GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL

JOSEPH H. CUMAGUN
FINALS TOPIC

CHAPTER 5: INTRODUCTION TO ETHICS commitments, abide by the spirit as well as the

Ethics can be defined broadly as a set of letter of an agreement; do not interpret
moral principles or values that govern the actions agreements in an unreasonably technical or
and decisions of an individual or group. While legalistic manner in order to rationalize
personal ethics vary from individual to individual at noncompliance or create excuses and
any point in time, most people within a society are justification for breaking commitments.
able to agree about what is considered ethical 4. Loyalty (Fidelity) and Confidentiality - Be
and unethical behavior. In fact, a society passes faithful and loyal to family, friends, employers,
laws that define what its citizens consider to be the client and country, do not use or disclose
more extreme forms of unethical behavior. information learned in confidence; in a
professional context, safeguard the influences
Each of us has such a set of values, and conflicts of interest.
although we may or may not have considered 5. Fairness and Openness - Be fair and open-
them explicitly. Philosophers, religious minded, be willing to admit error and, where
organizations, and other groups have defined in appropriate, change positions and beliefs,
various ways ideal sets of moral principles or values. demonstrate a commitment to justice, the
Examples of prescribed sets of moral principles or equal treatment of individuals, and tolerance
values at the implementation level include laws for acceptance of diversity; do not overreach
and regulations, church doctrine, code of business or take advantage of another's mistakes or
ethics for professional groups such as CPAs, and diversities.
codes of conduct within individual organizations. 6. Caring for Others - Be caring, kind, and
Ethics is a topic that is receiving a great compassionate; share, be giving, be of service
deal of attention throughout our society today. This to others; help those in need and avoid
attention is an indication of both the importance harming others.
of ethical behavior to maintaining a civil society, 7. Respect for Others - Demonstrate respect for
and a significant number of notable instances of human dignity, privacy, and the right to self-
unethical behavior. Much of what is considered determination of all people: be courteous,
unethical in a particular society is not specifically prompt, and decent: provide others with the
prohibited. So how do we know whether we are information they need to make informed
acting ethically? Who decides what standards of decisions about their own lives: do not
conduct are appropriate? Is any type of behavior patronize, embarrass, or demean.
"ethical" as long as it does not violate a law or a 8. Responsible Citizenship - Obey just laws; if all
rule of one's profession? law unjust, openly protest it; exercise all
democratic rights and privileged responsibly
It is common for people to differ in their by participation (voting and expressing
moral principles or values. Even if two people informed views), social consciousness, and
agree on the ethical principles that determine public service: when in a position of leadership
ethical behavior, it is unlikely that they will agree on or authority, openly respect and honor
the relative importance of each principle. These democratic processes of decision making,
differences result from all of our life experiences. avoid unnecessary secrecy or concealment of
Parents, teachers, friends and employers are information, and assure that others have all
known to influence our values, but so do television, the information they need to make intelligent
team sports, life successes and failures, and choices and exercise their rights.
thousands of other experiences. 9. Pursuit of Excellence - Pursue excellence in all
matters; in meeting your personal and
CHARACTERISTICS AND VALUES ASSOCIATED professional responsibilities, be diligent,
WITH ETHICAL BEHAVIOR reliable, industrious and committed; perform
The following list of ethical principles all tasks to the best of your ability, develop and
incorporates the characteristics and values that maintain a high degree of competence, be
most people associate with ethical behavior. well informed and well prepared, do not be
1. Integrity - Be principled, honorable, upright, content with mediocrity; do not "win at any
courageous and act on convictions; do not cost".
be twofaced or unscrupulous, or adopt an 10. Accountability - Be accountable, accept
end-justifies-the means philosophy that ignores responsibility for decisions, for the foreseeable
principle. consequences of actions and inactions, and
2. Honesty - Be truthful, sincere, forthright, for setting an example of others. Parents,
straightforward, frank, candid; do not cheat, teachers, employers, many professionals and
steal, lie, deceive or act deviously. public officials have a special obligation to
3. Trustworthiness and Promise Keeping - Be lead by example, to safeguard and advance
worthy of trust, keep promises, full the integrity and reputation of their families,
 GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

companies, professions and the government 1. Person's Ethical Standards differ from
itself; an ethically sensitive individual avoids General Society
even the appearance of impropriety, and
takes whatever actions are necessary to Extreme examples of people whose
correct or prevent inappropriate conduct of behavior violates almost everyone's ethical
others. standards are drug dealers, bank robbers, and
larcenists. Most people who commit such acts
WHY IS ETHICAL BEHAVIOR NECESSARY? feel no remorse when they are apprehended,
Ethical behavior is necessary for a society because their ethical standards differ from
to function in an orderly manner. It can be argued those of society as a whole.
that ethics is the glue that holds a society together.
What would happen if for example we could not There are also many far less extreme
depend on the people we deal with to be honest. examples when violate our ethical values.
If parents, teachers, employees, siblings, co- When people cheat on their tax returns, treat
workers and friends all consistently lied, it would be other people with hostility, lie on employment
almost impossible for effective communication to applications, or perform below their
occur. competence level as employees, most of us
regard that as unethical behavior. If the other
The need for ethics in society is sufficiently person has decided that this behaving is
important that many commonly held ethical ethical and acceptable, there is a conflict of
values are incorporated into laws. For example, ethical values that is unlikely to be resolved.
laws dealing with driving while intoxicated and
selling drugs concern responsible citizenship and 2. The Person Chooses to Act Selfishly
respect for other. Similarly, if a company sells a A considerable portion of unethical
defective product, it can be held accountable if behavior results from selfish behavior. The Pork
harmed parties choose to sue throughout the legal Barrel Seam and the other political scandals
system. resulted from the desire for political power and
A considerable portion of the ethical values wealth, cheating on tax returns and expense
of a society cannot be incorporated into laws reports is motivated by financial greed,
because of the judgmental nature of certain performing below one's competence and
values. Looking at the honesty principle, it is cheating on tests are typically due to laziness.
practical to have laws that deal with cheating, In each case, the person knows that the
stealing, lying, or deceiving others. It is far more behavior is inappropriate, but chooses to do it
difficult to establish meaningful laws that deal with anyway because of the personal sacrifice
many aspects of principles such as integrity, loyalty needed to act ethically
and pursuit of excellence. That does not imply that CATEGORIES OF ETHICAL PRINCIPLES
these principles are less important for an orderly 1. Principles of Personal Ethics include among
society. others
Business decisions influence employees, • Basic justice, fairness
customers, suppliers and competitors, while • Respect for the right of others
company operations affect communities, • Concern for the right of others
governments and the environment. • Concern for the well-being on welfare
of others
WHY DO PEOPLE ACT UNETHICALLY? • Benevolence, trustworthiness, honesty
Most people define unethical behavior as • Compliance with the law
conduct that differs from the way they believe 2. Professional Ethics include among others
would have been appropriate given the • Integrity, impartiality, objectivity
circumstances. Each of us decides for ourselves • Professional competence
what we consider unethical behavior, both for • Confidentiality
ourselves and other. It is important to understand • Professional behavior
what causes people to act in a manner that we • Avoidance of potential or apparent
decide is unethical. conflict of interest
3. Business Ethics include among others
There are two primary reasons why people • Fair competition
act unethically: • Global as well as domestic justice
1. the person's ethical standards are different • Social responsibility
from those of society as a whole, or • Concern for environment
2. the person chooses to act selfishly.

In many instances, both reasons exist.

 GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

THE NEED FOR PROFESSIONAL ETHICS Specific Principle of Professional Conduct

To understand the importance of a Code
of Ethics to professionals, one must understand the 1. Service to Others - Professionals are
nature of a profession as opposed to other committed to a life of service to others.
vacation. They protect life, property, and public
welfare. To serve others, they shall be
There is no universally accepted definition prepared for heroic sacrifice and genuine
of what constitutes a profession for generations, selflessness in carrying out their professional
certain types of activities have been recognized as duties even at the expense of personal
professions while others have not. gain.
2. Integrity and Objectivity - To maintain and
Medicine, law, engineering, architecture broaden public confidence, professionals
and theology are examples of disciplines long shall perform their responsibilities with the
accorded professional status. Public accounting is highest sense of integrity and imbued with
relatively new as far as the ranking of the nationalism and spiritual values. In the
professions is concerned but it has achieved performance of any professional service,
widespread recognition in recent decades. they shall at all times, main objectivity, be
All the recognized professions have several free of conflicts of interest, and refrain from
common characteristics. The most important of engaging in any activity that would
these characteristics are: prejudice their abilities to carry out their
duties ethically. They shall avoid making
1. a responsibility to serve the public any representation that would likely cause
2. a complex body of knowledge a reasonable person to misunderstand or to
3. standards of admission to the profession be deceived.
4. a need for public confidence 3. Professional Competence - In providing
professional services, a certain level of
Careless work or lack of integrity of a competence is necessary, i.e., knowledge,
professional may lead the public to a negative technical skills, attitudes, and experience.
view toward the entire profession. All professionals Professionals shall, therefore, undertake
must have public confidence of the public to be only those professional services that they
successful. Consequently, the members of the can reasonably deliver with professional
different professions act in unison by deriving their competence. Corollary to this, it is their
respective code of conduct. express obligation to keep up with new
Code of Good Governance for the Profession in the knowledge and techniques in their field,
Philippines (E.O. No. 220, June 23, 2003) continually improve their skills and upgrade
their level of competence and take part in
This Code is adopted by the Professional a lifelong continuing education program.
Regulation Commission (PRC) and the 42 4. Solidarity and Teamwork - Each profession
Professional Regulatory Boards to cover an shall nurture and support one organization
environment of good governance in which all for all its members. Though a deep spirit of
Filipino professionals shall perform their tasks. While solidarity, each member should put the
each profession may adopt and enforce its own broader interest of the profession above
code of good governance and code of ethics, it is one's personal ambition and preference.
generally recognized that there is a general Through teamwork within a cohesive
commonality among the various codes. This Code professional organization, each member
which covers the common principles underlying shall effectively observe ethical practices
the codes of various professions could be used by and pursue continuing professional
all professionals who face critical ethical questions development as well as deepen one's
in their work. social and civic responsibility.
5. Social and Civic Responsibility -
General Principle of Professional Conduct
Professionals shall always carry out their
Professionals are required not only to have professional duties with due consideration
an ethical commitment, a personal resolve to act of the broader interest of the public. They
ethically, but also have both ethical awareness shall, therefore, serve their
and ethical competency. Ethical awareness refers clients/employers and the publics with
to the ability to discern between right and wrong, professional concem and in a manner
while ethical competency pertains to the ability to consistent with their responsibilities to
engage in sound moral reasoning and consider society. As responsible Filipino citizens, they
carefully the implications of alternative actions shall actively contribute to the attainment
of the country's national objectives.
 GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

6. Global Competitiveness - Every CHAPTER 6: BUSINESS ETHICS

professional shall remain open to Basic Concept of Business Ethics
challenges of a more dynamic
interconnected world. He or she shall rise Business ethics refers to standards of moral
up to global standards and maintain levels conduct, behavior and judgment in business. It
of professional practices fully aligned with involves making the moral and right decisions while
global best practices engaging in such business activities as
7. Equality of All Professions - All professionals manufacturing and selling a product and
shall treat their colleagues with respect and providing a service to customers. Business ethics is
shall strive to be fair in their dealings with an area of corporate responsibility where
one another. No one group of professionals businesses are legally bound and socially
is superior or above others. All professionals obligated to conduct business in an ethical
perform an equally important, yet distinct, manner.
service to society. In the eyes of the PRC, all Business ethics is based on the personal
professions are equal and, therefore, every values and standards of each person engaged in
one shall treat one other professionals with business.
respect and fairness.
Purposes Of Business Ethics
Examples of Code of Conduct and Ethics for
Professionals are shown in: Main Purpose

Appendix A- For Professional Teachers The main purpose of business ethics is to

help business and would-be business to determine
Appendix B For Internal Auditors what business practices are right and what are
Appendix C-For Management Accountants wrong. Hopefully, they are going to use this
knowledge to guide them in making the right
Examples of Code of Business Conduct and Ethics business decisions.
for Private Enterprises are presented in:
Special Purpose
Appendix D-Telecommunications Company
There are other purposes which are
Appendix E-Manufacturing Company corollary to the main purpose. These purposes
include the following:
Appendix F-Commercial Bank
1. To make businessmen realize that they
cannot employ double standards to the
actions of other people and to their own
actions.
2. To show businessmen that common
practices which they have thought to be
right because they see other businessmen
doing it, are really wrong.
3. To serve as a standard or ideal upon which
business conduct should be based.

Except for some country's organizations,

professionals which have formulated and
implemented their Code of Ethics, the business
world today does not have one universal standard
code of ethics. Each man has to evaluate a
situation according to his own belief. Often,
because there is no code of ethics to guide them,
businessmen take actions that may be wrong.
Therefore, one of the specific purposes of business
ethics is to assist the business world in formulating
codes of conduct-personal, company and
professional - which can be used as a guide in
formulating business plans and strategies and in
making business decisions.
 GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

