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Introduction to Business

Ethics
Chapter III

Chapter Objectives:

Present the definition of ethics in general and business ethics in particular.

Recognize the need for a code of ethics that is upheld especially by setting
the right tone at the top.
Become familiar with the SEC rules and regulations relating to ethics.
Provide an overview of listing standards and suggestions relating to ethics.
Understand the boards role in setting the companys ethical codes.
Recognize the benefits of and need for an ethical workplace.
Identify incentive programs and their roles in promoting an ethical workplace.
Illustrate that actions speak louder than words in promoting an ethical
workplace.
Discuss the integration of business ethics into the business curriculum.
Provide an example of proficient implementation of an ethical code by
examining the Defense Industry Initiatives on Business Ethics and Conduct.

Key Terms
Business ethics
Code of Ethics
Committee of Sponsoring Organizations
Of the Treadway Committee (COSO)
Conference board
Defense Industry Initiatives
on Business Ethics and Conduct
Ethical Behavior
Ethical Incentives
Ethical Sensitivity

Ethical Theories
There are several broadly accepted ethical theories.

Consequentialist Theory

Nonconsequentialist Theory

The Individualist Dimension of Ethical Decision

Collectivist Theory

Metaethics

Normative Ethics

Business Ethics

Ethics In Workplace

There is increased interaction between the board of directors,


audit committees, internal auditors, external auditors,
executives, and employees in general regarding ethical
conduct in the workplace.
IS IT A RESULT OF SOX IMPLEMENTATION?
SOX is reported to have a positive impact on business codes
of ethics. But OTHER elements are required to promote
competency and integrity among all participants.

Findings of Deloitte&Touche
2007 Survey on Ethics and
Workplace
Key factors in promoting ethical workplace
management
behavior
direct supervisors
behaviour
positive
reinforcement
compensation (bonus
+salary)
behaviour of peers

Findings of Deloitte&Touche
2007 Survey on Ethics and
Workplace
Reasons why people make unethical decisions
lack of personal
integrity
job dissatisfaction
financial rewards
pressure to meet
goals
ignorance of code of
conduct

Findings of Deloitte&Touche
2007 Survey on Ethics and
Workplace
Aspects that cause incentives conflicts

high levels of stress


long hours
fast-paced
environment
inflexible schedule
highly competitive
environment

Findings of Deloitte&Touche
2007 Survey on Ethics and
Workplace
results pertaining to questionable
behavior in the workplace environment

stealing petty cash


taking credit for
another persons
accomplishment
other results

cheating on expense
reports
lying on time sheets
about hours worked

Findings of Deloitte&Touche
2007 Survey on Ethics and
Workplace
Majority believes that following actions are acceptable
use company
technology for
personal use
take a sick day when
not actually ill
date a subordinate
ask a collegue for
personal favour

THUS:
All organizations, regardless of their mission (e.g., profit
oriented, nonprofit) and size (large vs. small), should
establish an organizational ethical culture. The phrase
organizational ethical culture consists of three words:
(1) organization, which is defined as a group of individuals
or entities bound to achieve a shared goal;
(2) ethics, which is honorable behavior conforming to the
norm of the group;
(3) culture, which is a pattern of shared beliefs adopted by
the group in dealing with its internal and external affairs.

Business Ethics
Four different levels of business ethics have been identified based
on what type of business and how their actions are evaluated.
1. The society level, which defines ethical behavior and
assesses the effect of business on society.
2. The industry level, which suggests that different industries have
their own set of ethical standards (e.g., chemical industry vs.
pharmaceutical industry)
3. The company level, under which different companies have
their own set of ethical standards
4. The individual manager level, at which each manager and
other corporate participants are responsible for their own
ethical behavior

CONSEQUENTLY, one feasible way to judge ethical behavior is


to focus on determinants of business ethics and behavior such
as corporate culture, incentives, opportunities, and choices .

Business Ethics (Cont.)


Corporate Culture

Companies should promote a spirit


integrity that goes beyond compliance.

of

Incentives

Individuals within the company tend to act


according to incentives provided to them in
terms of rewards and the performance
evaluation process.

Opportunities

Effective corporate governance, internal


controls, and enterprise risk management can
reduce the opportunity for unethical conduct.

Choices

Individuals, in general, are given the freedom


to make choices and usually choose those
that will maximize their well-being.

Triangle of Business Ethics


The triangle of business ethics consisting of (1) ethics
sensitivity, (2) ethics incentives, and (3) ethical behavior.

Triangle of Business Ethics (Cont.)


Ethics sensitivity: Moral principles, workplace environment,
gamesmanship, loyalty, peer pressure, and job security that
influence ones ethical decisions.
Ethics incentives: Rewards, punishments, and requirements
for ethical behavior (e.g., tone at the top, AICPA code of
professional ethics).
Ethics behavior: Doing the right thing rises above a rulesbased mindset that asks, is this legal, and adopts a more
principles-based approach that asks, is this right?

