2nd Edition

Ethics for
Accountants
^Auditors
Deon Rossouw | Charl du Plessis
Frans Prinsloo | Martin Prozesky (Editor)

OXTORD
UNIVERSITY PRESS
SOUTHERN AFRICA
Contents

Special acknowledgements x

Contributors xi

Preface xii

Part 1: Principles of ethics

Introductory case study: A dilemma in- professional and
business ethics 2
Outcomes 2
Overview 2
Case study: A dilemma in professional and business ethics 3
Questions for discussion 15

1 Key concepts in business and professional ethics 16

Outcomes 16
Overview 16
Introduction 17
Ethics or morality .7 17
Ethics and values 18
Moral dilemmas 19
Business ethics 20
Personal and organisational ethics ; 22
Ethics and the law f. 23
Professional ethics '. 24
Professional virtues 24
Conclusion 25
Questions for discussion 25

2 Value systems in South Africa ,. 27

Outcomes 27
Overview 27
Introduction 28
Case study: The devout CEO 28
Moral convergence and consensus 29
Traditional African ethics 30
Introduction 30
Who are the ancestors in African tradition? 30
The ancestors of guardians of morality in African ethics 31
The general character of African ethics 31
What is ufowzfa? 31
Conclusion... .... ... .. 32
Ethics in Christianity and Judaism 33
Introduction 33
Jewish and Christian traditions 33
Four shared features of Jewish and Christian ethics' 34
Ethics in Judaism 35
Christian ethics 36
Jesus of Nazareth 37
Core moral guidelines in Christianity 37
Early developments in Christianity 38
Natural law 38
The modern moral maze 39
Conclusion 40
Islamic ethics .' 40
Introduction 40
The general character of Islamic ethics 41
The three sources of Islamic ethics 41
An ethic of action 42
A modern debate within Islam 43
Summary 44
Conclusion 44
Hindu ethics 44
Introduction 44
Hinduism as a way of life 45
Karma and dharma 46
Sources of Hindu ethics 47
Controversial practices 48
Revitalising Hinduism /. 48
Conclusion , 49
Modern value systems 49
Introduction 49
Human rights and responsibilities 50
Communist ethics 51
Secular humanism 52
Feminist ethics ; 53
Conclusion 55
Questions for discussion 55

3 Philosophical foundations of ethics 57

Outcomes 57
Overview 57
Introduction 57
Case study: Chris 58
Virtue theory 59
Virtues 59
Mean 60
Deontological ethics 62
The categorical imperative 63
Respect for persons 64
Utilitarian ethics 65
The Greatest Happiness principle 65
Criticism one: The theory is degrading to humans 66
Criticism two: Happiness cannot be the rational purpose of life 67
 Criticism three: Utilitarianism is unattainable 67
Criticism four: Utilitarianism is self-serving 68
Criticism five: The theory is too time-consuming 68
Conclusion 69
Questions for discussion 69

4 Ethical decision-making 71
Outcomes 71
Overview 71
Introduction 72
Case study: Jane Peterson's downsizing assignment 73
Making ethical decision in business or the profession 74
Is it legal? 75
Application to Jane Peterson's assignment 76
Does it meet company standards? 76
Application to Jane Peterson's assignment 78
Is it fair to all stakeholders? 78
Application to Jane Peterson's assignment 79
Can it be disclosed? 81
Application to Jane Peterson's assignment 82
Conclusion 83
Questions for discussion 84

5 Resolving ethical dilemmas 85

Outcomes 85
Overview 85
Introduction 86
Assumptions behind the RIMS strategy 87
Assumption one: Dissensus does not equal defeat 87
Assumption two: Dialogue can produce solutions 87
Assumption three: Focusing on motives is futile 87
Assumption four: Only moral arguments are allowed 88
The RIMS strategy...-:;. 88
Step one: Generate and evaluate all points of view 89
Step two: Identify the implications 89
Step three: Find solutions 89
Case study: The email dilemma 89
Resolving the email dilemma: RIMS at work 91
Step one: Generate^the moral points of view 91
Step two: Identify the implications 92
Step three: Find solutions 93
Conclusion 96
Questions for discussion 97

6 Case study using ethical skills a n d insights 98

Outcomes 98
Overview 98
Introduction 99
Case study: Using ethical skills and insights 99
Questions for discussion Ill
Part 2: Business ethics
7 Macro-ethics 114
Outcomes 114
Overview 114
Introduction 114
Reasons for the ascendancy of capitalism 116
The marvel of the pricing system 116
The opportunity for personal motivation 116
The link between macro-ethics and the commercial enterprise 117
Example one: Globalisation and the spread of capitalism 117
Example two: South Africa's political legacy 117
Key elements of our economic system 118
Property rights 119
Free markets 119
Competition ' 120
Profit '.'.'.'.'.".'.". ".".".'. 120
The joint-stock, limited liability corporation 121
The productive and distributive elements of capitalism 122
Economic justice under capitalism 123
Utilitarianism 123
Justice as fairness 125
Entitlement theory and the libertarians 125
Conclusion 126
Questions for discussion 127