SCOPE AND IMPACT OF BUSINESS ETHICS promote a positive image of their company. The
Business ethics covers all conduct, behavior environmental initiatives of a business leader often
and judgment in business. This includes the slightest force competitors to take similar action for an
deviation from what is right to illegal and dishonest increased beneficial effect on the environment.
acts that are punishable by law. It involves making
the right choices while engaging in such business Impact on Business Managers - The concepts and
activities as manufacturing and selling a product principles for the ethical conduct in business are
or selling and rendering a service. relegated to the managers of the business
enterprise. Thus, although the manager is
Generally, actions that are not forbidden expected to act in the best interest of the business,
by law are ethical. In some cases, however, what he cannot be expected to act in a manner that is
is legal (not forbidden by law) may be unethical. contrary to the law or to his conscience.
Business ethics therefore covers even acts that
may be legal but which are wrong because they In particular, a manager should:
violate ethical principles. • acknowledge that his role is to serve the
Business ethics is based on the personal business enterprise and the community;
values and standards of each person engaged in • avoid all abuse of executive power for
business. Since individual values differ, what is personal gain, advantage or prestige;
ethical or unethical in making profit also varies from • reveal the fact to his superior whenever his
person to person. And here lies the problem. There personal business of financial interests
is still no uniform standards of right and wrong from conflict with those of the company;
which all business may base their actions. • be actively concerned with the difficulties
and problems of subordinates, treat them
The businessman who provides fair business fairly and by example, lead them
competition is the most likely to observe the effectively, assuring to all the right of
business ethical rules of conduct, behavior and reasonable access and appeal to
judgment. Fair business competition means superiors;
achieving success solely by offering better • recognize that his subordinates have a right
products, services and terms than the competitor. to information on matter affecting them,
It is a form of business competition where success is and make provision for its prompt
gained by the merits of one's goods or services. communication unless such
communication is likely to undermine the
Economic Impact - A business has an economic security and efficiency of the business;
impact on society through the wages it pays to its • fully evaluate the likely effects on
employees, the materials that it buys from their employees and the community of the
suppliers and the prices it charges its customers. It business plans for the future before taking a
would have a positive social impact on its final decision and
employees if they are paid fair living wages and • cooperate with his colleagues and not
benefits. It will have a positive effect on its suppliers attempt to secure personal advantage at
that they paid fairly and on time for their supplies. their expense.
The effect on its customers is positive if the business
gives them good value for the price they pay for ETHICAL CHALLENGES IN TODAY'S WORLD
the products and services. In an article, "Ethical Challenges in Today's
World" written by Ms. Mercedes B. Suleik published
Social Impact - The social impact of corporate in the Business Mirror on February 13, 2018 the
governance contributes to the ethical climate of author expressed her insights on "Business Ethics"
society. If businesses offer bribes to secure work or where an inherent conflict between ethics and the
other benefits, engage in accounting fraud or pursuit of profit is more pronounced.
breach regulatory and legal limitations on their
operations, the ethics of society suffer. In addition Cited in this article is the message of Pope
to a deteriorating ethical environment, such as Francis in his Ecumenical, Evangeli Gaudium
corruption may unfairly raise the price of goods for
consumers or the quality of the product or service "Humanity is experiencing a turning point in
compromised. its history as can be seen from the advances
occurring in the sciences and technology. We are
Environmental Impact - Environmental protection is in age of knowledge and information and that this
a key area of business influence on society. has led to new and often anonymous kinds of
Businesses that implement good environmental power. We have today an economy of exclusion
policies to use energy more efficiently, reduce and inequality".
waste and in general lighten their environmental
footprint can reduce their internal costs and "In a system that idolizes increased profit,
everything that stands in its way is pushed aside.
 GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

Behind this attitude lurks a rejection of ethics. Ethics CHAPTER 7: COMMON UNETHICAL PRACTICES OF
has come to be viewed with derision as being BUSINESS ESTABLISHMENTS
counterproductive. Ethics is felt to be a threat Unethical problems in business ethics occur in
because it condemns the manipulation and many forms and types. The most common of these
debasement of the person and that ethics leads to unethical practices of business establishments are
a call for a committed response, which is outside of misrepresentation and over-persuasion.
the categories of the marketplace." 1. Misrepresentation may be classified into two
She also quoted Pope Benedict XVI's Encyclical types: direct misrepresentation and indirect
Caritas in Veritate misrepresentation.
2. Direct Misrepresentation is characterized by
"Humanity has a mission and the means to actively misrepresenting about the product or
transform the world in justice and love in human customers. This includes:
relations, even in the social and economic field.
• Deceptive Packaging - Deceptive
Market economics must be underpinned by
packaging takes many forms and is of
commitments to particular moral goods and a
certain version of the human person if it is to serve many types. One type is the practice of
rather than undermine humanity's common good. placing the product in containers of
The economy needs ethics in order to function exaggerated sizes and misleading shapes
correctly not an ethics which is people- oriented." to give a false impression of its actual
contents. An example of this type of
deceptive packaging is slack-fill packaging
where containers like cartons, tin cans and
certain plastics are filled only up to eighty-
five to ninety-five percent of their capacity.
• Misbranding or Mislabeling - Misbranding is
the practice of making false statements on
the label of a product or making its
container similar to a well-known product
for the purpose of deceiving the customer
as to the quality and/or quantity of a
product being sold.
• False or Misleading Advertising - Advertising
serves a useful purpose if it conveys the right
information. It is the principal means by
which people are informed about the
availability, nature and uses of old and new
products. However, advertising does not
always tell the "whole truth and nothing but
the truth" if it greatly exaggerates the virtues
of a product and tells only half of the truth
or else sings praises to its non- existent
virtues. If advertising does not provide a
useful service anymore to the customers, it
can become the agent of
misrepresentation.
Examples are:
a. Advertisements with pictures or
statements that convey exaggerated
impression of the product's reliability or
quality.
b. Advertisement that claims that the
product is the "fastest selling brand" or
the "product of the year".
c. Advertisements using fictitious or
obsolete testimonials.
• Adulteration - Adulteration is the unethical
practice of debasing a pure or genuine
GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

commodity by imitating or counterfeiting Among the most common practices involving

it, by adding something to increase its bulk indirect misrepresentations are caveat
or volume, or by substituting an inferior emptor, deliberate withholding of information
product for a superior one for the purpose and business ignorance.
of profit or gain. It is unethical because an • Caveat emptor - is a practice very common
inferior product is passed off as a superior among salesmen. Translated, caveat
one. This does not meet the standard for emptor means "let the buyer beware".
fair service, that is achieving success by Under this concept, the seller is not
offering better service (in the form of a obligated to reveal any defect in the
superior product and terms of payment) product or service he is selling. It is
than the competitor. responsibility of the customer to determine
• Weight understatement or Short weighing for himself the defects of the product.
- In short weighing, the mechanism of the
weighing scale is tampered with or Caveat emptor is indirect misrepresentation
something is unobtrusively attached to it and unethical because a seller is a witness
so that the scale registers more than the for the goods he is selling. He testifies to its
actual weight. An example is a foot pedal nature, features, uses and qualities. As a
with a concealed string tied to the witness, it is his obligation to "tell the truth
weighing scale. The modus operandi of and nothing but the truth" about his
sellers is to use two sets of scales one product. What makes caveat emptor
which gives the correct weight and has unethical is the willingness of the seller to
been sealed by the authorities and generate profit by taking advantage of the
another which looks identical but registers buyer's lack of information. This is passive
more weight than the product. Short deception which is also lying.
weighing is practiced in selling products • Deliberate Withholding of Information -
where prices depend on the weight such Following the argument that caveat
as sugar, meat, fish, vegetables, fruits, emptor is unethical, the deliberate
nails, etc. withholding of significant information in a
• Measurement understatement or Short business transaction, is also unethical. No
measurement - In short measurement, the business transaction is fair where one of the
measuring stick or standard is shorter than parties does not exactly know what he is
the real length or smaller in volume than giving away or receiving in return."
the standard. This unethical practice is • Passive deception - Direct
found in selling situations where the price misrepresentation gives business a bad
of the product depends on its length such name while indirect misrepresentation or
as selling cloth or textiles, electric cords or passive deception is not as obvious, it
wires or on its volume such as selling rice nonetheless contributes to the impression
by the sack. that businessmen are liars and are out to
• Quantity understatement or Short make a fast buck. Business ignorance is
numbering - In this unethical practice, the passive deception because the
seller gives the customer less than the businessman is unable to provide the
number asked for or paid for. Short customer with the complete information
numbering is often practiced in selling that the latter needs to make a fair
situations where the product being sold is decision.
in such a shape or is packed in a manner 4. Over-Persuasion - Persuasion is the process of
that would make counting the product appealing to the emotions of a prospective
difficult or inconvenient. For example, a customer and urging him to buy an item of
customer who is not vigilant may receive merchandise he needs. Persuasion is
less quantity than what he is entitled to legitimate and necessary in the selling of
when buying toilet paper, bond paper, goods if it is done in the interest of a buyer such
carbon paper, paper clips, thumb tacks, as persuading him to get a hospitalization
matches and toothpicks which are sold insurance policy. However, persuasion used
by the box or package. for the sole benefit of selling a product without
3. Indirect Misrepresentation - is characterized considering the interest of the buyer is not
by omitting adverse or unfavorable ethical. The common instances of over-
information about the product or service. persuasion include the following examples:
 GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

