Transcript Amity School of Business

Amity School of Business
Amity School of Business
BBA (All Programs), Semester 1st
Business Accountancy
Ms. Geetika Batra
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Amity School of Business
Module 6
Ethics in Accounting and
Business
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Outline
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Concept:
• Ethics.
• Importance.
• Fundamental principles.
• Ethical conflicts.
• Ethical Dilemmas.
• Role of regulatory bodies in the accountancy profession.
• Corporate codes of ethics.
Lessons We Are Learning
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Why are ethics so important?
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Business operations require trust.
• Consider the millions of business transactions that take place
daily that require mutual trust.
• Would you go to a job if you didn’t trust your employer to
compensate you?
• How many people would shop on the Web if they didn’t trust
that their financial information would be secure?
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The classical economists such as Adam Smith
considered economics a branch of ethics.
Business activity would grind to a halt without
trust, fair dealings, and honest communication.
In his 1995 book, Trust: The Social Virtues and the Creation of Prosperity,
Francis Fukuyama writes: "One of the most important lessons we can learn from
an examination of economic life is that a nation’s well being as well as its ability to
compete, is conditioned by a single, pervasive cultural characteristic: the level of
trust inherent in the society."
What is ethics?
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• Ethics is the branch of philosophy that
focuses on morality and the way in which
moral principles are applied to everyday
life. Ethics has to do with fundamental
questions such as “What is fair?” “What is
just?” “What is the right thing to do in this
situation?” Ethics involves an active
process of applying values, which may
range from religious principles to customs
and traditions.
Concept: Ethics
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A branch of philosophy which is the systematic study of
reflective choice (decision problems), of the standards of right
and wrong (moral principles) by which it is to be guided, and of
the good or bad (consequences) toward which it may ultimately
be directed.
An ethical problem occurs when you must make a choice
among alternative actions and the right choice is not absolutely
clear. Often that choice affects the well-being of other persons.
Fundamental principle in Ethics
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• The principle of integrity: It calls upon accounting and finance professionals
to adhere to honesty and straightforwardness to discharge their professional
duties.
• The principle of objectivity: this principle requires accounting and finance
professionals to stick to their professional and financial judgement.
• The principle of confidentiality: this requires practioners of accounting and
financial management to refrain from disclosing confidential information
related to their work.
• The principle of professional competence and due care: Finance and
accounting professional need to update their knowledge from time to time in
order to provide competent services to their clients.
• The principle of professional behaviour: this principle requires accounting
and finance professional to comply to rule and regulations in order to avoid
any future discredit with profession.
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Ethics codes: Accounting and Business
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Accounting and business organizations have established ethics codes. The code of
ethics of the Institute of Internal Auditors includes the following principles:
1. Integrity
The integrity of internal auditors establishes trust and thus provides the basis
for reliance on their judgment.
2. Objectivity
Internal auditors exhibit the highest level of professional objectivity in
gathering, evaluating, and communicating information about the activity or
process being examined. Internal auditors make a balanced assessment of all
the relevant circumstances and are not unduly influenced by their own interests
or by others in forming judgments
3. Confidentiality
Internal auditors respect the value and ownership of information they receive
and do not disclose information without appropriate authority unless there is a
legal or professional obligation to do so.
4. Competency
Internal auditors apply the knowledge, skills, and experience needed in the
performance of internal audit services.
What is business ethics?
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• Business ethics focuses on what
constitutes right or wrong behavior in the
world of business. Corporate business
executives have a responsibility to their
shareholders and employees to make
decisions that will help their business
make a profit. But in doing so,
businesspeople also have a responsibility
to the public and themselves to maintain
ethical principles.
Concept
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• Business ethics is the behavior that a business adheres
to in its daily dealings with the world.
• The ethics of a particular business can be diverse. They
apply not only to how the business interacts with the
world at large, but also to their one-on-one dealings with
a single customer.
Sources of Ethical Norms
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Fellow Workers
Fellow Workers
Family
Regions of
Country
Profession
The Individual
Conscience
Friends
The Law
Employer
Religious
Beliefs
Society at Large
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Codes of Ethics.
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• 1. Codes of ethics are formal standards and rules that managers
can use to help themselves make appropriate decisions.
• 2. An organization’s code of ethics derives from three sources in
the organizational environment.
• a. Societal ethics are standards that govern how members of a
society deal with each other in matters involving issues such as
fairness, justice, poverty, and the rights of individuals.
• b. Professional ethics are standards that govern how members
of a profession, managers, or workers, make decisions when the
decision is not clear-cut.
• c. Individual ethics are personal standards and values that
govern how individuals interact with other people.
Short Cases: Enron
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Enron Corporation is considered by many to be the most infamous financial
scandal in U.S. history. The Enron scandal caused people to question the reliability
of the financial reporting practices of publicly traded corporations. Enron was a key
event leading the U.S. Congress to pass a new federal securities law, the SarbanesOxley Act of 2002, often referred to as SOX.
