Transcript Week 2 : Analyzing Ethical Issues

Topic 2 : Analyzing Ethical Issues
&
Topic 3 : Stakeholders and Their Influences
Objectives
 Nature of an ethical issue with examples
 Factors influencing individuals’ ethical judgment
 Stakeholders and their influences
 Simple framework for analyzing ethical issues
1
Ethical Dilemma
Linda was engaged to perform an audit of the annual
financial statements of Wong & Wong company.
During the course of her examination of records, she
discovered that certain items were misstated on the
previous year’s profit tax return, which resulted in
large tax advantages for Wong & Wong company. The
tax return was prepared by her boyfriend, David. It
appeared to her that the discrepancies on the tax
return resulted from a deliberate effort to manipulate
facts and figures with the sole intent of reducing
taxes. Late, she found out from David that he had
accepted Mr. Wong’s proposal for the tax evasion,
and had received $200,000 cash from Mr. Wong to
pay for the down payment of their apartment and
part of their wedding cost. The wedding was
scheduled in two weeks time.
Linda cannot decide what, if anything, she should do
about this discovery.
The Meaning Of An Ethical Issue
Choosing among several ethical or unethical alternatives
Common factors :
Conflicts in moral principles and values
e.g., Honesty – truthfulness, integrity and trustworthiness

Fairness – just, equitable and impartial
Conflict of interest: advance own interest or those of others
Desire for personal gain, dubious personal character,
competitive working environment, pressures …
Failure to acknowledge ethical issues is a great danger
A rule of thumb: withstand open discussion, and survive
untarnished
3
Examples Of Ethical Issues
For Professional Accountants
 General: conflict of interest, confidentiality,
bribery, insider trading, whistle-blowing…….
 For auditors: independence, integrity and
objectivity, pressures (time, fees, competition)…….
 For financial accountants: accuracy of books and
records, manipulation of accounts…
 For management accountants: budgeting issues,
reliability of management reports…
 For tax consultants: tax evasion, pressures….
4
Five Major Factors Influencing
Individuals’ Ethical Judgement
 Moral development of the decision-maker
 Stakeholders and their influences
 Decision criteria or approaches used in
assessing various alternatives
 Standards of behaviour as benchmarks
 Temptations to rationalize unethical
alternatives
5
Moral Development Of The Decision-Maker

Kohlberg’s Theory : different people make
different decisions in similar ethical situations
because they are in different stages of
cognitive moral development

Six stages of moral development:
Fear of punishment:
 Respond to rules and labels of “good” and “bad” in
terms of authority figures
2. Seeking rewards and avoiding punishment:
 No longer make moral decisions only based on
rules or authority figures; also evaluate behavior
on the basis of its fairness to him/herself.
3. Desire for approval by peer group:
 Emphasizes others rather than him/herself
1.
Moral Development Of The Decision-Maker

Six stages of moral development:
4. Sense of duty to obey laws:
 Duty and maintaining the social order become
the focal points => duties to society as a whole
5. Obeying laws while preserving individual rights:
 Upholding the basic rights, values, and legal
contracts of society
6. Finding satisfaction for being ethical:
 Believes that the right is determined by
universal ethical principles that everyone
should follow