SEC Rules on Corporate Code of


Ethics
The SEC rule describes the term code of ethics as written
standards designed to deter wrongdoing and to promote:
(1) Full, fair, accurate, timely, and transparent disclosure
in reports and documents
(2) Avoidance of conflicts of interest, including disclosure
of any material transaction or relationship
(3) Honest and ethical conduct throughout the company
(4) Accountability for compliance with the established
code of ethics
(5) Compliance with applicable laws, rules, regulations,
and professional standards
(6) The prompt internal reporting of noncompliance and
any violations of the established code of ethics to an
appropriate person or persons designated in the code.

SEC Rules on Corporate


Code of Ethics (Cont.)
The SEC extended code of ethics requirements to both the
companys principal financial officers (SOXs Section 406) and
principal executive officers (SOXs Section 407). The SEC
rules in implementing Section 406 of SOX require public
companies to disclose whether they have adopted a code of
ethics for their principal officers, including principal executive
officers, principal financial officers, principal accounting
officers, controller, or other personnel performing similar
functions in the annual report filed with the SEC.
If the company has not adopted such a code of ethics, it must
disclose the reason for not doing so.

Listing Standards
The listing standards of the NYSE further expanded on the SEC
rules by requiring listed companies to
(1) adopt and disclose a code of business conduct and ethics for
directors, officers, and employees;
(2)
promptly disclose any waivers of the adopted code for
directors and executive officers.

Example: The NYSE listing standards recommend that each


company determine its own business conduct and ethics policies,
but provide an extensive list of matters that should be addressed
by the companys code.
NASD ethics rules for Nasdaq-listed companies are similar to
those of the NYSE and further require the companys adopted
code to provide for an enforcement mechanism and any waivers
of the code for directors or executive officers to be approved
by the board and disclosed not later than the next periodic report.

Ethics Teaching in Business


School
The emerging corporate governance reforms have had a
positive impact on academic programs.
The goal of corporate governance and business ethics
education is to teach students their responsibilities and
accountability to their profession and society. Almost all
states require CPA candidates to pass an ethics exam before
licensing and report the ethics component in their continuing
education requirements. Almost all states require a minimum
amount of ethics education for their practicing CPAs.

Ethics in Institutions of
Higher Education
Academic integrity and ethical conduct by students and
faculty are important to the sustainable well-being and
reputation of institutions of higher education. This academic
integrity can be achieved when:
(1) there is an effective and fairly enforceable academic honor
code,
(2) faculty are willing to take proper action against suspected
cheaters,
(3) adequate research is conducted to identify factors that
affect academic integrity, including fundamental ethical
values,
(4) ethics are integrated into the business curriculum, and
pedagogies are developed to teach and encourage adherence
to ethical values and conducts.

Personal Ethics
In June 2005, the International Ethics Standards Board for
Accountants (IESBA), part of the International Federation of
Accountants (IFAC), issued its revised Code of Ethics for use
by professional accountants worldwide.
The key principles of the IESBAs code of ethics are:
(1) integrity,
(2) objectivity,
(3) professional competence and due care,
(4) confidentiality,
(5) professional behavior.

Reporting Business Ethics and


Conduct
Section 406 of SOX requires public companies to disclose in
their annual financial statements the establishment (or lack
of) a corporate code of conduct.
Nevertheless, public companies may choose to report their
business ethics and conduct as a separate report to their
shareholders or as part of their regular filings with the SEC.
Hint: Look for survey conducted by the Ethics and Compliance
Officer Association (ECOA) and salary.com (2006)

Financial Reporting Integrity


Framework for Reporting with Integrity

Conclusion
Ethics are broadly described in the literature as moral
principles about right and wrong, honorable behavior
reflecting values, or standards of conduct. Honesty, openness,
responsiveness, accountability, due diligence, and fairness
are the core ethical principles.
Business ethics are a specialized study of moral right and
wrong.
An appropriate code of ethics that sets the right tone at the
top of promoting ethical and professional conduct and
establishing the moral structure for the entire organization is
the backbone of effective corporate governance.
SEC rules require public companies to report significant
amendments or any waiver affecting specified officers
pursuant to the filing of their first annual report on their code
of ethics.

Conclusion
Corporate culture and compliance rules should provide
incentives and opportunities for the majority of ethical
individuals to maintain their honesty and integrity, and provide
measures for the minority of unethical individuals to be
monitored, punished, and corrected for their unethical
conduct.
Attributes of an ethical corporate culture or an integritybased culture are sense of employee responsibility, freedom
to raise concerns, managers modeling ethical behavior and
expressing the importance of integrity.
The companys directors and executives should demonstrate,
through their actions as well as their policies, a firm
commitment to ethical behavior throughout the company and
a culture of trust within the company. Although a right tone
at the top is very important in promoting an ethical culture,
actions often speak louder than words.