Faculty of Commerce

Department of Finance
Bachelor of Commerce Honours Degree in Finance
Corporate Governance and Ethics
CFI4107
 ETHICS & CORP GOV
MANAGING BUSINESS ETHICS:

• Tools and Techniques of Business Ethics

Management
 Introduction

• Attempt to formally or informally manage ethical issues or problems

through specific policies, practices and programmes.
 Components of Business Ethics Mgt

• Mission or value statements

• Codes of ethics
• Reporting/advice channels
• Risk analysis and management
• Ethics managers, officers and committees
• Ethics consultants
• Ethics education and training
• Stakeholder consultation dialogue, and
partnership programmes
• Auditing, accounting and reporting
(Crane and Matten, 2007)
 Improving Ethical Behaviour
• Selection
• Codes of ethics and decision rules
• Top management leadership
• Job goals
• Ethics training
• Comprehensive performance appraisal
• Independent social audits
• Formal protective mechanisms
- ethical counselors
- ethical advocate
- whistle blowing
 ETHICS PROGRAMME
 A company must have an effective ethics program to ensure
that all employees understand organizational values and
comply with the policies and codes of conduct that create its
ethical climate. Two types of ethics program can be created.
Both can be adopted simultaneously. These are:
 Compliance Orientation Programme: A compliance
orientation creates order by requiring that employees comply
with and commit to the required conduct. It uses legal terms,
statutes, and contracts that teach employees the rules and
penalties for non-compliance.
• Values Orientation: Values Orientation strives to develop
shared values. Although penalties are attached, the focus is
more on an abstract core of ideals, such as respect and
responsibility. Instead of relying on coercion, the company’s
values are seen as something to which people willingly
aspire.
 Best Practices in Ethics Programme
 The recommendations of the ethics committee should include staff training,
evaluations of compliance systems, appropriate funding and staffing of the
corporate ethics office, and effective protections to employees who "blow the
whistle" on perceived actions which are contrary to the spirit and/or letter of the
code.
 Annual training on the code is a good practice. Many corporations establish
independent "hot lines" or "help lines" where employees can seek guidance
when they are faced with an ethical dilemma, or when they encounter any
unethical conduct in the workplace.
 Every publicly listed corporation should consider establishing a regular review
system to ensure that the codes are dynamic, and are updated in the light of
new developments.
 Every member of the Board of Directors of a publicly listed corporation
should be required to sign the Code of Ethics, and pledge that she/he will
never support a Board motion to suspend the Code.
 All outside law firms and auditing firms that consult to publicly listed corporations
should be required to sign statements noting that they understand and accept
the corporation's Code of Ethics.
 Employees basically want to know what is expected or required of them to
survive and to be successful
 Code of Ethics
 Most companies begin the process of establishing organizational ethics programs
by developing codes of conduct.
 Codes of conduct are formal statements that describe what an organization
expects of its employees. Such statements may take different forms like a code of
ethics, a code of conduct, and a statement of values.
 A code of ethics is the most comprehensive and consists of general statements,
sometimes altruistic or inspirational, which serve as principles and the basis for
rules of conduct. A code of ethics generally specifies methods for reporting
violations, disciplinary action for violations, and a structure of due process.
 A code of conduct is a written document that may contain some inspiration
statements, but it usually specifies acceptable or unacceptable types of behaviour.
A code of conduct is more akin to a regulatory set of rules and as such tends to
elicit less debate about specific actions.
 A statement of values serves the general public and also addresses distinct
groups of stakeholders. Values statements are conceived by management and are
fully developed with input from all stakeholders.
 A company can have a `credo’ which can be used as a tool to define the ethical
practices that the company pursues, and the respect for stakeholders including
customers, employees, community. Credo is a Latin word which means “a set of
fundamental beliefs or a guiding principle.” For a company, a credo is like a
mission statement.
 Types of Ethical Codes