People continue to change their decision
priorities beyond their formative years
Stakeholders And Their Influences
• Owning a vested interest or a stake in the
ethical decision
• Primary versus secondary
• Categorizing Stakeholders:
Social
Govt
Prof
Work
Psnl
DM
8
Stakeholders And Their Influences
• Influences : Bi-directional in nature
• The decision-maker may influence stakeholders’
interests
• Stakeholders may also ‘exercise’ influences on the
decision maker
 Example : Linda’s decision making
• Whose interests will be affected ?
• Who can influence her decision ?
Psnl
work
Prof
Govt
Social
•Assessing the influences from stakeholders
9
Stakeholders And Their Influences
• Influences
: Bi-directional
nature
•Outside
the employinginorganization:
• The decision-maker may influence stakeholders’
e.g. family and peer group
interests
•Exercising may
a wide
of influences
• Stakeholders
alsorange
‘exercise’
influences on the
decision maker
e.g. moral development, value system,
 Example : Linda’s decision making
self-image, goals, role models, standards
• Whose interests will be affected ?
of behaviour
• Who can influence her decision ?
•Positive and negative influences
Psnl
work
Prof
Govt
Social
•Assessing the influences from stakeholders
10
Stakeholders And Their Influences
•Work-related
•Outside the
: “Internal”
employing versus
organization:
“external”
stakeholders
e.g. family and peer group
•Influences
coming
from
a variety
of sources
•Exercising
a wide
range
of influences
e.g.
work
pressure,
reward system,
e.g.
moral
development,
value system,
internal
controls,
authority
structure,
self-image,
goals,
role models,
standards
access
to information …
of behaviour
•Positive
andand
negative
influences
•Positive
negative
influences
Psnl
work
Prof
Govt
Social
•Assessing the influences from stakeholders
11
Stakeholders And Their Influences
• Influences
: Bi-directional
nature
••Professional
bodies
Work-related
•Outside
the: “Internal”
employinginversus
organization:
“external”
• The
decision-maker
may influence
stakeholders’
e.g.
licensing and disciplinary
mechanisms,
stakeholders
e.g. family and peer group
interests
standards, guidelines and statements, quality
••Influences
coming
from
a variety
of sources
•Exercising
a …wide
range
of influences
Stakeholders
may
also
‘exercise’
influences
on the
review
system
decision
maker
e.g.
work
pressure,
reward system,
•Other
members
e.g. moral
development,
value system,
 Example
: Linda’s
decision
makingstructure,
internal
controls,
authority
e.g.
exercising
mutual
influences
self-image, goals, role models, standards
Whose
interests
will be affected
?
••The
public
access
to
information
…
of behaviour
• Who can influence her decision ?
e.g. ability
to withdraw
public trust
•Positive
andand
negative
influences
•Positive
negative
influences
Psnl
work
Prof
Govt
Social
•Assessing the influences from stakeholders
12
Stakeholders And Their Influences
• •Influences
: Bi-directional
nature
Major
influences
: Laws andinversus
regulations
••Professional
bodies
Work-related
•Outside
the: “Internal”
employing
organization:
“external”
• The
decision-maker
may influence
stakeholders’
e.g.
licensing and disciplinary
mechanisms,
stakeholders
e.g.e.g.
Companies
Ordinance
family
and
peer group
interests
standards, guidelines and statements, quality
••Influences
coming
from
aOrdinance
variety
of sources
Prevention
of
Bribery
•Exercising
a …wide
range
of influences
Stakeholders
may
also
‘exercise’
influences
on the
review
system
decision
maker
e.g.
work
pressure,
reward
Companies
(Amendment)
Billsystem,
1991 system,
•Other
members
e.g. moral
development,
value
 Example
: Linda’s
decision
makingstructure,
internal
controls,
authority
e.g.
exercising
mutual
influences
self-image,
role models, standards
Insider
Dealinggoals,
Ordinance
Whose
interests
will be affected
?
••The
public
access
to
information
…
of behaviour
•Governing
not only accountants
• Who can influence her decision ?
e.g. ability
to withdraw
public trust
•Positive
andand
negative
influences
•Positive
negative
influences
Psnl
work
Prof
Govt
Social
•Assessing the influences from stakeholders
13
Stakeholders And Their Influences
• •A
Bi-directional
inversus
nature
•Influences
Major
range
influences
of :environmental
: Laws and
stakeholders
regulations
••Professional
bodies
Work-related
•Outside
the: “Internal”
employing
organization:
“external”
• The
decision-maker
may
influence
stakeholders’
e.g.
licensing local
and disciplinary
mechanisms,
e.g.
society,
communities,
neighbours
stakeholders
e.g.e.g.
Companies
Ordinance
family
and
peer group
interests
standards,
guidelines and statements, quality
and
citizens
••Influences
coming
from
aOrdinance
variety
of sources
Prevention
of
Bribery
•Exercising
a …wide
range
of influences
Stakeholders
may
also
‘exercise’
influences
on the
review
system
•Generally
accepted
moral
principles
decision
maker

e.g.
work
pressure,
reward
Companies
(Amendment)
Billsystem,
1991 system,
•Other 
members
e.g. moral development,
value
 Example
: Linda’s
decision
makingstructure,
internal
controls,
authority
e.g.
exercising
mutual
influences
self-image,
goals,
role
models, standards
Insider
Dealing
Ordinance
Whose
interests
will be affected
?
••The
public
access
to
information
…
of behaviour
•Governing
not only accountants
• Who can influence her decision ?
e.g. ability
to withdraw
public trust
•Positive
and negative
influences
•Positive and negative influences
Psnl
work
Prof
Govt
Social
•Assessing the influences from stakeholders
14
Stakeholders And Their Influences
• •Discrepancy
Bi-directional
inversus
nature
•Influences
•A
Major
range
influences
of :environmental
between
: Laws
actual
and
stakeholders
regulations
and
perceived
••Professional
bodies
Work-related
•Outside
the: “Internal”
employing
organization:
“external”
• The
decision-maker
may
influence
stakeholders’
e.g.
licensing local
andOrdinance
disciplinary
mechanisms,
influences
e.g.
society,
communities,
neighbours
stakeholders
Companies

e.g.
family
and
peer
group
interests
standards,
guidelines and statements, quality
and
citizens
•Examples
ofcoming
influences
often
misestimated
••Influences
from
a
variety
of sources
Prevention
of
Bribery
Ordinance
•
Exercising
a
wide
range
of
influences
Stakeholders
may
also
‘exercise’
influences
on the
review system …
•Generally
accepted
moral
principles
decision
maker
•Examples
of
positive
and
negative
impact
often

