Ethics and Corporate Social Responsibility in the corporate world are very important.

What
follows will help you in your understanding of this very important topic – please summarize
this in 2-3 pages and explain the importance that ethics and corporate social responsibility play
in the accounting profession:

Ethics: Ethical issues as they relate to organizations and their social responsibility

What is Corporate Social Responsibility?

Corporate Social Responsibility (CSR) is the responsibility of an organization for the impacts of
its decisions and activities on society, the environment and its own prosperity, known as the
“triple bottom line” of people, planet, and profit. Not only do responsible, sustainable and
transparent approaches help build brand and reputation, they help strengthen the community and
therefore the marketplace. A solid business plan, embedded into the business culture, reflecting
organizational values and objectives through strategic CSR application, will help to build a
sustainable and profitable future for all.

The obligation of an organization's management towards the welfare and interests of the society
in which it operates.

What is business ethics?

Business ethics examines ethical principles and moral or ethical problems that arise in a business
environment. It applies to all aspects of business conduct and is relevant to the conduct of
individuals and entire organizations.

Business ethics reflects the philosophy of business, one of whose aims is to determine the
fundamental purposes of a company. If a company's purpose is to maximize shareholder returns,
then sacrificing profits to other concerns is a violation of its fiduciary responsibility. Corporate
entities are legally considered as persons in USA and in most nations. The 'corporate persons' are
legally entitled to the rights and liabilities due to citizens as persons.

Generally business ethics involves coming to know what it right or wrong in the workplace and
doing what's right -- this is in regard to effects of products/services and in relationships with
stakeholders. Attention to ethics in the workplace sensitizes leaders and staff to how they should
act. Perhaps most important, attention to ethics in the workplaces helps ensure that when leaders
and managers are struggling in times of crises and confusion, they retain a strong moral compass.
Business ethics can be strong preventative medicine. Ethics is also about assessing and
cultivating the corporate culture. Culture is comprised of the values, norms, folkways and
behaviors of an organization. Ethics is about moral values, or values regarding right and wrong.
Therefore, cultural assessments can be extremely valuable when assessing the moral values in an
organization. Businesses have recently become aware of the severe implications of the unethical
behavior of employees. In response, many businesses have begun training their employees to
make ethical decisions and establishing company codes of conduct. The message from
businesses today is clear—employees must be capable of making ethical decisions to protect the
business from legal liability and to maximize long-term profits.
Most students’ principles of right and wrong are well established prior to their attending high
school. Thus, the presentation of business ethics does not involve the teaching of right and
wrong. Instead, students need to learn how to apply their principles of right and wrong to
business situations.

The principles of right and wrong that guide an individual in making decisions are called ethics.
The use of personal ethics in making business decisions is called business ethics. In these
Business Ethics Activities, you will have the opportunity to analyze the ethics of common
business situations by using the following three-step checklist as a guide in collecting relevant
information regarding an action.

1. Is the action illegal? Does the action violate any laws? Obeying the law is in your best interest
and the best interest of your business.

2. Does the action violate company or professional standards? Public laws often set only
minimum standards of behavior. Many businesses and professions set even higher standards of
behavior. Thus, an action may be legal, yet still violate standards of the business or profession.
Violating these standards may affect your job security or any professional certification you may
hold.

3. Who is affected, and how, by the action? If an action is legal and complies with business and
professional standards, you must rely on your principles of right and wrong to determine if the
action is ethical. Determining how the action affects individuals and groups—including business
employees and owners, customers, the local community, and society—will help you decide if an
action is ethical.

In the activity presented below, you will read about a person who overstated information on a
résumé. Note how the three step checklist, described above, was used to determine whether the
individual demonstrated ethical behavior in preparing the résumé. A solution to the activity is
included. The solution illustrates the use of the three-step checklist. (Note that the answers for
future Business Ethics Activities will not be provided to you.)

Social responsibility a part of business ethics???