4 main types
1. Organisational or corporate codes of ethics
2. Professional codes of ethics
3. Industry codes of ethics
4. Programme or group codes of ethics - eg CAUX
Roundtable Principles
 Content of codes of ethics
 Mostly attempt to achieve one or both of the following:
1. Define principles or standards that the organisation, profession or
industry believes in or wants to uphold
2. Set out practical guidelines for employees behaviour, either generally
or in specific situations (such as accepting gifts, treating customers,
etc)
 Check out codes of different organisations
– e.g. Unilever’s Code of Business Principles: www.unilever.com
 Specific issues covered:
– Labour standards
– Environmental stewardship
– Consumer protection
– Bribery
– Competition
– Information disclosure
– Science and technology
 Code of ethics
 Corporate code of ethics often contains six core values or
principles in addition to more detailed descriptions and
examples of appropriate conduct.
 The six values that are desirable for codes of ethics include:
1. Trustworthiness
2. Respect
3. Responsibility
4. Fairness
5. Caring
6. Citizenship
 Contents of a Code of Ethics

 A well-designed code of conduct typically includes:

1. High-level endorsement from the organization’s leadership,
underscoring a commitment to integrity
2. Simple, concise, and positive language that can be readily
understood by all employees
3. Topical guidance based on each of the company’s major policies or
compliance risk areas
4. Practical guidance on risks based on recognizable scenarios or
hypothetical examples
5. A visually inviting format that encourages readership, usage, and
understanding
6. Ethical decision-making tools to assist employees in making the
right choices
7. A designation of reporting channels and viable mechanisms that
employees can use to report concerns or seek advice without fear
of retribution.
 Codes of Ethics
A study of varied firms as Exxon, Sara Lee,
DuPont, Bank of Boston, and Wisconsin Electrical
Power – found that their content tended to fall into
3 categories:
1. Be a dependable organizational citizen,
2. Do not do anything unlawful or improper that
will harm the organization, and
3. Be good to customers.
 CLUSTERS OF VARIABLES FOUND IN EIGHTY-THREE CORPORATE
CODES OF BUSINESS ETHICS

 Cluster 1. Be a Dependable Organizational Citizen

• Comply with safety, health, and security regulations.
• Demonstrate courtesy, respect, honesty, and fairness.
• Illegal drugs and alcohol at work are prohibited.
• Manage personal finances well.
• Exhibit good attendance and punctuality.
• Follow directives of supervisors.
• Do not use abusive language.
• Dress in business attire.
• Firearms at work are prohibited.
 .
 Cluster 2. Do Not Do Anything Unlawful or Improper That will
Harm the Organisation
• Conduct business in compliance with all laws
• Payments for unlawful purposes are prohibited.
• Avoid outside activities that impair duties.
• Maintain confidentiality of records
• Comply with all antitrust and trade regulations.
• Comply with all accounting rules and controls.
• Do not use company property for personal benefit.
• Employees are personally accountable for company funds.
• Do not propagate false or misleading information..
• Make decisions without regard for personal gain.
 Cluster 3. Be a Good Customer
• Convey true claims in product advertisements.
• Perform assigned duties in the best of your ability.
• Provide products and services of the highest quality.
 Effectiveness of Ethical Codes

 Nash (1981) provided 12 questions for examining the ethics of a business

decision
1. Have you defined the problem accurately?
2. How would you define the problem if you stood on the other side of the fence?
3. How did this situation occur in the first place?
4. To whom and to what do you give your loyalty as a person and as a member of
the corporation?
5. What is your intention in making this decision?
6. How does this intention compare with the probable result?
7. Whom could your decision or action injure?
8. Can you discuss the problem with affected parties before you make the decision?
9. Are you confident that your position will be as valid over a long period of time as
it seems now?
10. Could you disclose without qualm, your decision or action to your boss, your chief
executive officer, the board of directors, your family, and society as a whole?
11. What is the symbolic potential of your action if understood? If misunderstood?
12. Under what conditions would you allow exceptions to your stand?
 Ethical and Professional Standards