8 The modern corporation and its moral obligations 128

Outcomes 128
Overview 128
Introduction ; 129
Corporate social responsibility 130
Milton Friedman , 130
Christopher Stone \ 132
Corporate moral agency 133
Peter French 134
Stakeholder theory 135
Edward Freeman 136
Kenneth Goodpaster 139
Conclusion 140
Questions for discussion 140

9 Corporate governance 141

Outcomes 141
Overview 141
Introduction 142
What makes governance important? 143
Governance structures 144
The agency problem 145
A recurring crisis in governance practice 147
Shareholder apathy, co-ordination and information 149
 Institutional investors: saints or sinners? 150
The board: independence and commitment 151
Management: in whose service? 153
Stakeholder management as alternative 154
The King Reports on corporate governance 156
Triple bottom-line reporting 158
Governance role of the auditing profession 160
Role of the audit committee 161
Role of external auditors 161
Role of internal auditors 162
Conclusion 163
Questions for discussion 163

10 Managing ethics 165

Outcomes _ 165
Overview 165
Introduction 166
Determining ethical risk 167
Ethical risk assessment 168
Codifying ethical standards 169
Directional codes 169
Aspirational codes 170
Institutionalising ethics 170
Strategic level 170
Systems level 173
Reporting and disclosing ethical performance 175
Conclusion :- 176
Questions for discussion 177

11 Case studies in business ethics 178

Outcomes ] 178
Overview .' 178
Introduction 178
Cheating ,. 179
Case study one: Cheating and eating : 179
Qualification fraud 181
Case study two: Credible credentials? .' 181
HIV in the workplace 182
Case study three: Aids anxiety 183
Black economic empowerment 188
Case study four: Blackfront, white back 188
Gifts and gratuities 189
Case studyfive:Tempting tickets 190
Employment equity 192
Case study six: Promotion problems 192
Company expenses 193
Case study seven: Three nights out oftown 194
Whistle blowing 196
Case study eight: Suspicious invoices 196
Part 3: Professional ethics
12 Accountants and auditors as professionals 200
Outcomes 200
Overview 200
Introduction 201
What is a profession? 202
One: Entrance into the profession requires an extensive period of education
and training 204
Two: Professional knowledge and skill are essential to the wellbeing of the
larger society 205
Three: Professions usually have a monopoly on the provision of professional
services 208
Four: Professionals often have an unusual degree of autonomy when
rendering their services 209
Five: Professionals claim to be regulated by ethical standards 209
Types of professionals in society 210
Professional bodies guarding the profession and its ethics 213
South African Institute of Chartered Accountants (SAICA) 214
South African Institute of Professional Accountants (SAIPA) 215
Chartered Institute of Management Accountants (CIMA) 215
Association of Chartered Certified Accountants (ACCA) 215
Institute of Internal Auditors (IIA) 215
Independent Regulatory Board for Auditors (IRBA) 216
The collapse of Enron and Andersen 217
Conclusion 219
Questions for discussion 220

13 Codes of professional ethics 222

Outcomes 222
Overview 222
Introduction 223
What is a'Code of Professional Ethics'? .'. 223
One: Guidance on proper conduct for professionals 224
Two: Adherence to the Code.assists in protecting the public interest 225
Three: Rationale for adherence even when pressured to violate code of ethics
or moral conduct 225
Case study: Vanilla Investments (Pty) Ltd 226
Four: Providing a mechanism by which action can be taken against unethical
conduct of professionals 226
Five: Achieving the objectives of the profession • 227
Six: The Code provides a basis for debate about future changes and
improvements to ethical standards 228
Dissemination and enforcement of professional codes of ethics 228
Codes of Professional Ethics in the accounting profession 229
International Federation of Accountants (IFAC) 229
Case Study: Kool Trading (Pty) Ltd 231
SAICA's Code oj'Professional Conduct 234
Further analysis of selected fundamental principles of relevance to external auditors 236
Integrity 237
Independence 237
Professional competence and due care 241
The future of self-regulation 243
Conclusion 244
Questions for discussion 245

14 Case studies in accounting ethics 247

Outcomes 247
Overview 247
Introduction 247
Case study one: Business expense dilemma 248
Case study two: A touch ofinsider trading? 250
Case study three: Harassment and intimidation 251
Case study four: When in Rome? 253
Case studyfive:Money laundering 256
Case study six: Temptation beckons 258

Addendum: Learning journal assignment 260

Glossary 261

Index 267