Social responsibility and business ethics are often regarding as the same concepts. However, the
social responsibility movement is but one aspect of the overall discipline of business ethics. The
social responsibility movement arose particularly during the 1960s with increased public
consciousness about the role of business in helping to cultivate and maintain highly ethical
practices in society and particularly in the natural environment. Many companies believe they
have a responsibility to "give back" to society. This focus includes contributions of time and
money, a duty to provide environmentally friendly products and services, and a desire to improve
the lives of individuals here and around the globe. Such socially responsible companies see to it
that this "consciousness" permeates everything they do.

The following 10 companies stand out as prime examples of how social responsibility can be
productively coupled with sound strategies to advance goodwill, while building sustainable and
impressive businesses. They provide the leadership to demonstrate how marketers can pursue
both objectives simultaneously. As such, socially conscious companies have stepped up their
efforts with increasing effectiveness and productivity. It is an impressive movement and one that
invites society at large to do even more. Let's use these as examples for "how to get it done" so
that we can effectively expand our efforts to give back.

Burt’s Bees - The focus for Burt's Bees has always been on well-being and "the greater good."
As part of the Natural Products Association, the company helped develop The Natural Standard
for Personal Care Products, which created guidelines for what can be deemed natural. Burt's
Bees follows the highest possible standards for packaging sustainability, furthering its dedication
to the cause as a member of the Sustainable Packaging Coalition. Since the brand's start at a
crafts fair selling $200 worth of honey, the company has since expanded to candles, lip balm and
now more than 150 products. In 2009, revenue topped $250 million.

GE - To stay true to GE's mission, Ecomagination offerings include products that significantly
and measurably improve customers' operating performance or value proposition and
environmental performance. Ecomagination helped GE build its business by increasing
awareness of how the company is using renewable energy and reducing carbon emissions. As
proof of the effectiveness of GE's program, the Ecomagination portfolio has grown from 17
products to more than 80 today, with revenues reaching $17 billion in 2008, an increase of 21%
over 2007.

Method - As a cleaning product, Method hit the jackpot. While cleaning products historically
contained hazardous chemicals, Method was able to make safe and effective home and personal
cleaning products derived from natural ingredients such as soy, coconut and palm oils. The
products also come in environmentally responsible, biodegradable packaging. As one of the
fastest-growing companies in the world, and with $100 million in annual revenue, Method
proves that socially responsible products can be wildly successful.

The Body Shop - The Body Shop is regarded as a pioneer of modern corporate social
responsibility as one of the first companies to publish a full report on its efforts and initiatives.
Founder Anita Roddick led her company to stand up for its beliefs and champion causes such as
self-esteem, environmental protection, animal rights, community trade and human rights. From
sponsoring posters in 1985 for Greenpeace to presenting a petition against animal testing to the
European Union with 4,000,000 signatures, The Body Shop has contributed significantly to the
causes it supports, and exemplifies how other companies can do the same.

Starbuck’s Coffee - Since Starbucks Coffee started in 1971, the company has focused on acting
responsibly and ethically. One of Starbucks' main focuses is the sustainable production of green
coffee. With this in mind, it created C.A.F.E. Practices, a set of guidelines to achieve product
quality, economic accountability, social responsibility and environmental leadership. The
company supports products such as Ethos Water, which brings clean water to the more than 1
billion people who do not have access. To date, Ethos Water has committed to grants totaling
more than $6.2 million.
Ben & Jerry’s - Ben & Jerry 's founders Ben Cohen and Jerry Greenfield have infused the
company with the notions of giving back in every way possible, as well as "linked prosperity"
between the company, its employees and the community. They started the Ben & Jerry 's
Foundation, were founding members of the Business for Social Responsibility organization and
set an extraordinary rate of giving to charitable organizations in the corporate world, donating a
full 7.5% of pretax profits. In their own words, they "strive to show a deep respect for human
beings inside and outside our company and for the communities in which they live." Unilever
bought Ben & Jerry 's in 2000 and continues to support the foundation; it donated $2 million in
2009.

Kenneth Cole - Since 1985, Kenneth Cole has been openly involved in publicly supporting AIDS
awareness and research. He uses fashion to promote awareness of, and help fight, various social
issues. After 25 years of addressing meaningful social issues, Kenneth Cole established the
awareness’ Fund, a not-for-profit initiative that uses partnerships, merchandise, events and its
blog to celebrate, encourage and empower acts of service volunteerism and social change. A full
100% of net proceeds of the Awareness products go toward the fund. These efforts have helped
fuel the success of the Kenneth Cole brand, a company with nearly $500 million in sales.