e.g.
work
pressure,
reward
Companies
(Amendment)
Billsystem,
1991
•Other 
members
e.g. moral development,
value
system,
misestimated
Example
: Linda’s
decision
makingstructure,
internal
controls,
authority
e.g.
exercising
mutual
influences
self-image,
goals,
role
models, standards
Insider
Dealing
Ordinance
Whose
interests
will
be affected
?
••The
public
access
to
information
…
•Steps
to
arrive
at
a
“no-regret”
decision
of behaviour
•Governing
not only accountants
• Who can influence her decision ?
e.g. ability
to withdraw
public
trust
•Positive
and negative
influences
Distinguishing
between
primary
and
•Positive and negative influences
secondary stakeholders
Social
Prioritizing their respective interests
Govt
Prof
Assessing their influences critically
Psnl work
•Assessing the influences from stakeholders
15
Decision Criteria
Used In Assessing Alternatives
 Provide different justifications for making a
decision
 Shape a decision maker’s ethical judgment
 Provide a set of useful guidelines
 Three common criteria or approaches
 Utilitarian : Benefits outweighing costs
 Rights : Respecting stakeholders’ rights
 Justice : Fair distribution of costs and
benefits among stakeholders

Need to prioritize different concerns
16
Standards Of Behaviour
as Benchmarks
Society’s moral principles and values
Government laws and regulations
Trade / profession-related codes
Alts
???
Corporate culture / code of conduct
Decision-maker’s own values and beliefs
17
Temptations To Rationalize
Unethical Alternatives
 The essence of rationalization :
Acceptance of making unethical decisions
 Typical rationalizations
o e.g. within reasonable ethical and legal
o
o
o
o
limits
In the best interests of others
The alternative is safe
Superiors’ unethical instructions
Fear to loosing jobs….
18
•Conflict of interest; independence, integrity & objectivity
bribery; tax evasion….
Adisclose
Simpleher
Framework
•Whether to
finding in theFor
auditor’s report
Analyzing Ethical Issues
 Identify the ethical issue
 Identify the decision-maker
 Identify and assess effects on the stakeholders
 Diagnose the situation
 Analyze and assess major alternatives
 Pick the choice
19
•Conflict of interest; independence, integrity & objectivity
bribery; tax evasion….
Adisclose
Simpleher
Framework
•Whether to
finding in theFor
auditor’s report
Analyzing Ethical
Linda Issues
 Identify the ethical issue
 Identify the decision-maker
 Identify and assess effects on the stakeholders
 Diagnose the situation
 Analyze and assess major alternatives
 Pick the choice
20
• Psnl: Linda; David; Family members; Friends
•Conflict of interest; independence, integrity & objectivity
• Work: CPA firm and other colleagues; Mr. Wong;
bribery; tax evasion….
Wong & Wong
company
and it’s employees, shareholders
Adisclose
Simple
Framework
•Whether to
her
finding in theFor
auditor’s report
• Prof: Accounting
profession;
HKSA;
other members
Analyzing
Ethical
Issues
Linda
• Govt: Legal and enforcement (IRD, ICAC)
 Identify
the
ethical
issue
• Social:
General
public
(Users
of auditor’s report)
 Identify the decision-maker
 Identify and assess effects on the stakeholders
 Diagnose the situation
 Analyze and assess major alternatives
 Pick the choice
21
• Psnl: Linda; David; Family members; Friends
•Conflict of interest; independence, integrity & objectivity
• Work: CPA firm and other colleagues; Mr. Wong;
bribery;
tax
evasion….
• Wong
How
did
it
happen
in the
first
place? shareholders
& Wong
company
and it’s
employees,
A
Simple
Framework
For
•Whether
to
disclose
her
finding
in
the
auditor’s report
•• Prof:
WhatAccounting
could
have
prevented
it?
profession;
HKSA;
other members
Analyzing
Ethical
Issues
Linda
•• Govt:
Can the
damage
be undone?
Legal
and enforcement
(IRD, ICAC)
 Identify
the
ethical
issue
• Social:
General
public
(Users
of auditor’s report)
 Identify the decision-maker
 Identify and assess effects on the stakeholders
 Diagnose the situation
 Analyze and assess major alternatives
 Pick the choice
22
• Psnl: Linda;
David; Family
members;
Friends
Disclose
her
finding
in
the
auditor’s
report.
•Conflict of interest; independence, integrity
& objectivity
• Work:
firm and
and other
Mr. Wong;
Keep
theCPA
secret
help colleagues;
David to cover
up his act by
bribery;
tax
evasion….
• Wong
How did
it happen
in the
first
place? shareholders
&
Wong
company
and
it’s
employees,
A
Simple
Framework
For
providing
an
unqualified
auditor’s
report.
•Whether
to
disclose
her
finding
in
the
auditor’s report
•• Prof:
WhatAccounting
could
have
prevented
it?
profession;
HKSA;
otherthe
members
Analyzing
Ethical
Issues
Keep the secret.
Ask David
returning
sum to
Linda
•• Govt:
Can the
damage
be undone?
Legal
and
enforcement
(IRD, &ICAC)
Mr. Wong and resign from Wong
Wong.
 Identify
the
ethical
issue
• Social:
General
public
(Users
of auditor’s
report)
Report
the
fraud
to the
IRD,
ICAC and
other
 Identify
the decision-maker
regulatory
bodies
 Identify and assess effects on the stakeholders
…………...
 Diagnose the situation
 Analyze and assess major alternatives
 Pick the choice
23