 It is important that employees in any profession be guided by some

ethical and professional standards as their basis for ethical conduct.
 Example: The CFA Institute Standards of Practice Handbook
(SOPH)
• Provides Professional Standards for investment practitioners.
• Allow practitioner to identify and appropriately resolve ethical
conflict.
• CFA HANDBOOK CASELETS
 Code of Conduct
 The Code of conduct or what is popularly known as the Code of Business
Conduct contains standards of business conduct that must guide actions of
the Board of Directors and senior management of the company.
 The code of conduct may include the following:
1. Company Values
2. Avoidance of conflict of interests
3. Accurate and timely disclosure in reports and documents that the
company files before Government agencies, as well as in the company’s
other communications
4. Compliance of applicable laws, rules and regulations including Insider
Trading Regulations
5. Maintaining confidentiality of the company affairs
6. Standards of business conduct for the company’s customers,
communities, suppliers, shareholders, competitors, employees
7. Prohibition for the Directors and senior management from taking corporate
opportunities for themselves or their families
8. Review of the adequacy of the Code annually by the Board
9. No authority to waive off the Code should be given to anyone in any
circumstances.
The Code of Conduct for each Company summarises its philosophy of doing
business.
Although the exact details of this code are a matter of discretion,
the following principles have been found to occur in most of the
companies:
1. Use of company’s assets;
2. Avoidance of actions involving conflict of interests;
3. Avoidance of compromising on commercial relationship;
4. Avoidance of unlawful agreements;
5. Avoidance of offering or receiving monetary or other inducements;
6. Maintaining confidentiality;
7. Collection of information from legitimate sources only;
8. Safety at workplace;
9. Maintaining and Managing Records;
10. Free and Fair competition;
11. Disciplinary actions against the erring person.
 LEADERSHIP AND INTEGRITY

• In the workplace, we are faced daily with the responsibility of making

decisions.
• Companies hire people with integrity and expertise.
• These leaders have a responsibility to the people who work for them
and the society, in general, to provide employees with guidelines for
making ethical decisions.
• Ethics and ways in which leaders apply ethical standards in work
settings is of concern and importance to all.
• IMPORTANT QUESTONS:
1. How do corporate and institutional leaders decide what is the best
decision?
2. How do employees learn to behave and work in an ethical way?
3. What is the best way to achieve several goals?
• Once that question is answered, the ethical decision is made.
 LEADERSHIP AND INTEGRITY
What do good leaders do in order to achieve ethical standards?
1. Laws. First, there are laws that guide business leaders. Breaking laws can
lead to arrest and imprisonment.
2. Individual Ethics. Laws are not enough to assure ethical behaviours.
Individual leaders and their decision-making behaviours (ethical or
unethical) set examples for employees
3. On-the-Job Ethical Conflicts. Four ethical conflicts confront leaders in
business:
– Conflict of Interest – A leader achieves personal gain from a decision
he/she makes.
– Loyalty versus truth – A leader must decide between loyalty to the
company and truthfulness in business relationships.
– Honesty and integrity – A Leader must decide if he/she will be honest
or lie: if he/she will take responsibility of decisions and actions or blame
someone else?
– Whistleblowing – Does the leader tell others (media or government
authorities) about unethical behaviour of the company or institution?
 LEADERSHIP AND INTEGRITY

• Creating and Maintaining a Culture of Integrity. The following

attitudes and practices have profound influence on integrity on the
workplace
– Relationships
– Ownership
– Systems Approach
– Recruitment
– Reward Management System
– Long-term Thinking
– Top Management Leadership
• transformational leadership
 The Role of Power and Influence
• The Role of Power and Influence
• It is important to understand the nature of power dynamics as well
as influence patterns whereby individuals or groups seek to
influence others to think or act in particular ways.
• Effective leaders have learnt how to use power wisely to influence
others.
• Sources of Power are:
– Physical Power
– Resource Power
– Position Power
– Expert Power
– Personal Power (or charisma)
– Negative Power.
 Methods of Influence:
• The six power bases allow people to use one or more methods of
influence. These can be divided into two classes: overt and unseen
• Overt Methods of Influence are
– Force
– Exchange
– Rules and Procedures
– Persuasion
• Unseen Methods of Influence are
– Ecology: relationship between the environment to individual behaviour
or attitudes. E.g
• . (i) seating patterns tend to affect interaction patters (physical
environment);
• (ii) small groups are easier to participate in than large groups
(sociological environment);
• (iii) specific, challenging but attainable targets tend to produce
commitments irrespective of their specific content (psychological
environments)
– Magnetism – the invisible but felt pull of a stronger force, as a result of
personal power.
 THE TEN STEP METHOD OF DECISION-MAKING
.
 Developed by Jon Pekel and Doug Wallace, the Ten Step Method of
Decision-making has five features that make it practically useful in
today’s highly competitive, global context, rapidly changing business
environment
 Step 1: Identify the key facts.
– “Role play” key stakeholders to see what they see as facts.
– Watch out for assuming causative relationships among
coincidental facts.
 Step 2: Identify and Analyze the Major Stakeholders.
– Make sure to identify both direct and indirect stakeholders.
– Genuinely “walk in their shoes” to see what they value and want as
a desired outcome.
 Step 3: Identify the Underlying Driving Forces.
– Think like an M.D. – look for what’s beneath the presenting
symptoms.
– Use these driving forces to develop you Step 8 preventive
component.
 THE TEN STEP METHOD OF DECISION-MAKING
.
 Step 4: Identify/Prioritize Operating Values and Ethical Principles.
– Think of this step as determining up-front “design parameters” for an
effective solution.
– Don’t rush this step – building consensus here will pay off later.
• Step 5: Decide Who Should be Involved in Making the Decision.
– All stakeholders have a right to have their best interests considered.
– If you can’t actually involve all stakeholders, have someone “role play
their point of view.
• Step 6: Determine and Evaluate all Viable Alternatives.
– Quickly brainstorm a list of possible alternative solutions to the
situation.
– Critical: all possible alternatives must pass the 3-part review-gate
criteria, i.e.
• Prevents or minimizes harm to the major stakeholders
• Upholds the combined prioritized list of operating values and ethical
principles.
• Is a good, workable solution to the situation that can actually be
implemented.
 THE TEN STEP METHOD OF DECISION-MAKING