Pedigree - Pedigree dog food built its brand by focusing on the need for people to adopt
homeless dogs. Funding the support and care of these animals and sponsoring a national
adoption drive, Pedigree's 2009 goal was to distribute $1.5 million in grants to 1,000 shelters and
breed rescues. Pedigree donates one bowl of food to animal shelters every time it gets a
Facebook fan, and it did the same when the company's 2009 Super Bowl commercial was
viewed online. Pedigree's goal is to donate 4 million bowls of dog food, enough to feed every
shelter dog in America for one day.

Tom’s Shoes - Blake Mycoskie started Toms Shoes on the premise that for every pair of shoes
sold, one pair would be donated to a child in need. This innovative idea resulted from a trip to
Argentina where Mycoskie saw an overwhelming number of children without shoes. Toms
Shoes recognized that consumers want to feel good about what they buy, and thus directly tied
the purchase with the donation. In just four years, Toms Shoes has donated more than 400,000
shoes, evidence that consumers have clearly embraced the cause.

Whole Foods - Whole Foods supports sustainable agriculture, promotes the reduction of waste
and consumption of nonrenewable resources and encourages environmentally sound cleaning
and store-maintenance programs. The company created the Local Producer Loan program, which
provides up to $10 million in low-interest loans to small local producers to help grow their
businesses. Whole Foods has also created Whole Planet Foundation, which fights poverty
through micro lending in rural communities around the world. The foundation has raised $1.5
million to help 40,000 women lift themselves out of poverty by empowering micro
entrepreneurs.

In the post-Enron era, the number of companies reporting their social and environmental impact
on society has increased immeasurably. Indeed, to its many advocates, the emergence of
corporate social responsibility (CSR) is not only a blueprint for the future, but a new highway to
follow for conducting business in an uncertain world that has witnessed the evisceration of many
long-accepted norms of conduct.

Broadly speaking, CSR — also known as sustainable development — involves the increased
recognition by publicly held companies that they need to address and heed not only shareholders,
but all the multiple stakeholders impacted by the company’s behavior. These include employees,
customers, suppliers, governments, and nongovernmental organizations. In the new paradigm of
social responsibility, stakeholders also could include socially responsible investor organizations,
consisting of investors who make investment decisions using various social and ethical screens.

What follows are the major factors behind the emergence of CSR and an outline of key global
and U.S. standards that have been put in place, as well as a review of current corporate and social
audit reporting and support activities at numerous multinational companies. Several audit
practitioners also offer their suggestions on best practices for evaluating, developing, supporting,
and reporting on social and audit compliance standards.

EMERGENCE OF CSR

The theory behind CSR is that companies can be profitable while at the same time minimizing
their negative impact on stakeholders. As evidence, a recent study by Oekom Research, a
German agency that rates environmental and social performance, and securities firm Morgan
Stanley indicates that companies with higher sustainability ratings outperform their counterparts
who score lower on sustainability practices. The study examined the 602 companies in the
Morgan Stanley Capital International World Index that have received Oekom’s Corporate
Responsibility

Ratings and found that, between January 2000 and October 2003, the 186 highest-ranked
companies in terms of sustainability outperformed the remaining 416 companies by 23.4 percent.
Further, Lynn Sharpe Pains, a Harvard Business School professor, looked at all academic studies
conducted on the subject of whether ethics pays (85 studies, total) and found a positive
correlation between better financial performance and better social performance in 55 — or 65
percent — of the studies.

As recently as five years ago, CSR was seen as an either-or proposition. If a company attempted
to address stakeholder concerns, it might be perceived as impacting the company’s profitability.
More recently, studies and actual practice have shown that critical stakeholders — including
customers, employees, and socially responsible investors — are actively looking to do business
with socially responsible companies.