o Urging a customer to satisfy a low regularly. It is only in regular attendance that they
priority need for merchandise. can protect the rights and interests of the
o Playing upon intense emotional shareholders and their non-attendance of board
agitation to convince a person to buy. meetings could result to betrayal of trust of the
o Convincing a person to buy what he parties who elected them to their positions.
does not need just because he has the
capacity or money to do so. Some Unethical Practices of Executive Officers and
Lower Level Managers
CORPORATE ETHICS To a lesser extent, executive officers may
Unethical Practices of Corporate Management also guilty of unethical practices. All the unethical
Practices of corporate management that practices of the members of the Board of Directors
involve ethical considerations may be classified discussed are activities they are also capable of
into two: practices of the Board of Directors and engaging in though perhaps to a lesser degree
practices of executive officers. In many cases, the because of certain limits to their authority.
practices may apply to both categories of Unethical practices that are more common to
corporate management and the only dividing line executive officers and lower level managers are:
is in the financial magnitude and implications of a 1. Claiming a vacation trip to be a business
particular corporate management practice. trip. The President or a Vice President
reports his personal vacation in Europe or in
Some Unethical Practices of the Board of Directors the United States as a business trip so he
1. Plain Graft can get reimbursement for his expenses
Some of the Board of Directors help including those of his family's.
themselves to the earnings that otherwise would 2. Having employees do work unrelated to
go other stockholders. This is done by voting for the business. Executive officers and lower
themselves and the executive officers huge per managers ask company employees to do
diems, large salaries, big bonuses that do not personal things for them on company time
commensurate to the value of their services. They such as having the company janitors water
can also reduce the earnings going to the other and mow their lawns, having the
shareholders by authorizing purchases of goods maintenance men do house or appliance
and services for the company's use at a price repairs for them, and having subordinate
higher than normal, in consideration of a certain employees secure a license or type letters
percentage of the purchase value or commission pertaining to their other businesses.
accruing to them. 3. Loose or ineffective controls. Managers do
2. Interlocking Directorship not provide adequate controls to remove
Interlocking directorship is often practiced by temptation and to prevent or discourage
a person who holds directorial positions in two or employees from engaging in unethical
more corporation that do business with each other. practices. A manager has the moral
This practice may involve conflict of interest and obligation to provide the proper control
can result to disloyal selling. Disloyal selling atmosphere so that his subordinates will not
happens when this person is compelled to decide be tempted to commit dishonest acts. A
which of the two corporation's interest should be manager indirectly betrays the trust placed
protected or upheld. Thus, whatever decisions the on him by higher executive officers if the
person makes, he betrays the trust reposed on him administrative and accounting controls in
by the shareholders of either of the two his office are so weak or effective that
companies. employees are given the opportunity to
3. Insider Trading misappropriate funds or engage in petty
Insider trading occurs when a broker or thievery.
another person with access to confidential 4. Unfair labor practices. The labor code lists
information uses that information to trade in shares the following as unfair labor practices
and securities of a corporation, thus giving him an committed by an employer on employees
unfair advantage over the other purchasers of or a group of employees who have
these securities. organized themselves into a union.
4. Negligence of Duty a. To interfere with, restrain or coerce
A more common failure of the members of the employees in the exercise of their right
Board of Directors than breach of trust is neglect of to self-organization;
duties when they fail to attend board meetings
GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

b. To require as a condition of any other person who, having authority,

employment that a person or an influence or moral ascendency over another
employee shall not join a labor in a work or training or education environment,
organization or shall withdraw from one demands, requests or otherwise requires
to Which he belongs. sexual favor from the other, regardless of
c. To contract out services or functions whether the demand, request or requirement
being performed by union members for submission is accepted or not by the
when such will interfere with, restrain or object.
coerce employees in the exercise of
their rights to self-organization Some Unethical Practices of Employees
d. To initiate, dominate, assist or otherwise There are some employees who are not
in with the formation or administration mindful of their moral obligations to their
of any labor organization, including the employers. They take advantage of their position
giving of financial or other support to it: and the trust of their employees by committing
e. To discriminate with regard to wages, unethical practices harmful to their employers'
hours of work, and other terms or interest these unethical practices may be classified
conditions of employment in order to into conflict of interest and dishonesty.
encourage or discourage membership
in any labor organization. 1. Conflicts of Interest
f. To dismiss, discharge, or otherwise A conflict of interest arises when an employee
prejudice or discriminate, against an who is duty bound to protect and promote the
employee for having given or being interests of his employer violates this obligation by
about to give testimony under the getting himself into a situation where his decision
Labor Code: or actuation is influenced by what he can gain
g. To violate the duty to bargain personally from it rather than what his employer
collectively a prescribed by the Labor can gain from it. Some common examples of
Code: conflicts of interest are:
h. To pay negotiation or attorneys fees to a. An employee who holds a significant
the union or its officers or agents as part interest or shares of stock of a competitor,
of the settlement of any issue in supplier, customer or dealer favors this
collective bargaining or any other party to the prejudice of his employer.
dispute; b. The employee accepts cash, a gift or a
i. To violate or refuse to comply with lavish entertainment or a loan from a
voluntary arbitration awards or supplier, customer, competitor or
decisions relating to the contractor. In this situation, the decision or
implementation or interpretation of a action of the employee is influenced by his
collective bar gaining agreement; being indebted for a favor or loan from a
j. To violate a collective bargaining party with whom the company is doing
agreement. business. He, therefore, cannot act
5. Making false claims about losses to free impartially.
themselves from paying the compensation c. The employee uses or discloses confidential
and benefits provided by law. There are company information for his or someone
employers who claim non-existent losses so else's personal gain. An example is
they can be exempted from paying the revealing his employer's formula or menu
minimum wage and emergency-cost-of-living for a well-liked food to a competitor
allowances required by law. d. The employee engages in the same type of
6. Making employees sign documents showing business as his employer. He may attend to
that they are receiving fully what they are his business only after office hours because
entitled to under the law when in fact they are he has somebody to mind it for him but it is
only receiving a fraction of what they are still unethical. An example is an auditor
supposed to get. employed full-time in a public accounting
7. Sexual Harassment. Work, education or firm but maintains his own auditing office
training-related sexual harassment is where he works after office hours.
committed by an employer, employee, e. The employee uses for his own benefit a
manager, supervisor, agent of the employer, business opportunity in which his employer
teacher, instructor, professor, coach, trainer or
GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

has or might be expected to have an b. engagement in the same type of

interest. business as his employer
c. disclosure of confidential company
2. Dishonesty information to someone else for
Business ethics is not just limited to business personal gain.
transactions with outside parties. It also covers d. Application for a loan from his
employer to settle personal liabilities.
employee-employer relationship, especially with
7. The following are examples of dishonest acts
respect to an employee's honesty as he carries out
of an employee toward his employer except
his assigned duties in the office. Examples of a. Working overtime upon instruction of
dishonest acts of employees are: his supervisor.
a. Taking office supplies home for personal b. Bringing home office supplies for
use. personal use.
b. Padding an expense account through the c. Overstating business trip expenses by
use of fake receipts when claiming submitting false receipts.
reimbursements. d. Doing personal errands during office
c. Taking credit for another employee's idea hours.