 Step 7: Test Preferred Alternative with a Worst-Case Scenario.

– This step helps prevent a “rush to judgment” towards a wrong
solution.
– Emphasize this step when all stakeholder interests are not being
adequately considered.
 Step 8: Add a Preventive Component
– “Problem-solving heroes” want to get on to the next problem and
won’t take time for this step.
– Only immediate-solution decisions usually come back to bite you.
 Step 9: Decide and Build a Short and Long-Term Action-Plan
– The devil’s usually in the details – take the time needed to be
detailed and comprehensive.
– Make sure that the means used in your action-steps correlate with
your desired ends.
 Step 10: Use Decision-Making Checklist.
– Don’t allow group-think here – make sure everyone involved fills
this out individually.
 The Decision-making checklist involves the following tests:

1. Relevant information test. Have we obtained as much information as

possible to make an informed decision and action plan for this situation?
2. Involvement test. Have we involved as many as possible of those who have
the right to have input to, or actual involvement in, making this decision and
action plan?
3. Consequentialist test. Have we attempted to accommodate for the
consequences of this decision and action-plan on any who could be
significantly affected by it?
4. Ethical principles test. Does this decision and action-plan uphold the ethical
principles that we think are relevant to this situation.
5. Fairness test. If we were any one of the stakeholders in this situation, would
we perceive this decision and action-plan to be fair, given all of the
circumstances
6. Universality test. Would we want this decision and action-plan to become
“universal law” so it would be applicable to all – including ourselves – in similar
situations?
7. Preventive test. Does this decision and action-plan prevent or minimize
similar situations from happening again?
8. Light-of-day test. Can our decision and action-plan – including how we made
it – stand the test of broad-based public disclosure so everyone would know
everything about our actions?
 Ethics Training and Communication
 A major step in developing an effective ethics program would be to
implement a training program and communication system to train educate
and communicate employees about the firm’s ethical standards.
 Training programs can educate employees about the firm’s policies and
expectations, as well as relevant laws, regulations and general social
standards.
 These can also make employees aware of available resources, support
systems, and designated personnel who can assist them with ethical and legal
advice.
 They empower employees to ask tough questions and make ethical decisions.
 Many companies are now incorporating ethics training into their employee and
management development training efforts.
 Ethics Committee
 The oversight process of the Ethics Committee of an organization involves the
following areas to be addressed by it:
1. Review of the definitions of standards and procedures: The Committee
should review the organization's areas of operation, the activities that require a
formal set of ethical standards and procedures.
2. Facilitate Compliance: The ethics Committee has the responsibility for overall
compliance. It is the responsible authority for ethics compliance within its area of
jurisdiction. It should serve as the court of last resort concerning interpretations of
the organization's standards and procedures.
3. Due diligence of prospective employees: The ethics committee should define
how the organization will balance the rights of individual applicants and
employees against the organization's need to avoid risks that come from placing
known violators in positions of discretionary responsibility. This includes the
oversight of background investigations on employees and applicants who are
being considered for such positions.
4. Oversight of communication and training of ethics programme: The ethics
committee should define methods and mechanisms for communicating ethical
standards and procedures.
5. Monitor and audit compliance: Compliance is an ongoing necessity and the
ethics committee should design controls which monitor, audit and demonstrate
employees' adherence to published standards and procedures.
 .
6. Enforcement of disciplinary mechanism: Disciplinary provisions
should be in place to ensure consistent responses to similar
violations of standards and procedures (as against applying
different standards to different employees based on their position,
performance, function, and the like). There should be provisions for
those who ignore as well as for those who violate standards and
procedures.
7. Analysis and follow-up: When violations occur, the ethics
committee should have ways to identify why they occurred. It is
also important that lessons learned from prior violations are
systematically applied to reduce the chances of similar violations
taking place in future.
 Integrity Pact
 Developed by Transparency International (TI), the
Integrity Pact (IP) is a tool aimed at preventing corruption
in public contracting.
 It consists of a process that includes an agreement
between a government or a government department and
all bidders for a public contract.
 It contains rights and obligations to the effect that neither
side will pay, offer, demand or accept bribes; collude
with competitors to obtain the contract; or engage in
such abuses while carrying out the contract.
 The IP also introduces a monitoring system that provides
for independent oversight and accountability.
 WHISTLEBLOWING
Meaning of Whistleblowing
 Whistleblowing is the term used to define an employee’s decision
to disclose this information to an authority figure (boss, media or
government official).
