UNIT - 6

Professional Ethics

Chapter

1. Business Ethics
2. Business Ethics for professional ‘
3. Business Ethics for Organization

Chapter 1: Business Ethics

Ethics, in a broader sense, deals with human conduct in relation to what is morally good and bad,
right and wrong. However, to determine whether a decision is good or bad, the decision-maker
must judge the available options against an external standard or framework. Such standards can
be rigid or flexible.

Laws, codes of professional conduct, personal codes of conduct, religious teachings, philosophical
tenets, and social norms are all forms of moral frameworks that can aid a decision-maker to take
decision.

Ethics concerns the morality of activities and practices that are considered right or wrong,
including the rules and values that give rise to those activities and practices. Thus, business ethics
is a systematic study of morality as it is applied to the business world.

Ethics may be incorporated into an organization’s culture formally as part of the company’s Value
or Mission Statement. Or it could be incorporated into the organization’s culture informally, such as
through peer pressure or the tone set by the management team

By establishing corporate ethical standards, organizations endeavour to influence the behaviour of

their managers and employees and also to communicate a sense of morality to their current and
potential customers.

1. Compliance with laws and regulations, both external and internal

2. Resolution of conflicts
3. Conflicts of interest
4. Whistle-blowing
5. Bribes and kickbacks
6. Social responsibilities, or a statement on how the entity relates to its communities, the
environment, and society
7. A general understanding of what is considered to be right or wrong

Outside the organization. External pressures and influences, such as those from competitors,
investors, partners, customers, governments, and other stakeholders may compel individuals to
compromise their ethical standards.

Organizational level. The culture of an organization sets the tone for the way in which unethical
behaviours are handled. Management style, group dynamics, compensation or promotion systems
and practices, performance evaluation, budgeting, reporting processes, and the overall condition of
the business are all important factors that can prompt an individual to either engage in unethical
lapses or avoid them.

Individual level. Employees come from a wide range of backgrounds and bring to the work
environment their own motivations and desires, and therefore each individual comes with varying
levels of susceptibility to temptation and unethical behaviour

In the U.S., the importance of ethics is most visible in the Sarbanes-Oxley Act. The Act provides
that unethical activity in business can result in legal liability, not only of a corporate nature but
also of a personal nature.
Note: Customs and traditions in different parts of the world, and even in neighbouring countries,
make ethics a complicated issue. What may be considered unethical in one part of the world may
be seen as “business as usual” in another. Despite these local and regional elements of ethics,
there is a shared understanding of what is considered ethical or unethical on a global levee

Ethics concerns the morality of activities and practices that are considered right or wrong, including
the rules and values that give rise to those activities and practices. Thus, business ethics is a
systematic study of morality as it is applied to the business world

An organization needs to establish policies that describe acceptable and Unacceptable behaviours.
They must communicate and drive the desired ethical culture throughout the organization through
proper training and awareness. This is done through the established human resource policies as well
as the organization’s system of internal controls.

However, it is important to keep in mind that an individual’s values are their beliefs as they relate to
right and wrong or good and bad.

The concepts of morality and virtue play an important role in ethical behaviour. A person’s morals
come from their belief system and are the standards and rules of good behaviour they have adopted. It
is the organization, society, or government that judges these morals as good or bad, or right or wrong.
Virtue is conduct that is in accordance with moral and ethical principles.

Individuals learn and develop their morality and virtue from whom they are taught. The teachers can
be family, religion, or some other source. It is extremely important to cultivate virtues. This means
having excellent character and excellent conduct. Virtues are valuable whether you believe they are
innate or are learned.

Intent is the basis for how the decision is made, while the outcome is the result or consequences of the
decision.

In general, moral philosophy has three branches.

• The first branch is meta-ethics and focuses on “big picture” issues such as “What is truth?”.
• The second branch is normative ethics. This focuses on building frameworks to determine
what is right and wrong.
• The third branch is applied ethics and focuses on specific issues people may confront on a
daily basis

Moral Philosophies and Business Decisions

Teleology

The name comes from the Greek telos, or target. It is also called as Result Based Ethics. it relates to aims,
goals, or missions.