The 2004 Cone Corporate Citizenship Study, conducted by strategic marketing and public
relations firm Cone Communications, shows that eight in 10 Americans say corporate support of
causes wins their trust in that company, a 21 percent increase since 1997. Moreover, the study
reveals that Americans stand ready to act against companies that behave illegally or unethically:
more than three-fourths of respondents indicated they would respond to a company’s negative
practices by taking actions such as switching to another firm or speaking out against the
company among family and friends. Increasingly, the value of companies’ long term is seen as
dependent upon their ability to meet their expectations of social responsibility.

Furthermore, a significant percentage of many companies’ value today is made up of “good

will,” or benevolence — an asset easy to lose and difficult to regain. In consequence, companies
that recognize this fact are increasingly seeing the need to take appropriate steps to minimize
their negative impacts on stakeholders and thereby protect their valuable reputations and good
will.

PROMOTING RESPONSIBILITY

Failure to pay heed to CSR can dramatically impact a company’s reputation and even its value.
Multinationals such as Royal Dutch/Shell Group, Dow Corning Corp., Coca-Cola Co., and Nike
Inc. have taken hits to their reputations for failing to stay ahead of their stakeholders’
expectations. At Wal-Mart Stores Inc., CEO Lee Scott recently apologized publicly for letting
the reputation of the company be sullied by questionable hiring practices. “For a bottom-line
company like Wal-Mart, that was a significant step,” observes Bruce K. Packard, a corporate
attorney at Dallas-based law firm Davis Munck P.C. who has advised several boards and audit
committees concerning their codes of social responsibility.

As the profile of CSR has increased globally, numerous governmental, non-governmental, and
advocacy groups have joined the dialogue. Several European governments are looking at
regulatory approaches to CSR issues. France, for example, has enacted a law requiring listed
companies to report annually, not merely on their financial performance, but on their social and
environmental performance as well. In addition, the United Kingdom requires pension funds to
identify social and environmental criteria relied upon in making investment decisions. Moreover,
the IIA–UK and Ireland recently issued a “Professional Issues Bulletin” on the growing
importance of CSR in organizations. The bulletin discusses issues and challenges associated with
CSR and how internal auditors can help their organization address them.

Today, worldwide conferences such as the United Nations World Summit on Sustainable
Development proliferate. Groups such as Business for Social Responsibility, a global nonprofit
organization, help companies identify and manage their social responsibility obligations. The
recently published report by retail giant GAP Inc. on its social responsibility activities attracted
considerable and favorable media attention worldwide. Indeed, social responsibility reporting by
publicly traded corporations has become an expected part of doing business on a global scale.

GUIDELINES FOR BEHAVIOR

There are upwards of 50 global and domestic guidelines by which companies can measure their
social responsibility efforts. Most have been issued in the last decade or so. The more prominent
categories covered include the environment, supply chain management, hiring practices,
community relations, internal management or corporate governance, and charitable donations.
Some of the global benchmarks against which companies’ CSR performance is being measured
include the United Nations Declaration of Human Rights, the International Labor Organization’s
(ILO’s) labor standards, and several globally recognized voluntary standards, such as the
Organization for Economic Co-operation and Development’s guidelines for multinationals and
the United Nations Global Compact, to name just a few.

Perhaps the most widely accepted reporting guideline, however, is the Global Reporting
Initiative (GRI), based in Amsterdam (see “Key Global Standards on Sustainable
Development”). Launched in 1997 and billed as a common framework for sustainable reporting,
the GRI was developed by a group of organizations widely involved with responsible business
reporting. Among them were representatives of the Association of Chartered Certified
Accountants, the United Nations Environment Programmed, and the World Business Council for
Sustainable Development. “What the GRI accomplished was to take the best practices in the area
of human rights, labor relations, environmental management, and sustainable development, and
craft them into guidelines that enable any corporation to produce one comprehensive report,”
says Jeffrey Hollander, author of What Matters Most: How a Small Group of Pioneers Is
Teaching Social Responsibility to Big Business and Why Big Business Is Listening.

Social responsibility also has become more prevalent in the United States. Witness the recent
lawsuits against U.S. nonprofit hospitals for charging poor, uninsured patient’s higher rates than
they charge insured patients. “Although the lawsuits seek to attack their tax status, the bigger
issue is whether these institutions are behaving in a socially responsible manner,” notes attorney
Packard.