Before its collapse in late 2001, Enron was a highly regarded energy company
located in Houston, Texas. The company’s bankruptcy, which was the largest in
U.S. history at the time, resulted in 20,000 employees losing their jobs. Many of
them also lost their life savings, which were tied up in Enron stock. As explained in
the 2005 documentary film Enron: The Smartest Guys in the Room, a great
number of the company’s assets and profits were overstated or in some cases
completely fraudulent and nonexistent.
Short Cases: WorldCom
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WorldCom began in 1983 as Long Distance Discount Services, Inc. (LDDS). It
was located in the U.S. in a middle-sized town, Hattiesburg, Mississippi. Bernard
Ebbers became the company’s CEO in 1985. In subsequent years, the company
name was changed to LDDS WorldCom and later just WorldCom. From 1999 to
2002, the company manipulated earnings by using fraudulent accounting methods,
thereby presenting a false image of economic growth and prosperity. As a result,
the company’s stock price continued to climb, when in reality it should have been
falling.
Two techniques were used to cook the books. The first was underreporting “line
costs” by recording them as assets on the balance sheet instead of correctly
expensing them on the income statement. The second technique was overstating
revenues through recording fraudulent transactions regarding “corporate
unallocated revenue accounts.” During 2002, a small group of internal auditors at
WorldCom worked together, frequently in the evening and in secret, to explore
and reveal $3.8 billion in fraud.
Benefits of managing ethics in organization
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Substantially improves society.
Support employees growth and meaning.
Maintain a moral course in turbulent times.
Cultivate strong teamwork and productivity.
Ethical programmes are an insurance policy.
Help avoid criminal acts of “Omission” .
Promote strong public image.
Formal attention in the workplace is the right thing to do.
Ethical Issues/Conflicts
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• “An Ethical issue is a problem, situation or
opportunity requiring an individual or
organization to choose among several
actions that must be evaluated as right or
wrong, ethical or unethical.“
• Managers experience ethical issues at the
personal, organizational, professional,
societal and global levels.
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Ethical issues which were categorized as follows:
• Equity: Executive salaries, comparable worth, product
pricing
• Rights: Corporate due process, employee health
screening, privacy, sexual harassment, affirmative
action/equal employment opportunity.
• Honesty: Employee conflicts of interest, security of
employee records, inappropriate gifts, unauthorized
payments to foreign officials, advertising content.
• Exercise of corporate power: Political action committees,
workplace/product safety, environmental issues,
disinvestment, corporate contributions, closures.
Abusive or Intimidating Behavior
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Lying
Three types of lies:
1. Joking without malice
2. Commission lying
3. Omission lying
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Bribery
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• Bribery is the practice of offering something in order to
gain an illicit advantage
• Different types of bribery
– Active bribery
– Passive bribery
Discrimination
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• A company in the U.S. can be sued for discrimination
if it:
– Refuses to hire an individual for discriminatory
reasons
– Unreasonably excludes an individual from
employment
– Unreasonably discharges an individual
– Discriminates against an individual with respect to
hiring, employment terms, promotion, or privileges
Sexual Harassment
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• A repeated, unwanted behavior of a sexual nature
perpetrated upon one individual by another
• Hostile Work Environment
– The conduct was unwelcome
– The conduct was severe, pervasive, and regarded
by the claimant as so hostile or offensive as to
alter his or her conditions of employment
– The conduct was such that a reasonable person
would find it hostile or offensive
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Environmental Issues
• The environment is a significant and growing issue in
business
• The Kyoto Protocol: An international treaty on
climate change that commits nations to reducing
greenhouse gas emissions
• Water pollution: Results from dumping sewage and
toxic chemicals in places where they can filter into
water supplies
• Green energy sources are perceived to have lower
emissions or waste than traditional ones
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Fraud
• Any purposeful communication that deceives,
manipulates, or conceals facts in order to create a
false impression is fraud
• Accounting fraud
– Misrepresentation of company’s financial reports
– Sarbanes-Oxley Act sought to improve this
– 2008-2009 Wall Street financial meltdown and
recession revealed continuing problems
• Marketing fraud
• Consumer fraud
Financial Misconduct
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Intellectual Property Rights and
Privacy
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The Challenge of Determining
Ethical Issues in Business
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Steps in Ethical Decision-Making
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Define all the facts and circumstances: e.g. Who, what, where, when, and how?
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Identify the people (stakeholders) affected by the situation; What are the stakeholders
rights and obligations?
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Identify the alternative decisions and consequences.
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Make the decision.
Managers ask these questions
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before making a decision, and they call these three
questions the "ethics check."