Utilitarianism:

There is a moral obligation to act in an ethical way. The goals are to spread happiness, relieve suffering,
enable freedom, and aid humanity to survive and thrive. The outcome is more important than intent.

When individuals are deciding what to do for themselves alone, they consider only their own
utility. For example, if you are choosing ice cream for yourself, the utilitarian view is that
you should choose the flavour that will give you the most pleasure.

How is getting Impacted in Business

 1. Decisions are based solely on the forecasted outcomes or consequences. This means the decisions would be based
less on how the outcome or consequence is achieved.

Deontology

It is Action based Ethics

Decisions are based solely on what is right and good based on the rules. How the outcome is achieved is the most important
thing? There is less focus on what the outcome actually was

The name comes from the Greek Deon, or duty.

example of deontology is the belief that killing someone is wrong, even if it was in self-
defence

Virtue Ethics

Morality is based on rules that the individual applies. The rules are based on true, honourable, and just virtues that guide the
individual’s actions.

Virtues" are attitudes, dispositions, or character traits that enable us to be and to act in ways
that develop this potential. They enable us to pursue the ideals we have adopted. Honesty,
courage, compassion, generosity, fidelity, integrity, fairness, self-control, and prudence are
all examples of virtues.

Decisions are being made by individuals and are based on their own set of rules. Decisions will be based on a personal sense
of wellbeing as well as the well-being of others.

Virtue ethics is person rather than action based: it looks at the virtue or moral character of

the person carrying out an action, rather than at ethical duties and rules, or the
consequences of particular actions.

Relativism

Relativists often do claim that an action/judgment etc. is morally required of a person.

For example, if a person believes that abortion is morally wrong, then it IS wrong -- for her.
In other words, it would be morally wrong for Susan to have an abortion if Susan believed
that abortion is always morally wrong.

Ethical Relativism is the view that moral (or normative) statements are not objectively true,
but “true” relative to a particular individual or society that happens to hold the belief. ... Note:
the opposite view- right and wrong is objective and universal – is often called nonrelativism,
or Ethical Objectivism.

This is a concept that stems from virtue ethics and is based on the idea that ethics vary from culture to culture due to a
specific culture’s different values and needs. Judgments should not be made and there are no absolutes.

Business decisions will be made based on the culture the company is operating in. This explains why a company in one
nation or culture would make decisions that are different from, and possibly contradictory to, a company in another nation or
culture.

Justice

Business decisions are based on the laws put in place by the society in which the company operates. Many human resource
policies are put in place due to government intervention to provide for those who are least-advantaged. These include but are
not limited to Equal Employment Opportunity, minimum wage requirements, and Occupational Safety and Health

The principle of justice could be described as the moral obligation to act on the basis of fair

adjudication between competing claims. As such, it is linked to fairness, entitlement and
equality
How are ethical decisions made? The concepts of fairness, integrity, due diligence, and fiduciary
responsibility impact ethical decisions.

One who makes decisions; however, these decisions can become corporate practices. When an
individual is viewed as being fair, they have the quality of treating people equally. Their decisions
will be free of bias. In addition, the decision will not give an advantage or disadvantage to one group
over another. This is done in a way that is right or reasonable. It demonstrates that individual’s
concern for others. When there is fairness in the decision that is made, it will be viewed as an ethical

Due diligence means reasonable care or a required carefulness

In
business and legal use, it refers to the process of how a due diligence investigation should be
performed or carried out. This provides the information needed for useful decision-making. There are
similarities to due diligence in generally accepted accounting principles (GAAP) on how the financial
statements are prepared and the notes compiled for use by external users of those statements. In
business this can apply to the investigation performed by an acquirer firm to evaluate a target
company for an acquisition. Due diligence in an investigation will enhance the amount
and quality of information available for the decision maker.