The U.S. Sarbanes-Oxley Act of 2002 has raised the bar for many corporations with mandates
that they conduct business with social responsibility in mind. The legislation includes an
expectation that companies build “effective” programs based on adherence to values as opposed
to merely laws. Principally through Sarbanes-Oxley Section 302, company executives must now
certify that they have effective disclosure controls and procedures in place — and they must
continually evaluate them to ensure their ongoing effectiveness.

Other portions of the act — including the whistleblower and code-of-ethics provisions —
“combine to make social auditing essential,” Packard says. Nonetheless, he believes the jury is
still out on whether Sarbanes-Oxley will be an effective locus for corporate social responsibility.
“We don’t know where the courts are going to go. The litigation is just beginning.”

More needs to be done by U.S. companies to incorporate sustainable development issues, agrees
author Hollender, who is president of Seventh Generation, a producer of natural household
products. “What we need is to develop a parallel to the Generally Acceptable Accounting
Principles financial reporting guidelines to make sure the information is complete and
independent.” Hollender recently accepted the Corporate Stewardship Award for Small Business
from the U.S. Chamber of Commerce Center for Corporate Citizenship. The award recognizes
Seventh Generation for exemplifying the highest ideals in corporate stewardship.

RESPONSE TO CSR CONCERNS

Thus, the question arises: Are the existing audit inspection measures such as Sarbanes-Oxley and
recent CSR initiatives working or not? Perhaps the key determination will be what the public
does with this additional information. So far, the signs are encouraging. Many domestic and
international companies are taking social issues more seriously and making them an important
part of their agendas.

Under fire for years, cigarette manufacturer Brown & Williamson Tobacco Corp. (now merged
with R.J. Reynolds Tobacco Co.) began approximately four years ago an unprecedented series of
dialogues with various stakeholders across the United States to improve its image. The question
was simple: “What would we need to do to meet your concerns?” The company has held more
than 25 dialogues with different constituencies including members of the public, legislators,
public health officials, employees, retailers, and wholesalers. Both an external auditor and an
internal auditor audited the process.

The company’s efforts have led to significant change. Brown & Williamson has asked that more
of the money U.S. states receive from tobacco settlement funds be spent by the states on
education, prevention, and treatment. It has also requested that the Motion Picture Association of
America not feature cigarettes in movies. Moreover, the company will no longer put any
advertisements on the back of any magazine lest a child see it.

Bill White, director of audit for Brown & Williamson, said, “We were impressed by the
openness and directness displayed during the dialogue sessions and by the integrity and
willingness of management to address the key issues. Our conclusion was that the CSR annual
report accurately reflected the issues and management’s response to them.”

Likewise, Baxter International, a manufacturer of pharmaceutical and biomedical products, has a

viable sustainability program in place. The external verification aspect of Baxter’s program got
its start in the mid 1990s in response to a stockholder group wanting assurance that
environmental data presented to the public was accurate. Initially, Baxter only used its internal
personnel at the division and corporate levels to verify environmental data. External auditors
were drawn into the verification process as a result of the stockholder group’s concerns. Over
time, the external report evolved to incorporate the reporting of health and safety data as well as
environmental data. Currently, an external consultant, ERM Certification and Verification
Services (CVS), and Baxter have an arrangement in which they jointly verify selected data at
every facility they audit. ERM CVS maintains overall quality control of the process through
recently created verification protocols for use by all their auditors assessing Baxter’s facilities.

“Besides improving the accuracy of the data, the verification process has also assisted Baxter in
improving the efficiencies of collecting, combining, and publicly reporting the data,” says Mike
Cycyota, Baxter’s director of corporate environmental health and safety audits. Because Baxter
has manufacturing facilities in almost 30 countries, the cultural differences between auditors
were an additional concern. Cycyota adds, however, that the verification protocols used by ERM
CVS will help minimize these inevitable auditor differences when working in different
geographic areas.