• 1. Is it legal? Will I be violating either civil law or company policy?
• 2. Is it balanced? Is it fair to all concerned in the short term as well
as the long term?
• Does it promote win-win relationships?
• 3. How will it make me feel about myself? Will it make me proud?
Would I feel good if my decision was published in the newspaper?
Would I feel good if my family knew about it?
• Obviously, the "wrong" answers to the above questions should move
the manager into reconsidering his or her decision.
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• An ethical dilemma is a complex situation
that often involves an apparent mental
conflict between moral imperatives, in
which to obey one would result in
transgressing another. This is also called
an ethical paradox since in moral
philosophy, paradox often plays a central
role in ethics debates.
Ethical Dilemmas
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• It arises due to the conflict between moral
imperatives in which obeying one would
result in transgressing another.
• We are not only faced between question
right and wrong but also between right and
right.
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Situation in which a business
decision may be influenced
for personal gain.
Employee’s disclosure
of illegal, immoral, or
unethical practices in
the organization.
Telling the truth and
adhering to deeply felt
ethical principles in
business decisions.
Businesspeople expect
employees to be loyal
and truthful, but ethical
conflicts may arise.
Managing Ethical Dilemmas
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1. Identify who's involved, …so that you've got a clear picture of who's got a stake in how
the dilemma emerged and how it might be resolved.
2. Make sure you're clear about all the facts, …by checking what you've been told and
asking for clarification of any grey areas.
3. Set out the dilemma in clear terms, …so that it fairly represents the interests of the key
people involved.
4. View the dilemma through the lens of your firm's values and your profession's ethics,
...because they're there to help resolve questions of principle like this.
5. Identify the options for how the dilemma could be resolved …so that you have
alternatives that you can weigh up and then estimate the impacts of.
6. choose the option that fits best with those values and ethics, …because if they're to
mean anything, it's in situations like these.
7. Ask a work colleague for a second opinion on your preferred option, …because
receiving feedback from a critical friend will test the robustness of your case, as
well as allow the meaning and intent of those values and ethics to be exchanged
and shared .
8. Make your final decision and implement it clearly and concisely, …by communicating it
to those involved, so that they have a clear understanding of what's to happen and
why.
9. Take steps to minimise the impacts of your decision, …where that's possible, while still
upholding your decision and how you arrived at it.
7. Review company policies and processes to avoid a repetition, ….because ethical
dilemmas are experiences that most people have something to learn from.
What is Ethical Behaviour?
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•
•
•
•
1.
Discuss the various kinds of ethical dilemmas that hospital
employees—doctors, nurses, or pharmacists—may encounter in their
dealing with stakeholders such as patients or suppliers.
Doctors, especially in emergency rooms are constantly faced with
critically injured patients on the verge of death. They are faced with the
ethical dilemma of attempting to save the life of these patients when the
patient’s potential quality of life is dramatically decreased if they survive.
The patient might remain on life support indefinitely or require constant
care, left without the ability to take care of themselves.
Nurses are faced with ethical dilemmas when they have knowledge
that leads them to believe that the doctor’s instructions are not in the best
interest of the patient. They are instructed to always follow the doctor’s
orders, but what if this is detrimental to the patient? Do they follow their
orders or not?
An example of an ethical dilemma faced by a physician is when a
customer enters the pharmacy in a two day span with prescriptions from five
different physicians for narcotics. The pharmacists knows that this is an
excessive amount, do they fill the prescriptions?
Identify a specific behaviour that the
three
kinds
of
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hospital employees mentioned in item 1 might exhibit, and
characterize the behaviour as ethical or unethical
• Employee Ethical Behaviour / Unethical Behaviour:
Doctor Knowing a patients complete medical history before
performing any procedures. Not treating a patient in need
because they do not have health insurance. Nurse Ensuring
that patients receive all medicine prescribed by their doctor at
the appropriate times. Treating a patient disrespectfully
because they get on their nerves. Pharmacist Making sure that
critical supplies and medications are always stocked to
appropriate levels. Filling a prescription with the generic
substitute even though the prescribing physician designated
that brand is medically necessary.
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• 3. Based on this discussion, identify three standards or
values that you will incorporate into your personal ethical
code to help yourself determine whether a behaviour is
ethical or unethical.
•
By asking ourselves the following questions we can
determine if the practices of our hospital are ethical or
unethical:
• Is the patients best interest always the top priority?
• Is the patients safety being compromised?
• Are we providing the highest quality of care to the
patient?
Managing Ethically
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• Responses to this set of questions will differ, based upon the varying
experiences:
•
Ethics will vary based on individual and cultural characteristics
as well as in different situations. Sometimes the goals and targets
are very difficult to reach, and managers feel pressured to resort to
unethical behaviour to meet them. Dishonesty is unacceptable
regardless of the circumstance. Employees should be careful to
avoid conflicts of interest that may cause others to question their
integrity. Although those involved in such unethical situations may
perhaps benefit in the short run, in the long run they harm not only
their customers and their companies, but also themselves.