The other term specific to business and the law is fiduciary responsibility. Most often we see this
term used for the person who manages other peoples’ assets. These asset managers have a fiduciary
responsibility

The manager is expected to act on behalf of the asset owner and not on their own behalf. This requires
the element of trust. In the world of business this means the stockholders of a publicly held company
must trust the Board of Directors and the executive management team they appoint. The management
team needs to make ethically sound decisions to protect the company’s assets while growing the
business, so it provides a return to the stockholders.

Deontological theories focus on the inherent goodness of decisions. Specific duties or obligations have intrinsic
value and are self-evident according to deontological theories. Consequences are not used to determine whether
a decision is ethical.

Chapter :2

Ethical Considerations for Management Accounting and Financial Management

Professionals

Ethical challenges can derail the career of a management accountant or financial management
professional. Therefore, these individuals have an obligation to the public, their profession, the
organizations. maintain the highest standards of ethical conduct.

The IMA has issued an updated version of IMA Statement of Ethical Professional Practice – 2017
It is also issued as part of the IMA Statement on Management Accounting (SMA)
IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility”
Ethics is the intellectual discipline that attempts to distinguish right from wrong in human conduct. It
is also a practical endeavour that proposes standards of model behaviour as points of comparison
when individuals choose among various courses of action.

Practitioners of management accounting and financial management, as well as members of IMA, shall
not commit acts contrary to these standards nor shall they condone the commission of such acts by
others within their organizations.

Members of IMA shall behave ethically. A commitment to ethical professional practice includes
overarching principles that express our values and standards that guide member conduct

Honesty

The first principle, honesty, requires conscientious application to the task at hand and truthfulness in
all analyses and communications. Honesty is one of the key attributes people look for in an accountant
or financial professional: “If you can’t trust your accountant, who can you trust?”

Honesty means fairness and straightforwardness of conduct. It is the quality of being upright, having
integrity, truthfulness, sincerity, frankness, and freedom from deceit or fraud.

Fairness

means acting in an impartial manner and being free from bias, dishonesty, or injustice. It requires
a person to be open-minded, tolerant and accepting.

Examples of fairness include: providing information and feedback objectively; identifying and fixing
mistakes; and selecting vendors without bias, prejudice, or favouritism.

Objectivity

means basing a judgment on an established set of criteria. It is the state of being unbiased, free
from personal feelings or prejudice and basing analyses and decisions on the facts alone.

Objectivity requires impartial and dispassionate evaluation of conflicting points of view before
arriving at a conclusion.

Responsibility

In the principle of responsibility, the IMA is reminding accounting and financial

professionals what, exactly, their responsibilities

Examples of responsibility include conveying information at the appropriate time,

ensuring information on reports and statements is accurate, and gathering enough information to make
an informed decision

means performing an act or a function completely and in a timely manner. It is the state of being
answerable or accountable for something that is within one’s own power, control, or management.

Responsibility means performing an act or a function completely and in a timely manner. It is the
state of being answerable or accountable for something that is within one’s own power, control,
or management

STANDARDS
COMPETENCE

1. Maintain an appropriate level of professional leadership and expertise by enhancing

knowledge and skills.
2. Perform professional duties in accordance with relevant laws, regulations, and technical
standards

3. Provide decision support information and recommendations that are accurate, clear, concise,
and timely. Recognize and help manage risk.

Competence means the quality of having the required skill, knowledge, qualifications, and capacity
to fulfil a particular job effectively. Every level of responsibility has its own requirements, and
competence can and should occur at all stages of a person’s career. Competence in one position
does not automatically mean that the person will be competent in a different position.
Fulfilling the competence standard includes keeping up with changes in laws, regulations,
accounting standards, and association rules and requirements. Some examples of these are:

1. New guidance issued by the PCAOB and the SEC relating to requirements in the Sarbanes-
Oxley Act.

2. New and revised Generally Accepted Accounting Principles (GAAP), including US standards
issued by the Financial Accounting Standards Board (FASB) and/or International Financial
Reporting Standards (IFRS) issued by the International Accounting Standards Board
(IASB), as appropriate.

3. Other national and state legislation specific to the applicable industry or applicable to all
firms. Failure to keep informed about changes in these regulations could cause an
individual to unknowingly violate a legal requirement and/or commit an ethics violation.