CHAPTER 8: ETHICAL DILEMMA

REVIEW QUESTIONS Introduction:
1. Examples of direct misrepresentation about An ethical dilemma is a situation a person
the product include the following except faces in which a decision must be made about the
a. False advertising appropriate behavior. A simple example of an
b. Deceptive packaging ethical dilemma.is finding a diamond ring, which
c. Mislabeling necessitates deciding whether to attempt to find
d. Caveat emptor the owner or to keep it.
2. Examples of indirect misrepresentation about
the product include the following except RESOLVING ETHICAL DILEMMAS
a. caveat emptor In recent years, formal frameworks have
b. deliberate withholding adverse been developed to help people resolve ethical
information dilemmas. The purpose of such a framework is in
c. business ignorance identifying the ethical issues and deciding on an
d. false advertising appropriate course of action using the person's
3. Examples of direct misrepresentation about own values. The six-step approach that follows is
the product include the following except intended to be a relatively simple approach to
a. Adulteration resolving ethical dilemmas:
b. short merging 1. Obtain the relevant facts.
c. short measurement 2. Identify the ethical issues from the facts.
d. over persuasion 3. Determine who is affected by the outcome
4. Interlocking directorship can be committed by of the dilemma and how each person or
a. rank and file employees group is affected.
b. members of the board of directors 4. Identify the alternatives available to the
c. top executive officers person who must resolve the dilemma.
d. middle-level managers 5. Identify the likely consequences of each
5. The following constitute unfair labor practices alternative.
of an employer except 6. Decide the appropriate action
a. to restrain employees to form a union
b. to violate a collective bargain or Illustrative Case: Resolving an Ethical Dilemma
agreement
c. to discriminate with regard to wages, Bert Cruz has been working for 6 months as a staff
hours of work assistant for a law firm. Alvendia and Castro.
d. to terminate employment of Currently he is assigned to the case of Ryan
employees found to have violated Manufacturing Company under the supervision
company policy or employment of Carlos Reyes, an experienced senior lawyer.
contract. There are three junior legal of assistants assigned
6. The following are examples of unethical to the case, including Bert. Carlos and more
practices of employers except experienced assistant, Martha Sy.
a. acceptance of gifts from a customer in
exchange for a favor that is During lunch on the first day, Carlos says, "It will
detrimental to its interest of his be necessary for us to work a few extra hours on
employer
GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

our own time to make sure we come in on current and future

budget. This case isn't very profitable anyway, engagements.
and we don't want to hurt our firm by going over • May affect the
budget. firm's ability to
realistically
We can accomplish this easily by coming in a budget
half hour early, taking a short lunch break, and engagements and
working an hour or so after normal quitting time. bill clients.
We just won't write that time down on our time • May affect the
report." firm's ability to
motivate and
Bert recalls reading in the firm's policy manual retain employees.
that working hours and not charging for them on Staff assigned to • May result in
the time report is a violation of Alvendia and Rayon Manufacturing unrealistic time
Castro employment policy. He also knows that in the future budgets.
seniors are paid bonuses, instead of overtime, • May result in
whereas staffs are paid for overtime but get no unfavorable time
bonuses. performance
evaluations.
Later, when discussing the issue with Martha, she • May result in
says, "Carlos does this on all of his job. He is likely pressures to
to be our firm's next manager. The partners think continue practice
he is great because his job always come in under of not charging for
budget. He rewards us by giving us good hours worked.
engagement evaluations, especially under the Other staff in firm • Following the
cooperative attitude category. Several of the practice of this
other seniors staff follow the same practice." engagement may
Ethical Issue motivate others to
The ethical issue in this situation is not difficult to follow the same
identify practice on other
engagements.
• Is it ethical for Bert to work hours and not
them as hours worked in this situation? Bert's Available Alternatives
• Refuse to work the additional hours.
Who is Affected and How is each Affected? • Perform in the manner requested.
There are typically more people affected in • Inform Carlos that he will not work the
situations in which ethical dilemmas occur than additional hours or will charge the
would normally be expected. The following are additional hours to the engagement.
the key persons involved in this situation: • Talk to manager or partner about Carlos
Who How Affected request.
Bert • Being asked to • Refuse to work on the engagement.
violate firm policy. • Quit working for the firm.
• Hours of work will Each of these options includes a potential
be affected.Pay consequence, the worst likely one being
will be affected. termination by the firm.
• Performance
evaluations may Consequences of Each Alternative
be affected. In deciding the consequences of each
Martha • Same as Bert alternative, it is essential to evaluate both the
Carlos • Success on short- and long-term effects. There is a natural
engagement and tendency to emphasize the short term because
in firm may be those consequences will occur quickly, even
affected. when the long- term consequences may be
• Hours of work will more important. For example, consider the
be affected. potential consequences if Bert decides to work
Alvendia and Castro • Stated firm policy the additional hours and not report them. In the
is being violated. short term, he will likely get good evaluations for
• May result in under cooperation and perhaps a salary increase. In
billing clients in the the longer term, what will be the effect of not
 GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

reporting the hours this time when other ethical the politician and the public servant but also the
conflicts arise? CEO, CFO and but other employees of a
company."
Consider the following similar ethical dilemmas It involves wrong doing on the part of an
Bert might face in his career as he advances: authority or powerful party through means that are
• A supervisor asks Bert to work 3 illegitimate, immoral or incompatible with ethical
unreported hours daily and 15 standards. Corruption often results from patronage
unreported hours each weekend. and is associated with bribery.
• A supervisor asks Bert to initial certain A much more difficult, scientific definition
procedures as having been performed for the concept 'corruption' was developed by
when they were not. Professor (emeritus) Dr. Petrus Van Duyne
• Bert concludes that he cannot be "Corruption is an improbity or decay in the
promoted to manager unless he decision-making process in which a decision-
persuades assistants to work hours that maker consents to deviate or demands deviation
they do not record. from the criterion which should rule his or her
• Management informs Bert, who is now a decision-making, in exchange for a reward or for
partner, that either the companу gets a the promise or expectation of a reward, while
P400,000 legal fee or the company will these motives influencing his or her decision-
change lawyers. making cannot be part of the justification of the
• Management informs Bert that the legal decision."
fee will be increased P50,000 if Bert can In general, corruption is a form of
find a plausible way to increase dishonesty or criminal activity undertaken by a
probability or wining the case. person an organization entrusted with a position of
authority, often to acquire illicit benefit.
Appropriate Action
HOW DOES CORRUPTION LOOK LIKE?
Only Bert can decide the appropriate option to Corruption may take place in any of the following
select in the circumstances after considering his forms/ways:
ethical values and the likely consequences of • A company paying a bribe to win the
each option. At one extreme, Bert could decide public contract to build the local highway,
that the only relevant consequence is the despite proposing a sub-standard offer.
potential impact on his career. Most of us would • A politician redirecting investments to his
conclude that Bert is an unethical person if he hometown rather than to the region most in
follows that course. At the other extreme, Bert need.
can decide to refuse to work for a firm that • Public official embezzling funds for school
permits even one supervisor to violate firm renovation to build his private villa.
policies. Many people would consider such an • A private company manager recruiting an
extreme reaction naïve. ill-suited friend for a high level position.
• Or, local officials demanding bribes from
CHAPTER 9: ADVOCACY AGAINST CORRUPTION ordinary citizens to get access to a new
What is Corruption? water pipe.
Corruption is the abuse of private and • A salesman bribing the purchasing
public office for personal gain. It includes acts of manager of a company to give preference
bribery, embezzlement, nepotism, kickbacks and to his products.
state, capture. At the end of the day, those hurt most by
This is often associated with and reinforced corruption are the world's weakest and most
by other illegal practices such as bid rigging, fraud, vulnerable.
or money laundering, extortion.
Simply defined, corruption is receiving, WHY AND HOW DOES A PERSON BECOME
asking for or giving any gratification to induce a CORRUPT
person to do a favour for private gain. This act Corruptions spread when there are
covers not only public corruption involving misuse opportunities, when risk is minimal in comparison to
of public power by elected politician or appointed benefits obtained or when one is confronted with
civil servant but also private corruption between issues like
individuals and businesses. • Career advancement
• Earning of more income
A broader definition of corruption follows: • Financial problems caused by illness, loss of
"Corruption is the misuse of entrusted power property, etc.
(by heritage, education, marriage, election, Those engaged in corruption learn how to be
appointment) for private gain. It covers not only dishonest. The next corrupt actions become easier
 GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