•
Training in ethics raises awareness of issues and helps others
to look at different aspects of an issue. Establishing an
organizational code of ethics and making all employees aware of it
can encourage ethical behaviour. It is also important that managers
always engage in ethical conduct, so that they can lead by example
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• Establishing Ethical Control Systems.
1.The most important step to encourage ethical behaviour is to develop
a code of ethics that is given to every employee and published
regularly.
2.Next, provide a visible means of support for ethical behaviour.
a. Organizations are increasingly creating the role of ethics officer, or
ethical ombudsman, to monitor their ethical practices.
i. The ombudsman is responsible for communicating, designing,
monitoring and training ethics.
ii. Because the ombudsman has organization-wide authority,
members in any department can discuss unethical behaviour without
fear of retribution.
b. Guidance on the ethics of an action can be provided by an
ombudsman or ethics committee.
3.Developing an Ethical Culture.
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a. An organization can also make ethical values and norms a central
part of its organizational culture.
i. When organizational members abide by the organization’s values
and norms, these become part of each individual’s personality.
ii. High standards and strong values and norms help individuals resist
self-interested actions.
b.The managers’ role in developing ethical values and standards in
other employees is very important.
i. Managers become ethical role models.
ii. If top managers are not ethical, their subordinates are not likely to
be either.
c. Codes of ethics and regular training help employees learn ethical
values.
i. In 2000, KPMG reported that 16% of Canadian companies gave no
ethics training and one-third third gave less than one hour per year.
ii. If top managers are not ethical, their subordinates are not likely to
be either.
Accounting standard-setting bodies
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• Accounting standard setting bodies are national or international
organisations that have been delegated responsibility for setting
Generally Accepted Accounting Principles (GAAP) by statute in
a country or jurisdiction.
International
• The International Accounting Standards Board issues IFRS.
• The International Federation of Accountants (with its
International Public Sector Accounting Standards Board IPSASB) issues IPSAS for Government/Public entities
accounting.
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•Australia: Australian Accounting Standards Board
•Canada: CICA's Accounting Standards Board "AcSB“
•France: Autorité des Normes Comptables (ANC) (formerly the Conseil
National de la Comptabilité)
•Germany: Accounting Standards Committee of Germany (ASCG, in German:
DRSC)
•India: National Advisory Committee on Accounting Standards (NACAS) with
the aide and advice of Institute of Chartered Accountants of India. Getting
replaced soon by NFRA in the Company Bill 2012.
•Iran: Accounting Standards Board
•Malaysia: Malaysian Accounting Standards Board
•Malta: Maltese Accountancy Board
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Role of regulatory bodies in Accounting
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Profession
• The Institute of Chartered Accountants of India (ICAI) is a national
professional accounting body of India.
• Established on 1 July 1949 as a body corporate under the Chartered
Accountants Act, 1949 enacted by the Constituent Assembly of India
(acting as the provisional Parliament of India) to regulate the
profession of Chartered Accountancy in India.
• ICAI is the second largest professional accounting body in the world
in terms of membership second only to American Institute of
Certified Public Accountants.
• The only licensing cum regulating body of the financial audit and
accountancy profession in India.
• ICAI is solely responsible for setting the auditing and assurance
standards to be followed in the audit of financial statements in India.
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Role of regulatory bodies in Accounting
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Profession
• ICAI is one of the founder members of the International
Federation of Accountants (IFAC), South Asian Federation of
Accountants (SAFA), and Confederation of Asian and Pacific
Accountants (CAPA). ICAI was formerly the provisional
jurisdiction for XBRL International in India.
• It also helps various government agencies like RBI, SEBI,
MCA, CAG, IRDA, etc. in policy formulation.
• ICAI presented an approach paper on issues in implementing
Goods and Service Tax in India to the Ministry of Finance.
• In response to this, Ministry of Finance has suggested that
ICAI take a lead and help the government in implementing
Goods and Services Tax (GST).
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International Federation of
Accountants
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• Serves the Public Interest.
• Establish and promotes adherence to high
quality professional standards and furthers their
adoption and implementation of such standards.
• Support the global development of the
accountancy profession, professional
accountants in business and small & medium
practices.
• Speak out on public interest issues where the
professional voice is most relevant.
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Professional Accountancy Organization
•
PAOs are membership organizations are
membership organizations of
professional accountant which
1. Act in public interest.
2. Develop and produce capable and
competent accountancy professionals.
3. Act as a resource to govt. regulates and
other stakeholders.
Power of PAO’s in Economy
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• Attracts FDI
• Promotes growth and development of
small & medium enterprises (SMEs)
Sector.