Confidentiality

1. Keep information confidential except when disclosure is authorized or legally required.

2. Inform all relevant parties regarding appropriate use of confidential information. Monitor to
ensure compliance.

3. Refrain from using confidential information for unethical or illegal advantage.

Notes

While the Confidentiality standard is fairly straightforward, today’s technological advances actually
may hinder management accountants from following it as Diligently as they must. Not only should
paper and electronic documents be Properly secured, but all conversations, especially those on mobile
phones, should be Conducted only in a private setting. Technology is advancing rapidly. Today,
people carry out activities with mobile phones and devices that just a few years ago required full
blown computers. Internet usage with mobile devices places accounting and finance professionals at
risk. The potential for unwittingly disclosing confidential information is high. Accounting and finance
professionals must find ways to conduct business on mobile devices without breaching
confidentiality. This is a matter of extreme importance.
Integrity section

1) Mitigate actual conflicts of interest. Regularly communicate with business associates to

avoid apparent conflicts of interest. Advise all parties of any potential conflicts of interest
.
2) Refrain from engaging in any conduct that would prejudice carrying out duties ethically.

3) Abstain from engaging in or supporting any activity that might discredit the profession.

4) Contribute to a positive ethical culture and place integrity of the profession above personal
interests.

Integrity includes the responsibility to communicate both the good and the bad, whether it is news,
analysis, judgment, or professional opinion.

CREDIBILITY
 1) Communicate information fairly and objectively.

2) Provide all relevant information that could reasonably be expected to influence an intended
user’s understanding of the reports, analyses, or recommendations.

3) Report any delays or deficiencies in information, timeliness, processing, or internal controls

in conformance with organization policy and/or applicable law.

4) Communicate professional limitations or other constraints that would preclude responsible

judgment or successful performance of an activity.

RESOLVING ETHICAL ISSUES

In applying the IMA Standards of Ethical Professional Practice, the member may encounter unethical
issues or behaviour. In these situations, the member should not ignore them, but rather should
actively seek resolution of the issue

When faced with unethical issues, the member should follow the established policies of his or her
organization, including use of an anonymous reporting system if available

If the organization does not have established policies, the member should consider the following
courses of action:

1. The resolution process could include a discussion with the member’s immediate supervisor.
If the supervisor appears to be involved, the issue could be presented to the next level of
management.

2. IMA offers an anonymous helpline that the member may call to request how key elements
of the IMA Statement of Ethical Professional Practice could be applied to the ethical issue

3. The member should consider consulting his or her own attorney to learn of any legal
obligations, rights and risks concerning the issue.

If resolution efforts are not successful, the member may wish to consider dissociating from the
organization.

Addressing any ethical conflict requires careful consideration and an examination of all the facts
before proceeding. This may require:
Employee Fraud and the Fraud Triangle

Donald R. Cressey
three conditions are called the three legs of the “fraud chair”:
Pressure, Opportunity and Rationalization

Pressure. The employee has a financial problem that cannot be shared and cannot be solved
through legitimate means, such as addictions, bills, or excessively high company earnings
expectations or sales targets.

Pressure, such as a financial need, may often provide a motive for committing the fraud.

Opportunity. The employee sees a way to use a position of trust with an employer to solve the
problem in secret and believes it can be done in such a way that there will be a low risk of getting
caught.

defines the method by which the crime can be committed. The individual fraudster must see some
way he or she can use (abuse) his or her position of trust to solve the financial problem with a low
perceived risk of getting caught. For instance, an individual committing a fraud (stealing monies) sees
an internal control weakness and, believing no one will notice if funds are taken, begins the fraud
with a small amount of money. If no one notices, the amount taken usually grows.

Rationalization. The employee needs to be able to justify the crime as an acceptable or justifiable
act. Such rationalization may require the employee to engage in convoluted, contradictory, and
morally suspect leaps of logic in order to defend an illegal or immoral act.

