Introduction to Business

Ethics
Chapter III
 Chapter Objectives:
• Present the definition of ethics in general and business ethics in particular.
• Recognize the need for a code of ethics that is upheld especially by setting
the right “tone at the top.”
• Become familiar with the SEC rules and regulations relating to ethics.
• Provide an overview of listing standards and suggestions relating to ethics.
• Understand the board’s role in setting the company’s ethical codes.
• Recognize the benefits of and need for an ethical workplace.
• Identify incentive programs and their roles in promoting an ethical workplace.
• Illustrate that actions speak louder than words in promoting an ethical
workplace.
• Discuss the integration of business ethics into the business curriculum.
• Provide an example of proficient implementation of an ethical code by
examining the Defense Industry Initiatives on Business Ethics and Conduct.
 Key Terms
Business ethics
Code of Ethics
Committee of Sponsoring Organizations
Of the Treadway Committee (COSO)
Conference board
Defense Industry Initiatives
on Business Ethics and Conduct
Ethical Behavior
Ethical Incentives
Ethical Sensitivity
 Ethical Theories
There are several broadly accepted ethical theories.

 Consequentialist Theory

 Nonconsequentialist Theory

 The Individualist Dimension of Ethical Decision

 Collectivist Theory

 Metaethics

 Normative Ethics

 Business Ethics
 Ethics In Workplace

There is increased interaction between the board of directors,

audit committees, internal auditors, external auditors,
executives, and employees in general regarding ethical
conduct in the workplace.

IS IT A RESULT OF SOX IMPLEMENTATION?

SOX is reported to have a positive impact on business codes

of ethics. But OTHER elements are required to promote
competency and integrity among all participants.
Findings of Deloitte&Touche
2007 Survey on Ethics and
Workplace
Key factors in promoting ethical workplace

management behavior
direct supervisors
behaviour
positive reinforcement
compensation (bonus
+salary)
behaviour of peers
Findings of Deloitte&Touche
2007 Survey on Ethics and
Workplace
Reasons why people make unethical decisions

lack of personal integrity

job dissatisfaction
financial rewards
pressure to meet goals
ignorance of code of
conduct
Findings of Deloitte&Touche
2007 Survey on Ethics and
Workplace
Aspects that cause incentives conflicts

high levels of stress

long hours
fast-paced environment
inflexible schedule
highly competitive
environment
Findings of Deloitte&Touche
2007 Survey on Ethics and
Workplace
results pertaining to questionable
behavior in the workplace environment

stealing petty cash

cheating on expense
reports
taking credit for another
person’s accomplishment
lying on time sheets about
hours worked
other results
Findings of Deloitte&Touche
2007 Survey on Ethics and
Workplace
Majority believes that following actions are acceptable

use company technology

for personal use
take a sick day when not
actually ill
date a subordinate
ask a collegue for
personal favour
THUS:
All organizations, regardless of their mission (e.g., profit
oriented, nonprofit) and size (large vs. small), should
establish an “organizational ethical culture.” The phrase
“organizational ethical culture” consists of three words:
(1) organization, which is defined as a group of individuals
or entities bound to achieve a shared goal;
(2) ethics, which is honorable behavior conforming to the
norm of the group;
(3) culture, which is a pattern of shared beliefs adopted by
the group in dealing with its internal and external affairs.
 Business Ethics
Four different levels of business ethics have been identified based
on what type of business and how their actions are evaluated.
1. The society level, which defines ethical behavior and assesses
the effect of business on society.
2. The industry level, which suggests that different industries
have their own set of ethical standards (e.g., chemical industry
vs. pharmaceutical industry)
3. The company level, under which different companies have their
own set of ethical standards
4. The individual manager level, at which each manager and other
corporate participants are responsible for their own ethical
behavior

CONSEQUENTLY, one feasible way to judge ethical behavior is

to focus on determinants of business ethics and behavior such
as corporate culture, incentives, opportunities, and choices.
 Business Ethics (Cont.)

Corporate Culture Companies should promote a spirit of integrity that goes

beyond compliance.

Incentives Individuals within the company tend to act according to

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

Opportunities Effective corporate governance, internal controls, and

enterprise risk management can reduce the opportunity
for unethical conduct.

Choices Individuals, in general, are given the freedom to make

choices and usually choose those that will maximize their
well-being.
 Triangle of Business Ethics

The triangle of business ethics consisting of (1) ethics

sensitivity, (2) ethics incentives, and (3) ethical behavior.
 Triangle of Business Ethics (Cont.)

Ethics sensitivity: Moral principles, workplace environment,

gamesmanship, loyalty, peer pressure, and job security that
influence one’s ethical decisions.

Ethics incentives: Rewards, punishments, and requirements for

ethical behavior (e.g., tone at the top, AICPA code of
professional ethics).