 A whistleblower is an employee or former employee, or member of an
organization, especially a business or government agency, who reports
misconduct to people or entities that have the power and presumed
willingness to take corrective action.
 Generally the misconduct is a violation of law, rule, regulation and/or a
direct threat to public interest, such as fraud, health/safety violations,
and corruption.
 Blowing the whistle may include:
1. Reporting wrongdoing or a violation of the law to the proper
authorities such as a supervisor, a hotline or an inspector general.
2. Refusing to participate in workplace wrongdoing.
3. Testifying in a legal proceeding.
4. Leaking evidence of wrongdoing to the media.
 WHISTLEBLOWING
 The most common type of whistleblowers are:
1. Internal whistleblowers report misconduct to another employee or superior
within their company or agency. The usual subjects of internal whistleblowing
are disloyalty, improper conduct, indiscipline, insubordination, disobedience etc.
2. External whistleblowers report misconduct to outside persons or entities. In
these cases, depending on its severity and nature, whistleblowers may report
the misconduct to lawyers, the media, law enforcement or watchdog agencies,
or to other local, or state agencies.
3. Alumini: When the whistleblowing is done by the former employee of the
organization it is called alumini whistle blowing.
4. Open: When the identity of the whistleblower is revealed, it is called Open
Whistle Blowing.
5. Personal: Where the organizational wrongdoings are to harm one person only,
disclosing such wrong doings it is called personal whistle blowing.
6. Impersonal: When the wrong doing is to harm others, it is called impersonal
whistle blowing.
7. Government: When a disclosure is made about wrong doings or unethical
practices adopted by the officials of the Government.
8. Corporate: When a disclosure is made about the wrongdoings in a business
corporation, it is called corporate whistle blowing.
 Guidelines for Whistleblowing
 The following list is a guideline that will help an employee to determine if
a situation merits whistleblowing.
1. Magnitude of Consequences. How much harm has been done or
might be done to victims? Will the victims really be “beneficiaries”? If
one person is or will be harmed, it is unlikely to be a situation that
warrants whistleblowing.
2. Probability of Effect. The probability that the action will actually take
place and will cause harm to many people must be considered.
3. Temporal Immediacy. Length of time between the present and the
possibly harmful event. An employee must also consider the urgency of
the problem in question. The more immediate the consequences of the
potentially unethical practice, the stronger the
4. Proximity. The physical closeness of the potential victims must be considered.
For example, a company that is depriving workers of medical benefits in a
nearby town has a higher proximity than one 1000 kilometers away. The
question arises about matters of emotional proximity or situations in which the
ethical question relates to a victim with some emotional attachment to the
whistleblower.
5. Concentration of Effort. A person must determine the intensity of the unethical
practice or behaviour. The question is how much intensity does the specific
infraction carry. For example, according to this principle, stealing US$10 000
from one person is more unethical than stealing US$1 from 10 000 people.
 Common Reactions to Whistleblowing
 Some see whistleblowers as selfless martyrs for public interest and
organizational accountability. Others view them as pursing personal
glory and fame.
1. Common reactions are:
2. Termination
3. Suspension
4. Demotion
5. Wage garnishment
6. Harsh treatment by other employees
7. Ostracized by co-workers
8. Discrimination
9. Workplace bullying
 Whistle Blowing under Sarbanes-Oxley Act, 2002
(SOX): [USA]
 Section 302 of Sarbanes Oxley Act of 2002, an Act enacted by U.S.
congress to protect investors by improving the accuracy and reliability of
corporate disclosures made pursuant to the securities laws, and for other
purposes contains following provisions for whistle-blowers:
1. Make it illegal to “discharge, demote, suspend, threaten, harass or in any
manner discriminate against” whistleblowers
2. Establish criminal penalties of up to 10 years for executives who retaliate
against whistleblowers
3. Require board audit committees to establish procedures for hearing
whistleblower complaints
4. Allow the secretary of labour to order a company to rehire a terminated
employee with no court hearing.
5. Give a whistleblower the right to a jury trial, bypassing months or years of
administrative hearings
 AUDITING, ACCOUNTING, AND REPORTING
• Activities concerned with measuring, evaluating and
communicating the organisation’s impacts and performance
on a range of social, ethical, and environmental issues of
interest to their stakeholders.
• Initiatives, such as global reporting initiative (GRI) seek to
provide internationally comparative standards for aspects of
auditing, accounting, and reporting.
• Effective management of business ethics relies on being able
to assess and evaluate performance. These include social
auditing, environmental accounting, and sustainability
reporting.
 Social Accounting
This is the voluntary process concerned
with assessing and communicating
organizational activities and impacts on
social, ethical, and environmental issues
relevant to stakeholders.
Reasons for engaging in social accounting
include:
1. Internal and external pressure
2. Identifying risks
3. Improved stakeholder management
4. Enhanced accountability and transparency.
The typical framework for social accounting would
include the following elements:

1. Stakeholder consultation to identify issues regarded as salient

or of particular interest to stakeholders, prior to the main
collection of data.
2. Stakeholder dialogue following publication of the report in order
to obtain feedback and set priorities for future action.
3. Stakeholder satisfaction surveys of employees, customers, and
others together with focus groups and other methods of
communication and data collection.
4. Social auditing and other forms of internal assessment to
evaluate organisations’ performance in relation to their codes
of ethics.
 RISK ANALYSIS AND MANAGEMENT
 Managing and reducing risk has because one of the key
components of business ethics management because awareness of
potential reputational and financial risks has been one of the key
drivers of increased attention to business ethics in recent years.
 Managing business ethics by identifying areas of risk, assessing the
likelihood and scale of risks and putting in place measures to
mitigate or prevent such risks from harming the business has led to
more sophisticated ways of managing business ethics.
 This is an area of continual development, and a greater range of
ethical problems such as human rights violations, corruption, and
climate change impacts are beginning to be seen on the risk radar of
major companies.

THE ETHICS OF DOWNSIZING
When faced with the possibility of laying off excess labour, managers should explore all possibilities of
retaining their staff by resorting to some of the following options.
– Natural wastage
– Recruitment freeze
– Overtime ban
– Redeployment
– Relocation
– Ban on temporary staff
– Short-time working
– Work sharing
– Voluntary early retirement and voluntary separation
– Outplacement
– Proportionally reducing work hours 9to spread the pain of reduced employment costs across the
entire work force.
– Reducing wages (possibly weighted so that the highest paid take larger pay cuts)
– Taking work previously outsourced (such as maintenance or subcontracting) back into the
organization.
– Building inventory while demand is slack.
– Freezing hiring to avoid making overstaffing worse.
– Having people do other things, such as deferred maintenance and repair, taking training courses,
and similar activities for which they were too busy when business was better.
– Refraining from hiring to meet peak demand, which makes reductions in employment almost
inevitable when demand decreases.
– Encouraging people to develop new products, services, or markets so that their skills can still be
used by the firm.
– Putting production or staff people into sales to build demand.
STAKEHOLDER CONSULTATION, DIALOGUE AND
PARTNERSHIP PROGRAMMES
• These are various means of including an organisation’s
stakeholders more fully in corporate decision-making.
• The activities are central in the promotion of corporate
accountability.
• If ‘good’ business ethics is about doing the ‘right’ thing, then it is
essential that organisations consult with relevant stakeholders in
order to determine what other constituencies regard as ‘right’ in the
first place.
 Read