Another company that is paying more than lip service to sustainable development is French
telecommunications giant Alcatel. Having emerged from a major reorganization in 2003, Alcatel,
which operates in 130 countries with 60,000 employees, has a comprehensive sustainable
development program. Its strategy is based on strict guidelines published in policies and charters,
as well as social, environmental, and economic objectives, defined by the company’s executive
management.

Alcatel’s sites around the world have benefited from an environmental management system; and
through its “Digital Bridge” initiative, Alcatel technologies serve development in scores of
countries. In 2003, the company joined the UN Global Compact, reinforced its corporate
governance practices, updated its “Statement on Business Practices,” and elaborated on its Social
Charter, which emphasizes Alcatel’s commitment to socially responsible practices.

In a country with a substantial natural resource sector, Canadian investors, businesses, and
taxpayers have been sensitive to social and environmental concerns for some time. Rio Algom
Ltd., which before a takeover in 2000 was one of Canada’s leading diversified mining and metals
distribution companies, developed and operated mines in North and South America.

“The company believed a strong corporate social awareness went beyond a matter of being a
good corporate citizen to being good business,” recalls Archie Thomas, a former chief audit
executive of Rio Algom. “The company also believed that the responsible reputation it was
building was key to gaining a competitive advantage when it came to getting local acceptance
and regulatory permits for new projects.”

Thomas speculates that Rio Algom’s CSR program was one factor that made the company an
attractive takeover candidate. He adds: “I think in any corporation that sets out measurable goals
for operating at a high level of corporate social responsibility, internal auditors can play an
important role in assessing the risks and controls associated with these goals and the strategies
and tactics put in place to attain them, as well as the integrity of the resulting performance
reporting.”

THE RISK OF IRRESPONSIBILITY

In an address on matters related to CSR at The IIA’s International Conference in Sydney in June
2004, Charles Macek, chairman of the Australian Financial Reporting Council and the
Sustainable Investment Research Institute (SIRIS), said companies should regard their social
responsibilities at least on a par with their financial obligations. Too often, he said, financial
analysis of companies ignores other risks and resources beyond purely financial matters. “These
are regarded as ‘soft’ or nonfinancial issues,’’ Macek said. “Yet a failure to meet environmental,
labor market, or even social obligations can have a substantial impact in the longer term. Names
such as Shell, Exxon, Nike, Philip Morris, and Coca-Cola come to mind.”

According to Macek, directors are appointed by shareholders as fiduciaries, and have an

obligation to the company, which should include its multiple stakeholders. “The shareholder
perspective focuses on the short term and only on items that are readily measured,” Macek said.
“The stakeholder view considers the long-term view and recognizes that so-called soft issues can
involve considerable financial costs that are ultimately borne by shareholders.”

Internal auditors, he said, should take the lead in managing risk in these areas beyond their
traditional role in financial reporting. Macek took to task cynics and others who say corporate
social responsibility is of little value except to “do-gooders.” This is a “narrow and erroneous
view dangerous to shareholders’ wealth,” Macek said. “The issue of CSR is best considered by
answering the following question: Does reputation matter? When a company that rated in the top
25 global brands with 120,000 employees [Arthur Anderson] can literally disappear within a
matter of weeks, the answer is self-evident.”

INTERNAL AUDITING’S ROLE

There is broad agreement that for the future, chief audit executives need to ensure that social
responsibility is on the board’s agenda of corporate governance issues. They should be aware of
existing standards and global initiatives as they relate to CSR and use them as yardsticks against
which to measure their organization’s performance.

Additionally, auditors should advise the board on identified best practices and determine whether
their organization’s core values and code of conduct still reflect the desired position of the
enterprise in today’s and tomorrow’s world.

Finally, internal auditors should use the international standards and practices designed by
independent organizations or competitors as benchmarks against which to measure their
organization’s CSR performance. Summing up the role internal auditors need to play in the
future, Phillip H. Rudolph, an attorney involved in Foley Hoag LLP’s corporate responsibility
practice, says, “CSR issues are increasingly touching upon subjects of material relevance to
corporations and their boards, and internal auditors need to be correspondingly vigilant in
making sure their companies are not falling short of what shareholders and management should
reasonably expect.”