

licensed and below the barrier the risk of assessing competence of the service
provider is that of the individual.

Four professionals are determined:

1) Classic
Those who service the public sphere would be expected to be licensed.

Ethics 34
 2) Trust-seeking
Members require licensing and they service mostly a private client and service
the needs of the client.

3) Professing
Members are actively involved in creating knowledge and is generally in the
public interest. No licensing is required.

4) Owner-agent
No formal licensing is required and they service the private interests of
whoever pays for their services.

In terms of accountants it is important to distinguish between an accountant

who performs duties of an accountant and an auditor or chartered accountant.

Auditors are placed above the social efficiency barrier as formal licensing is
required.

4) Professional bodies

Professional bodies have a responsibility to protect the standing of their

professions as such they:

1) Regulate entrance to the profession through education and training

2) Administers a registration system for candidates who want to practice as
professionals
3) Sets or controls the technical standards with which its members must comply
4) Issues ethical standards to the members of the profession so that good
conduct is the norm

Various professional bodies within South Africa that are linked to the accounting
profession:

1) South African Institute of Chartered Accountants (SAICA)

2) South African institute of Professional Accountants (SAIPA)
3) Chartered Institute of Management Accountants (CIMA)
4) Association of Chartered Certified Accountants (ACCA)
5) Institute of Internal Auditors (IIA)
6) Independent Regulatory Board of Auditors (IRBA)

5) Conclusion

Chartered accountants and auditors may certainly be considered professionals. As

a professional they should aim to ensure that professional services are rendered in
the public interest and should comply with the necessary professional ethical
standards.

Ethics 35