For example, the employee may think “I am just borrowing the money and I will put it back,” “I
am being underpaid, and my employer owes this to me,” “the amount I’m taking is not significant
enough for management to care about,” or “my employer is dishonest to others and deserves to
get dishonesty back.”
Finally, rationalization involves the individual fraudster justifying the crime to him- or herself in a
way that makes it an acceptable or justifiable act

Cressey notes that an employer can reduce the chances of fraudulent activity by cutting off at
least one leg of the “fraud chair.”.

They are 2 types of fraud

1, Misappropriation of Assists
2. Financial Reporting Failure

• Employees should be made to feel that they can come to their employer about financial or
other problems without being judged, and the employer will help them.

• The employer should provide a means for employees to air grievances (kuraikal)

• Employers can set a moral and ethical “tone at the top” and prevent employee
rationalization that the employer is dishonest by making sure that management projects
and engages in honest behavior.

• An employee hotline, mandated under Sarbanes-Oxley, gives employees the opportunity

to let management know about suspected wrongdoing.

The purpose of an ethics helpline is to provide counselors who can assist a caller in clarifying the
issues and determining the proper course of action. Helplines such as these can help to maintain an
ethical organizational culture over the long term under the types of stresses and strains that exist in
the real world.
Chapter: 3

Ethical Considerations for the Organization

Although it is true that companies are made up of individuals and each individual will have his or
her own morals and ethics, the organization itself must have its own overarching set of ethical
standards that employees must adhere to. In the absence of such guidelines, a company risks
creating a moral vacuum that, if it endures unchecked, may threaten to derail an organization, no
matter how well-intentioned the management might be or how noble the enterprise in which they
are engaged.

Organizations and the Ethical Behaviour of Employees

Corporate culture impacts behavioral values within an organization. Understanding organizational

culture is therefore important for understanding and explaining the behavior of the organization’s
members with respect to ethics. For example, people who share the same culture will tend to share the
same values. This common set of values means that decision-making and behavior have some
level of consistency within the culture and that deviations from the norm are apparent to the other
members of that culture.

Many organizations, including the IMA, have created confidential ethics helplines staffed with
counselors. The IMA’s helpline counselors can provide clarification of provisions in the IMA Statement
of Ethical Professional Practice and assist callers in determining a proper course of action.The IMA’s
helpline cannot be used as a hotline to report specific suspected ethical violations,
however. It was not developed for that purpose.

effort to create a values-based organizational culture should be seen as an investment in the

company’s human resources, which can lead to:
1) Higher levels of productivity through motivated, engaged employees.
2) Better teamwork.
3) Less fraud through a sense of ownership and identification with the company.
4) Better business processes and higher quality of services through engaged, committed
employees.
5) Improved financial performance.

Importance of a Code of Ethics

A code of ethics is important to the organization and its members for the following reasons:
1) In writing the code of ethics, senior management is required to define and document its
expectations for the organization.
2) The code of ethics provides a common standard and understanding of the company’s definition
of ethical behavior by creating a reference point for the company employees.
3) This reference point provides a framework for decision-making when an explicit company policy
does not exist.
4) A code of ethics complies with legislation in the United States. Sarbanes Oxley section 406
specifically refers to a corporate code of ethics.

In reality, no one code of ethics can cover all possible cases and scenarios that an individual may
face. However, several general guidelines can help employees determine whether a particular
action or behavior is right or wrong.

Influence of the External Environment on Ethical Business Practices.

Governments and regulatory agencies exert the most impact on ethical business practices because
their mandates are backed up with the force of law. Depending on the political culture and
philosophy of a given government or agency, the impulse to regulate through legislation will exist
somewhere between a completely hands-off approach (so-called laissez-faire) and a minute, detailed
list of rules and requirements. Often, specific requirements will be enacted through legislation
when governmental authorities determine that organizational behavior does not meet minimum
acceptable standards. In such instances, the government will codify into law those practices that
they wish to make mandatory.

Foreign Corrupt Practices Act (FCPA) of 1977

The Foreign Corrupt Practices Act of 1977 (FCPA) was established as a reaction to numerous
publicized scandals in which U.S. companies were paying bribes and making other questionable
payments to foreign officials in order to obtain or retain business.