Ethics behavior: Doing “the right thing” rises above a rules-

based mindset that asks, “is this legal,” and adopts a more
principles-based approach that asks, “is this right?”
 SEC Rules on Corporate Code of Ethics
The SEC rule describes the term “code of ethics” as written
standards designed to deter wrongdoing and to promote:
(1) Full, fair, accurate, timely, and transparent disclosure in
reports and documents
(2) Avoidance of conflicts of interest, including disclosure of
any material transaction or relationship
(3) Honest and ethical conduct throughout the company
(4) Accountability for compliance with the established code of
ethics
(5) Compliance with applicable laws, rules, regulations, and
professional standards
(6) The prompt internal reporting of noncompliance and any
violations of the established code of ethics to an appropriate
person or persons designated in the code.
 SEC Rules on Corporate Code of
Ethics (Cont.)
The SEC extended code of ethics requirements to both the
company’s principal financial officers (SOX’s Section 406) and
principal executive officers (SOX’s Section 407). The SEC
rules in implementing Section 406 of SOX require public
companies to disclose whether they have adopted a code of
ethics for their principal officers, including principal executive
officers, principal financial officers, principal accounting
officers, controller, or other personnel performing similar
functions in the annual report filed with the SEC.
If the company has not adopted such a code of ethics, it must
disclose the reason for not doing so.
 Listing Standards
The listing standards of the NYSE further expanded on the SEC
rules by requiring listed companies to
(1) adopt and disclose a code of business conduct and ethics for
directors, officers, and employees;
(2) promptly disclose any waivers of the adopted code for
directors and executive officers.

Example: The NYSE listing standards recommend that each

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

The emerging corporate governance reforms have had a

positive impact on academic programs.

The goal of corporate governance and business ethics

education is to teach students their responsibilities and
accountability to their profession and society. Almost all
states require CPA candidates to pass an ethics exam before
licensing and report the ethics component in their continuing
education requirements. Almost all states require a minimum
amount of ethics education for their practicing CPAs.
 Ethics in Institutions of
Higher Education
Academic integrity and ethical conduct by students and
faculty are important to the sustainable well-being and
reputation of institutions of higher education. This academic
integrity can be achieved when:
(1) there is an effective and fairly enforceable academic honor
code,
(2) faculty are willing to take proper action against suspected
cheaters,
(3) adequate research is conducted to identify factors that
affect academic integrity, including fundamental ethical
values,
(4) ethics are integrated into the business curriculum, and
pedagogies are developed to teach and encourage adherence
to ethical values and conducts.
 Personal Ethics
In June 2005, the International Ethics Standards Board for
Accountants (IESBA), part of the International Federation of
Accountants (IFAC), issued its revised Code of Ethics for use
by professional accountants worldwide.

The key principles of the IESBA’s code of ethics are:

(1) integrity,
(2) objectivity,
(3) professional competence and due care,
(4) confidentiality,
(5) professional behavior.
 Reporting Business Ethics and
Conduct

Section 406 of SOX requires public companies to disclose in

their annual financial statements the establishment (or lack
of) a corporate code of conduct.

Nevertheless, public companies may choose to report their

business ethics and conduct as a separate report to their
shareholders or as part of their regular filings with the SEC.

Hint: Look for survey conducted by the Ethics and Compliance

Officer Association (ECOA) and salary.com (2006)
Financial Reporting Integrity

Framework for Reporting with Integrity

 Conclusion
• Ethics are broadly described in the literature as moral
principles about right and wrong, honorable behavior
reflecting values, or standards of conduct. Honesty, openness,
responsiveness, accountability, due diligence, and fairness
are the core ethical principles.
• Business ethics are a specialized study of moral right and
wrong.
• An appropriate code of ethics that sets the right tone at the
top of promoting ethical and professional conduct and
establishing the moral structure for the entire organization is
the backbone of effective corporate governance.
• SEC rules require public companies to report significant
amendments or any waiver affecting specified officers
pursuant to the filing of their first annual report on their code
of ethics.
 Conclusion
• Corporate culture and compliance rules should provide
incentives and opportunities for the majority of ethical
individuals to maintain their honesty and integrity, and
provide measures for the minority of unethical individuals to
be monitored, punished, and corrected for their unethical
conduct.
• Attributes of an ethical corporate culture or an integrity-
based culture are sense of employee responsibility, freedom
to raise concerns, managers modeling ethical behavior and
expressing the importance of integrity.
• The company’s directors and executives should
demonstrate, through their actions as well as their policies, a
firm commitment to ethical behavior throughout the company
and a culture of trust within the company. Although a “right
tone at the top” is very important in promoting an ethical
culture, actions often speak louder than words.