• Business Ethics: A Manual for Managing a Responsible

Business Enterprise in Emerging Market Economies.
U.S. Department of Commerce, International Trade
Administration, Washington, D.C.
 THE MISSING AUDIT WORKPAPERS

• Major "Big 6" Certified Public Accounting firms have three sources of revenue or three divisions:
Audit, tax, and Management Consulting. But the real power resides in the Audit Department
because the Audit Partners earn between $100,000-750,000 per year. An annual audit of a large
U.S. corporation can cost over $500,000 each year.
• The Securities and Exchange Commission (SEC) of the federal government requires that all
corporations selling stock on the New York Stock Exchange be audited annually by an
independent national CPA firm. The Audit Partner in-charge of the engagement directs the staff
auditors to keep audit workpapers for evidence in case of a law suit. These workpapers show
that the corporation is or is not maintaining generally accepted accounting principles (GAAP).
• During an audit in Hollywood, California a staff auditor was completing an audit of a home health
care corporation. During the investigation it was noticed that some of the accounting records
were missing. It was common knowledge that the prior corporate controller had embezzled
hundreds of thousands of dollars from the corporation and had fled the United States. The staff
auditor commented in the workpapers that the missing files could be due to the embezzlement.
Upon reviewing the workpapers, the Audit Manager rebuked the staff auditor for mentioning the
embezzlement in the workpapers.
• What are the issues involved here?
• Should the audit workpapers be re-done?
• What would you do?
• What are the short and long term consequences of not reporting the embezzlement in the
workpapers?
• What are the legal ramifications of this case?
• Who is affected by the note in the papers: stockholders, employees, auditors, the community in
general?
•
 TAX RETURN PREPARATION

• Major "Big 6" Certified Public Accounting firms are known for their accuracy and competence in
preparing 1040 tax returns. Each return is reviewed three times for accuracy in the tax department
before it is finalized. Thus major CPA firms must charge high hourly rates, which average $75 per
hour or approximately $1,000 per return, for the preparation of returns. Clients expect the best
service and advice that money can buy.
• During April of a specific tax year B.G., the Tax Partner of a "Big 6" firm, assigned a young staff
tax preparer, John, the responsibility of preparing a tax return for a very wealthy client who lived in
Honolulu, Hawaii. In preparing a return the first step is always to look at the client's prior year's tax
return to familiarize oneself with the client's sources of income and deductions.
• In reviewing the prior year's tax return, Schedule A, John noticed that the client had a $10,000
home mortgage interest expense tax deduction recorded. He telephoned the firm's client and
asked very diplomatically if the client had any mortgage interest tax deduction for the current year.
The client answered that he had "never had a mortgage on his home.”
• John thanked the client and immediately walked into B.G.'s office and asked if an amended prior
year's tax return should be prepared. B.G. said "No! Turn right on around and walk out. And
remember I will deny ever having had this conversation. Have a good day!"
• Questions:
• What should John's course of action be?
• What would you do?
• Are there any legal consequences in this situation?
• What is the best solution morally?
• How should it be implemented?
• Why was the Tax Partner against amending the prior year's tax return?
• What could the consequences be if it was amended or if it was not amended?
 THE MAGICAL $100,000