Anti-Bribery Provisions of the FCPA

The FCPA prohibits payments to foreign officials, politicians, or political parties to obtain or renew
Business

and it provides a legal framework to punish both individuals and companies for making payments
to foreign officials that could be judged as bribes or other forms of improper payments.

Its scope includes payments made directly by an organization and also includes any actions to
initiate payments by third parties to government officials.

It defines government officials in a broad enough sense that the scope of the law can
accommodate a variety of governmental structures worldwide.

The anti-bribery provisions of the FCPA apply to three categories of persons and entities:

1. Issuer
2. Domestic Concerns
3. Certain persons and entities

Issuer

Issuers of publicly-traded securities and their officers, directors, employees, agents, and
shareholders. Any company with a class of securities listed on a national securities exchange in the
United States, or any company with a class of securities quoted in the over-the-counter market in
the United States and required to file periodic reports with SEC, is an issuer.

Domestic concerns and their officers, directors, employees, agents, and shareholders. A domestic
concern is any individual who is a citizen, national, or resident of the United States, or any
corporation, partnership, association, joint-stock company, business trust, unincorporated
organization, or sole proprietorship that is organized under the laws of the United States or its
states, territories, possessions, or commonwealths or that has its principal place of business in the
United States.

Certain persons and entities, other than issuers and domestic concerns, acting while in the territory
of the United States, such as foreign nationals or entities that are not issuers or domestic
concerns that are in the territory of the United States.

Thus, the anti-bribery provisions of the FCPA apply not only to public entities but also to private
entities.

Individuals and firms may also be penalized if they order, authorize, or assist someone else to
violate the provisions of the FCPA.

the payment must be intended to induce the recipient to misuse an official position to direct
business wrongfully to the payer or to any other person.

Finally, the FCPA contains one exception and two affirmative defenses. Thus, there are three situations in
which payments to foreign officials would not result in liability under the FCPA. An affirmative
defense is an assertion of facts that, if true, will defeat a prosecution’s claim even if the allegations
made
The routine governmental action exception. The FCPA does not apply to payments made for the
purpose of facilitating, expediting, or securing the performance of a routine governmental action.
Facilitating payments are generally small payments made to foreign government officials to
expedite or secure a non-discretionary routine governmental action. “Routine governmental
action” refers to actions such as the following and actions of a similar nature that are commonly
performed by a foreign official.

The two affirmative defenses. An affirmative defense allows a person to defend himself or herself
if accused of violations of an FCPA provision. The two situations in which a payment, gift, offer, or
promise of something of value to a foreign official may qualify as an affirmative defense under the
FCPA are the following.

• If the payment, gift, offer, or promise of something of value is lawful under the written laws and
regulations of the country of the foreign official, political party, party official, or candidate.

• If the payment, gift, offer, or promise of something of value is a reasonable and bona fide
expenditure, such as travel and lodging expenses directly related to the promotion, demonstration,
or explanation of products or services, or the execution or performance of a contract with a foreign
government or agency thereof.

Accounting Provisions of the FCPA

1. Companies are required to maintain complete, accurate, and reliable accounting records that
represent, in all material aspects, the complete and true nature of business transactions.

2. Companies are required to devise and maintain a system of internal accounting controls
that is adequate to provide reasonable assurance

Some of the Internal Controls

• transactions are executed in accordance with management’s authorization

• transactions are recorded as necessary to permit preparation of financial statements and
to
• maintain accountability for assets
• access to assets is limited to management’s authorization
• the recorded accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences (assets are
inventoried and reconciled regularly).
The first provision is the anti-bribery provision that prohibits business-related
bribes to government and public officials.

The second provision is the accounting provision that requires companies to

develop an internal control and financial reporting system that produces fair
and accurate accounting reports in all material respects
Section 802
Section 802 of the Sarbanes-Oxley Act prohibits altering, destroying, mutilating, concealing, or
falsifying records, documents, or tangible objects with the intent to obstruct, impede, or influence
a potential or actual federal investigation. Accountants are prohibited from knowingly and willfully
violating the requirement that all audit or review papers be maintained for a period of five years