to do unless one is firmly rooted on solid principles There is a growing worldwide concern over
and has been nurtured in an upright manner. corruption at the present time. A consensus has
now been reached that corruption is universal. It
ILL EFFECTS OF CORRUPTION exists in all countries, both developed and
Economically, developing, in the public and private sectors as
• Corruptions add up to 10% of the total costs well as is non-profit and charitable organizations.
of doing business in any part of the world Allegations and charge of corruption now play a
and up to 25% of the cost of procurement more central role in politics that at any other time.
programs in developing countries. Governments have failed careers of world
• Corruption leads to waste or the inefficient renowned public figures ruined and reputation of
use of public resources. well-respected organizations and business firms
badly tarnished on account of it.
In the Philippines, figures from 1960 to 2016
indicate that an average of P550 billion is Major corruption arises whenever major
lost yearly to crime, corruption and tax events involving large sums of money, multiple
evasion. This amount could clearly have parties or huge quantities of products are at stake.
been used more efficiently and effectively Corruption also flourishes in situation involving high
for poverty alleviation or education instead technology (e.g. purchase of a technologically
• Corruption corrodes public trust, far-advanced aircraft) or in situations that are
undermines the rule of law, and ultimately chaotic and a number of actions is very large such
delegitimizes the state. as natural disasters, civil war and betting in
• Africa's 700 million people under 30 are international sports tournaments. Major corruption
seeking opportunities with dignity and if thrives on a broad base of small corruption
mismatch between aspirations and payments or bribes. In the end, all corruption costs
fulfilment continues, this could lead to are absorbed by the consumers and the
apathy, discontent and turn them to taxpayers.
radical extremists and join terrorist groups.
Other significant and serious repercussions of CHARACTERISTICS OF CORRUPTION
corruption are: Although there is a widespread perception
1. If allowed to take root in society, it can lead that corruption is prevalent, it is difficult to establish
to a breakdown in social order and lives are how wide and deep corruption has penetrated our
affected when ordinary people are economy and social life. This is because both
prevented from receiving all the essential partners in an exchange of power for privileges
service that they are entitled to. keep their transaction secret.

Corruption may have drastic impacts like a) Recipients and payers

most of the public funds are used on the Corruption is the abuse of entrusted power
leisure and lifestyle of influential people and elected authority for private profit.
instead of allotting them on hospitals,
schools and other basic needs of general Worldwide complaints are heard about
public. politicians and public officials who accept bribes
2. It creates unfair competition and increases and enrich themselves privately at the expense of
the cost of doing business. Every form of the common citizen. This may be at the expense of
corruption is bad for economic growth and the employee and the employer, consumer and
could result to tarnished reputation of an producer, renter and tenant; the one applying for
entire country. a permit to do something, or asking exemption
from an obligation to pay or to deliver a product or
Corruption causes businesses to flee from a service. All those cases may be considered to be
the country because businessmen find it a abuse of power and authority for one's own
constant threat for their progress. benefit.
3. Corruption is cancer that spreads rapidly all
over the body. Corruption in Australia, Complainants forget that necessarily there
Canada and few European countries has should also be payers who benefit from that abuse
dropped extensively due to adoption of of power and authority. The other side of the coin
concrete measures. Nevertheless, shows payers assuming that their 'gift' to a politician
corruption in developing and or a public official, may in return deliver profitable
underdeveloped countries (especially preferential treatment or delivery.
Afghanistan and Somalia) is still a critical
problem. Anyone who wants to fight corruption and
safeguard integrity in governance should not only
 GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

prevent politicians and public officials from loss. From the micro-economic point of view, for
unlawfully accepting gifts, but should also fight the the bribing entrepreneur, it is profitable. The payer
high and mighty that abuse their power and of a bribe secures a desired transaction which if
authority to give privileges such as land rights, evaluated on purely commercial grounds - strictly
permits, diplomas, allowances, money, against a speaking, should have been assigned to someone
reward. else. That will harm individual entrepreneurs and
transactions; it will harm the national economy and
b) Extortion the world economy.
They do not only blame politicians and public
officials for willingly accepting bribes. It is also often d) An ethical dilemma
alleged that those having authority in our society The mere fact that both the payer and the
ask to be bribed or give us the opportunity to bribe. recipient of bribes want to keep their behavior
This means that the question 'who is to blame', shifts secret (and often succeed in doing so as well)
from the person who pays to the person who shows that such behavior is generally considered
extorts and receives. Again on the ground of the to be improper. Many consider corruption to be an
allegation: 'There's no escaping from it, for if you ethical problem, a behavioral problem. And refer
don't pay, you are bound to fall behind' to it as being 'sinful', a 'wrongdoing'. It is a problem
to be solved by means of personal 'reform'.
In every society it is known, either publicly or
privately, which public official is open to Emphasizing the 'sinfulness' of corruption, aims
transactions with gifts being made reciprocally. at improving especially individual and personal
The gift on the part of the official may then imply behavior. Poor entrepreneurship (in a moral sense)
considering an application with priority, or should then be improved on a personal basis. Our
assigning a contract, scholarship or employment. focusing on the conditions and the implications of
The potential payer will look for his "prey": he will corrupt behavior aims rather on the entire structure
look for the politician/public official of whom of society and economy, and on the conditions
everybody knows that he can be "bought", that he that exist within that structure to prevent and fight
is prepared to break the rules in exchange for a corrupt behavior and safeguard integrity. Good
"gift". Therefore, the reputation that a public official entrepreneurship is judged with regard to its quality
or politician enjoys, is of great significance. Some in all three aspects: People, Planet and Profit. The
will never be approached with a proposition". as qualification 'poor' is not a sign of sinfulness, but a
the potential extortionists or bribers do know that quality that signifies an adverse effect on all three
they (those public officials or politicians) are not aspects, not only on the economics.
open to such practices. Equally, as regards some
business enterprises, it is a known fact that they do e) Poverty alleviation
not keep any cash for bribes. They run less risk of The explanation that refers to individual
falling victims to extortion. poverty reduction is especially given by those who
have a keen eye for corruption among lower
c) Lubricant of society operational staff in government service, notably
Many think that paying bribes is required to lower office clerks, police officers, customs officers,
ensure smoother operation of society. They think the military, teachers, admission staff in hospitals,
that without an occasional gift (for example, bus ticket collectors, car-park attendants,
around Christmas and New Year), or incidentally (a garbage collectors, etc., who on an operational
gift on the occasion of a marriage or when a child level often have good opportunities to extract
is born) for instance upon entering into a contract extra income or privileges from decisions they
for the supply of a product or a service, such might take of importance to entrepreneurs and
contracts might be lost to them and might be citizens. Consequently, these have a certain value.
assigned to others.
Investigations into the effect of the level of
For entrepreneurs who want to secure sales, income enjoyed by a person, however, provide
those gifts are a cost item which they account for sufficient proof that this explanation is not correct.
in advance in their prices. As a consequence, Low pay does surely not automatically imply that,
products and services cost unnecessarily more consequently, the person concerned is corrupt.
than is needed from a commercial point of view, What is of much greater importance for the
for as a matter of fact, these gifts have already prevention of, or fight against, corruption at a
been budgeted. lower level in all kinds of hierarchies, is the clearness
and transparency of the rules and of the decision-
If corruption is judged purely on the basis of making process, and the control exercised on the
business economics, macro- economically it costs application of the rules? Timely payment of salaries
money to society which should be considered as a
 GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