• On a weekday morning in 1975, there was an anonymous phone call to a cash teller
at one of the nation's largest national banks. The anonymous caller stated that an
employee had just stolen $$100,000 from an electronics supply subsidiary of the
bank. The Financial VP of the bank was notified; he called in one of the internal
auditors and assigned him to solve the case. The auditor, working in conjunction with
a retired FBI agent, employed a secretary and immediately set up an office at the
electronics supply plant. An analysis of the accounting records showed that the theft
involved inventory. The first step was to interview many of the 100 employees of the
plant including all plant officers. None of the employees knew anything about the
inventory.
• Second, an analysis of the Accounts Receivable records showed that a major
building construction firm only owed $9.54, though its supply trucks were always
picking up large amounts of electronic inventory. He immediately became unavailable
for questioning! Several days later the auditor was contacted by an attorney
representing the building construction firm for an appointment for his client and
himself. When the auditor arrived, the attorney stated, "I want you to know that my
client has done absolutely nothing wrong! But here is some information you might like
to know." The attorney then explained how the 30-year-old son of the president of the
electronics supply plant would sell inventory at one-half price if the construction firm
made out the checks to the son personally. They had, in effect, purchased $200,000
of inventory for only $100,000.
• This information of the theft was immediately supplied to the Financial VP and the
bank's attorneys. Within 48 hours, the president of the electronics supply plant
retired. His son had fled the state and $100,000 in cash was returned to the bank.
 THE MAGICAL $100,000

• On a weekday morning in 1975, there was an anonymous phone call to a cash teller
at one of the nation's largest national banks. The anonymous caller stated that an
employee had just stolen $$100,000 from an electronics supply subsidiary of the
bank. The Financial VP of the bank was notified; he called in one of the internal
auditors and assigned him to solve the case. The auditor, working in conjunction with
a retired FBI agent, employed a secretary and immediately set up an office at the
electronics supply plant. An analysis of the accounting records showed that the theft
involved inventory. The first step was to interview many of the 100 employees of the
plant including all plant officers. None of the employees knew anything about the
inventory.
• Second, an analysis of the Accounts Receivable records showed that a major
building construction firm only owed $9.54, though its supply trucks were always
picking up large amounts of electronic inventory. He immediately became unavailable
for questioning! Several days later the auditor was contacted by an attorney
representing the building construction firm for an appointment for his client and
himself. When the auditor arrived, the attorney stated, "I want you to know that my
client has done absolutely nothing wrong! But here is some information you might like
to know." The attorney then explained how the 30-year-old son of the president of the
electronics supply plant would sell inventory at one-half price if the construction firm
made out the checks to the son personally. They had, in effect, purchased $200,000
of inventory for only $100,000.
• This information of the theft was immediately supplied to the Financial VP and the
bank's attorneys. Within 48 hours, the president of the electronics supply plant
retired. His son had fled the state and $100,000 in cash was returned to the bank.
 THE MAGICAL $100,000

• Questions:
• Did the employees know of the lost inventory?
• If they did, why didn't they tell more?
• Were the president of the construction firm and his employees honest?
• Had they done anything wrong?
• Could they be sued?
• Why did the father retire?
• What was his responsibility?
• Should the bank's corporate officers go to the police and indite the son on
grand theft?
• The bank received back $100,000 from the theft. Where from?
 AFFIRMATIVE ACTION
• Peter is a vice president in a large corporation. As part of his duties,
he supervises fifteen managers; fourteen of these managers are
men. Only one of the managers is a black man, and one is a white
female.
• Peter is replacing one of the white, male managers. He has
advertised the position both in house and outside, as required by his
company's hiring policies. After reviewing all of the applications, he
believes that Steve, an employee of the company for 12 years, is the
most qualified applicant. However, in the pool of applicants there are
three qualified women and two qualified black men. Morally what
should Peter do?
• Questions:
• Is it fair to hire Steve, even though this will still mean that the
managers will have definite gender and race inequity?
• Is it fair to Steve to hire someone less qualified to agree with
Affirmative Action?
• Would it be more fair to hire a woman, or to hire a black male?
• Should Peter give up and let the other managers vote on who
should be hired?
 THE ELDERLY STOCKHOLDER

• By Kathleen Higgens and Robert Solomon

Philosophy
University of Texas at Austin
• You are the CEO of a corporation whose board has just decided to cut the
dividend to the stockholders. This is a matter of absolute confidentiality, as it could
have major effects on your stock prices if the information gets out before
implementation of the cut.
• At a reception, you are approached by an elderly gentleman, who retired from the
company several years ago. Virtually all of his savings and much of his retirement
income is in company stock. He asks, point blank, whether he should sell some of
his stock, in order to obtain some needed funds for living expenses. You know that
he knows a "yes" answer will indicate some dramatic decision, such as a decision
to cut the dividend, is impending. If you tell him "no," he could lose considerable
value on his stock.
• Questions:
• Do you tell him?
• What do you say?
• If you tell him, could it affect your company?
• Could this affect your own job?