is an important pre-condition to prevent corrupt legal framework in settling disputes and

behavior. challenging regulations as poor. Investment
disputes can take several years to resolve due to a
f) Culture lack of resources, understaffing, and corruption in
Gifts are inherent to human relations and the court system. Low salaries for judicial officials
therefore present in all cultures. You give and are said to perpetuate the problem of bribery.
receive gifts on the occasion of birthdays, Santa
Claus or Christmas; on the occasion of memorable The judiciary is underfunded by the state
events; an appointment or a departure; marriage and often depends on local sponsors for resources
or a retirement. and salaries, resulting in non-transparent and
biased court decisions. Foreign investors have
When you receive a gift from them, it will also noted that the inefficiency and uncertainty in the
be open and visible to everyone. Corrupt judicial system are disincentives for investment,
payments are made in hiding, are not made investors regularly decline to file disputes due to the
known. A gift made in public will also impose a perception of corruption among personnel and
certain obligation upon the recipient. On a next the complex and slow litigation processes.
occasion you will show your gratitude by Enforcing a contract takes much longer than the
reciprocating the gift and you share the gift regional average, but the costs involved are
received with your family and friends. In fact, in our significantly lower.
everyday life it is not much different. You give and
receive on birthdays, on the occasion of marriages In one recent case, a businessman filed an
and births, and on other festive occasions. Look at administrative complaint in the country's Supreme
the reciprocal state visits of Heads of government Court against Makati City judge for allegedly
and Heads of state, exchanging gifts. asking for a PHP 15 million bribe in exchange for a
favorable ruling in an insurance claim. At the time
g) 'Kindness among friends' of review, no further updates on the case were
It is essential, whether you just want to be available.
'thoughtful', or whether your gift is presented with a
certain intention. Is it a sign of thoughtfulness or is it Police
hiding a particular purpose, an expected 'return' in There is a high-risk of corruption when
the future? Whether 'attention' or 'intention', the dealing with the police. The national police force is
difference is of great importance for the widely regarded as one of the most corrupt
relationship. Is it a 'friendly turn' or is it an institutions in the country. Reports of the police and
"investment'? military engaging in corruption, extortion, and
being involved in local rackets are widespread.
To have friends belongs to culture. However, Companies report that they cannot rely on the
can you 'buy' a friend? Is real friendship not to be police services. More than half of firms pay for
based on honesty and transparency? To give private security. Businesses rate the National
presents reciprocally is a sign of friendship. It should Police's commitment to fighting corruption as
not get lost in a misuse of power for private gains. "poor". President Duterte has accused several
police generals of being involved in the trafficking
THE PHILIPPINES CORRUPTION REPORT of illegal drugs.
The Former Secretary of Finance reported
in 2016 that the Philippines loses P200 billion from In one corruption case, Police
smuggling and P400 billion from tax evasion Commissioner Mr. Sombero, is under investigation
perpetuated through collusion with some for allegedly facilitating a PHP 50 million bribe from
personalities in the government agencies. P2.6 gambling tycoon Jack Lam, who tried to bribe
trillion is lost annually in corruption globally. immigration authorities in order to release
approximately 1,300 Chinese nationals who were
Judicial System working in his resorts illegally.
Corruption risks are high in the judicial
system. Bribes and irregular payments in return for Public Services
favorable judicial decisions are common. The Companies contend with a high corruption
judiciary is formally independent, but the rich and risk when dealing with the public services.
powerful have frequently influenced proceedings Approximately half of business executives reported
in civil and criminal cases. Procedural fairness and being asked for a bribe by someone in the
transparency are severely undermined by government in 2017. Nearly three out of five
nepotism, favoritism, and impunity. Companies do business reported expecting to give gifts in order to
not have sufficient faith in the independence of get things done', but only one in ten reported
the judiciary and they rate the efficiency of the expecting to give gifts to get an operating license.
 GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

Tax Administration
Irregular payments and bribes in the public There is a high risk of corruption when
services sector sometimes occur. Philippine officials dealing with the tax administration. Around one in
involved in processing documents related to civil seven companies indicate they expect to give gifts
and property registration and building permits are in meetings with tax officials. Tax regulations are
more likely to solicit bribes compared to officials among the most problematic factors for
dealing with other types of services. Inefficient conducting business in the Philippines. Companies
government bureaucracy is ranked as the most indicate that they perceive that only a fifth of
problematic factor for doing business in the businesses in their line of business pay their taxes
Philippines. honestly. Officials at the Bureau of Internal
Revenue (BIR) are believed to be prone to
Civil servants often do not have the corruption and known for embezzlement and
resources or abilities to fulfill their tasks free from extortion. A typical example of this can be found in
corruption and red tape. Furthermore, civil servants a recent case in the city of Bacolod; an officer with
are generally not recruited in a competitive the BIR was caught extorting PHP 125,000 from a
manner; appointments are based on a practice of local company. Businesses rate the BIR's
patronage. commitment to fighting corruption as poor. On a
more positive note, there are signs that the BIR is
The total number of procedures required to pursuing more cases of tax evasion.
set-up operations, including registering the
company with local government and getting a Companies make twenty-eight tax
construction permit, are significantly higher than payments a year, which is higher than the regional
regional averages. Getting electricity takes average.
significantly less time than elsewhere in the region.
Customs Administration
Land Administration There is a high risk of encountering
Corruption risks in the land administration corruption when dealing with the customs
are high. Two out of five companies report administration. Companies indicate that irregular
expecting to give gifts when obtaining a bribes and payments in import and export
construction permit. Property rights are formally procedures are very common.
recognized and protected in the Philippines, but in
practice. the law is not always upheld. Businesses About a quarter of companies indicate
have insufficient confidence in the protection of they expect to give gifts when obtaining an import
property rights. license. A business survey indicates that the Bureau
of Customs (BOC) was the only agency receiving
Corruption and arbitrariness in the a rating of 'very bad' when it came to its
application of the law are common. Multiple commitment to fighting corruption. Companies
agencies are responsible for land administration, cite burdensome import procedures and
which has led to overlapping procedures for land corruption at the border as being among the most
valuation and title registration: this has made the problematic factors for importing. The efficiency
process costly. and time predictability of procedures are rated as
poor. Border compliance costs in the Philippines
The court system is slow to resolve land are significantly higher than the regional average,
disputes. Land records are not properly managed whereas the time required is in line with the regional
due to a lack of trained personnel and funds. average.
Foreigners are not allowed to directly own land,
but they may lease land for up to 50 years with a The Bureau of Customs (BOC) has
possible one-time extension of 25 years. indicated that smuggling of goods, among which
cigarettes, vehicles, and oil, into the Philippines has
Expropriation is possible under Philippine led to the evasion of taxes worth at least USD 1
law; the law calls for fair market value billion yearly. Consistent fraud in the form of under-
compensation, but coming to a mutually invoicing when importing and exporting costs the
acceptable price can be a lengthy process in the state USD billions in revenues each year. In 2016,
court system. Registering property takes nine the BOC alleged one of its employees accepted
procedures in the Philippines, which is double the as much as USD 4 million in bribes monthly.
regional average. However, the total time required
is less than half of the regional average. Public Procurement
There is a very high risk of corruption in the
public procurement sector, which is subject to
rampant corruption, irregularities, and inconsistent
 GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

implementation of legislation. Likewise, more than Even with harsh penalties, corruption cannot be
a fifth of businesses report they expect to give gifts eradicated completely.
in order to win a government contract. Two in five
companies indicate that most companies in their Below are some measures businesses and
sector give bribes in order to win contracts. organizations can adopt to help prevent
Diversion of public funds, as well as favoritism in the corruption in the work-place.
decisions of public officials, is very common. The
public sector is obliged to procure goods and 1. Clear Business Processes
services from companies with at least 60% Having defined workflows, clear directives on
Philippine ownership. Local-level public financial approving authorities, and standard
procurement lacks transparency, fostering a procurement instructions can help flag irregularities
culture of corruption through the misuse of the pork in a business or organization. These processes
barrel system; which are funds for discretionary use should be reviewed on regular basis to ensure they
by representatives for projects in their respective are updated to the shifting business environment.
districts. Philippine law allocates responsibility for Diligent record-keeping and regular audits are also
monitoring, investigating and sanctioning good practices to deter corrupt activities.
irregularities in public procurement to a number of
different state institutions, leaving potential 2. Policy on Gifts and Entertainment
misconduct, inefficiency and impunity unchecked. Gifts and entertainment are often offered in
the legitimate course of business to promote good
Natural Resources relations. However, if it is too frequent or lavish, or
Companies operating in the natural done with the deliberate intention to gain an unfair
resources sector face a high risk of corruption. The business advantage, such gifts and entertainment
Philippines has shown marked improvements in its can be tantamount to corruption, regardless of
natural resource governance in the past few years, whether the recipient is able to fulfill the request of
the country has a good enabling environment and the giver. The risk of corruption can be reduced by
its regulatory quality and control of corruption are setting a policy on when gifts and entertainment
judged as adequate. However, poor value may be given and accepted and what records
realization and revenue management have need to be kept. Your business partners should be
caused the country's overall resource governance aware of your organization's gift and
to be judged as 'weak". The Philippines has been entertainment policy too.
working to achieve compliance with the Extractive
Industries Transparency Initiative (EITI) since joining 3. Declaration of Conflict of Interest
in 2013. Some mining contracts are publicly Conflict of interest occur when a personal
disclosed via the EITI portal. While transparency in interest or relationships is placed before the
the sector has improved, poor regulation and business interest, and can lead to corrupt activities
overlapping policy responsibilities between local such as giving or accepting bribes. In order to
and central governments have meant that small- safeguard the business interest, a declaration
scale mining is still a contentious issue. system that is applicable to all levels of employees
may be instituted. The company may provide a
Government corruption has allowed declaration form for conflict of interest for
mining companies to evade government employees, and then use the information to take
regulations, which has resulted in large-scale the most appropriate course of action. This could
deforestation, flattened mountaintops and water include excluding the employee from engaging in
pollution. The government responded by cracking the work or transferring the employee to another
down on illegal mining operations; and as of 2017 department or post.
Secretary of the Environment Gina Lopez shut
down 28 of the country's 41 mining companies for 4. Convenient Corruption Reporting System
polluting the environment. However, Lopez was The corruption reporting system is a key
removed from her job by Congress in May 2017 function to control corruption and bribery risks, and
after mounting complaints from the pro-mining can comprise a whistle-blowing policy or
lobby. feedback channel where staff can conveniently
raise concerns and feel protected from being
PREVENTION OF CORRUPTION identified or retaliated against. One way to do this
Corruption in Singapore is under control. would be by allowing reports to be filed
However, a clean system is not a natural state of anonymously through a publicized email address
affairs. Corruption comes from weakness of human or phone number.
nature greed, temptation, the desire to amass
wealth or to obtain business through unfair means.
 GOVERNMENT, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL
JOSEPH H. CUMAGUN
FINALS TOPIC

EFFORTS TO CURB CORRUPTION THROUGH Congress. There are a multitude of watchdog

LEGISLATION organizations monitoring implementation of policy.
The Anti-Graft and Corrupt Practices Act
criminalizes active and passive bribery, The Constitution guarantees freedoms of
embezzlement, extortion, abuse of office and speech and of expression, but in practice these
conflict of interest in the public sector. freedoms are not consistently upheld. The media
environment is largely privately owned and
Bribery of public officials and trading in diverse, and the state generally exercises very little
influence are also criminalized in the Anti-Red Tape censorship. The views represented in the
Act. The Act forbids office-holders from accepting mainstream media are heavily influenced by the
any gifts or material benefits in exchange for any oligarchical owners of many of the outlets.
government permit or license.
The Philippines is the second most
Under the Revised Penal Code, gifts are dangerous country in the world for journalists to
classified as, indirect bribery. An exception is made operate in, as measured by the number of
for gifts of insignificant value given as a token of journalist deaths. The state is not directly
friendship in line with local customs. Facilitation responsible for the violence, which can mostly be
payments are not addressed in the law. Private blamed on local strongmen and criminals and the
sector bribery is is not criminalized. Under the Code, weakness of the authorities.
public officials are required to regularly file a
statement of their assets and liabilities. In case of The existence of libel and defamation laws
any discrepancy between the official's asset remains a problem and are frequently used by
declaration and the amount of property or officials and powerful individuals to try to silence
financial assets actually possessed, the official is journalist. The media does frequently report on
subject to immediate dismissal. Punishments for high-level corruption cases. Independent
corrupt acts include imprisonment of up to ten observers report that bribes and other incentives
years, a fine, removal from office, and/or are often used by high-level officials to motivate
confiscation of property. journalists to create one-sided reports for the
official's benefit. Internet access is widely
The Anti-Money Laundering Act criminalizes available, but there are concerns about the
money laundering and organized crime. government trying to install some degree of
censorship. The Philippine press is classified as
The Act Establishing a Code of Conduct "partly free.
and Ethical Standards for Public Officials and
Employees formulates standards for the personal
integrity and accountability of civil servants.

The Government Procurement Reform Act

requires competitive and transparent bidding.
Philippine legislation does not contain any
provisions on protecting whistleblowers who report
on corruption.

The Philippines has ratified the United

Nations Convention against Corruption.
Companies should note that the legal anti-
corruption framework in the Philippines is
complicated and poorly enforced; there is a lack
of cooperation between law enforcement
agencies, and officials are rarely prosecuted and
convicted for corruption crimes.

VIGILANCE OF CIVIL SOCIETY

Philippine civil society is active and is
represented by a wide variety of different
organizations. Public participation is high and civil
society organizations (CSOs) enjoy a high level of
social capital. CSOs are normally not included in
formal decision-making, but they play a large role
in initiating legislation and steering debate in