BUSINESS ETHICS

LECTURE # 3
 OVERVIEW

 Ethics in Finance and Accounting

 Ethics in Marketing and Advertising
 Ethics in Human Resource Management
 Ethics in Governance and Leadership
 Ethics in Finance and Accounting

Accounting is the process through which any business keeps track of its financial activities by recording its
Debits and Credits and balancing its accounts.
 The financial scandals raised in the recent times were characteristics of deeper problems and identified that
improvement of ethical standards, adequacy of financial management, reporting mechanisms, audit quality and
strengthening of governance regimes as means to improve public confidence in financial reporting.
 The accounting profession has a responsibility towards these areas, whose deficiencies have led to corporate
scandals and collapses. Hence, today, ethical conduct of accounting and finance has become a topical issue.
 For accounting and finance professionals it is extremely important to be ethical in their practices due to the
very nature of their profession.
 The nature of accountants‘ work puts them in a special position of trust in relation to their clients, employers
and general public, who rely on their professional judgment and guidance in making decisions.
 Ensuring highest ethical standards is important to a public accountant‘ (one who renders professional services
such as assurance and taxation service to clients for a fee) as well as to an accountant in business‘ (one who is
employed in a private or public sector organization for a salary). Both public accountants‘ and accountants in
business‘ are in a fiduciary relationship, former with the client and latter with the employer.
 Ethics in finance and accounting Contd.

 In such a relationship, they have the responsibility to ensure that their duties are performed in
conformity with the ethical values of honesty, integrity, objectivity, due care, confidentiality,
and the commitment to the public interest before one‘s own.
 Thus, accountants, as professionals, are expected to maintain a level of ethical conduct that
goes beyond society‘s laws. This has made the professional accounting bodies to develop a
code of professional conduct, which sets rules or standards that define right from wrong to
ensure that members‘ behavior complies with perceived public expectations of ethical
standards.
 However, in recent times accountants‘ involved with large corporate scandals shows that they
have not complied with the expected ethical standards.
 It is argued that accountants‘ focus too much on technical issues and lack ethical sensitivity to
recognize ethical dilemmas involved with their work, which would ultimately lead to making
wrong decisions.
 Thus, accountants should be trained to be sensitive to identify the moral dimension of
 Ethics in finance and accounting Contd.

Ethical issues in accounting:

 Underreporting Income: Under-reporting income in order to avoid taxes is an illegal practice.
When people under report their incomes, the federal government loses tax revenue that could go
towards social security, Medicare and other federal projects. Corporations are especially watched
by auditors because of the large tax bills at stake each tax year. If caught under reporting,
individuals and companies will be subject to penalties and, in extreme cases, criminal charges.
 Falsifying Document: Falsification of Documents is to change details on the original document
and try to pass them off as real. Some types of documents that are commonly falsified may
include: Tax returns and income statements, Personal checks, Bank account records, Business
record keeping books, Immigration documents (such as visas, passports, etc.), Identification cards
and birth certificates.
 Many different types of acts can be considered as falsifying a document, including: Altering or
misrepresenting factual information such as prices or monetary amounts, Stating false
information when requested to provide truthful statements, Forging a signature, Using official
letterheads without authorization, Concealing assets or property (especially in bankruptcy
proceedings), Knowingly using or distributing a fake document.
 Ethics in finance and accounting Contd.

 Ethical issues in accounting:

Again, a person can only be held criminally liable if they are acting with the intention of
deceiving or defrauding another party.
Falsifying documents is a very serious offense and is generally classified as a felony. This means
that a person charged with falsifying documents may be subject to the following legal penalties:
 Having to pay a monetary fine
 Incarceration in a prison facility
 Creative accounting: Accounting practices that follow required laws and regulations, but
deviate from what those standards intend to accomplish. Creative accounting capitalizes on
loopholes in the accounting standards to falsely portray a better image of the company. When
firms indulge in creative accounting they often distort the value of the information that their
financials provide. Creative accounting can be used to manage earnings and to keep debt off the
balance sheet.
 Ethics in finance and accounting Contd.

 Ethical issues in finance:

 Insider trading: “Insider trading” is a term that most investors have heard and usually associate with
illegal conduct. But the term actually includes both legal and illegal conduct. The legal version is when
corporate insiders—officers, directors, and employees—buy and sell stock in their own companies.
Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or
other relationship of trust and confidence, while in possession of material, non-public information about
the security. Insider trading violations may also include “tipping” such information, securities trading by
the person “tipped,” and securities trading by those who misappropriate such information.
 Campaign financing: Campaign finance refers to all funds raised in order to promote candidates,
political parties, or policies in elections, referendums, initiatives, party activities, and party organizations.
The funds could also detract from the opponents of the above. Campaign funds are the subject heading
under which all books dealing with money in politics are catalogued by the Library of Congress.
 The above Issues can be prevented through: GAAP (generally accepted accounting principles) GAAP
for short of Generally accepted accounting principles, are the accounting rules used to prepare and
standardize the reporting of financial statements, such as balance sheets, income statements and cash
flow statements, for publicly traded companies and many private companies.
 E thic s in M ar ke ting an d A dv ert is i ng

 Over the years advertising and marketing communication messages have

created a lot of debatable ethical issues, due to the public belief that
advertisements nowadays deeply affect the way people perceive themselves
and the world surrounding them, including crucial actions and behaviors.
 Ethics issues in marketing are important, given the fact that marketing is
expected to identify, predict and satisfy customer requirements profitably.
 There exist several controversial moments in marketing that could be offensive
or which could cause unexpected negative influence on costumers.
 Such techniques are intentional and are meant to be controversial to grab more
attention, increasing the viewer’s interest to follow the advertisement, to
eventually create the desired brand awareness and enhance persuasion.
 Eth ics in ma rk etin g a nd ad ver tis ing Co ntd .

 The emotional advertising is designed to stimulate one's emotions, rather than one's sense of the practical or
impractical.
 Using of emotional appeal in advertising intended for the consumer's psychological, social, or emotional needs.
 The emotional advertisement is written to arouse fear, love, hate, greed, humor, or otherwise create
psychological tension that can best be resolved by purchase of the product or service.
 Western union, for instance, used this technique to convey the concepts of trust and reliability.
 MasterCard has used this approach for one of its most successful advertisements with the slogan “there are
some things money can’t buy, for everything else there is MasterCard’.
 Emotional advertisements are very popular and can be used creatively for almost anything.
 For that reason there is a great ethical debate about this appeal, since it can sometimes exploit the audience’s
emotions, leading to the purchase of the product that they might have not needed, or a product that would
eventually harm them.
 Eth ics in ma rk etin g a nd ad ver tis ing Co ntd .

 Ethics in advertising and marketing:

 Should not mislead the consumer
 What it promises must be there in the performance of products
 Ad should not be indecent and obscene
 As advertising is also a social process, it must honor the norms of social behavior, and should not offend
our moral sense
 Ethical issues in advertising and marketing:
 Advertising is a highly visible business activity and any lapse in ethical standards can often be risky for the
company. Some of the common examples of ethical issues in advertising are given below:
 Vulgarity / Obscenity used to gain consumers’ attention
 Misleading information and deception
 Puffery (extreme exaggerating)
 Stereotypes
 Racial issues
 Ethics in Human Resource Management

 HRM is the process of organizing, directing and controlling human activities to achieve the
organizational goals and individual goals.
 Ethics in human resource management indicates the treatment of employees with ordinary
decency and distributive justice. The ethical business contributes to the business goals as
the employee will feel motivated and they will work with efficiency and effectiveness.
 Ethics in HRM generally deals with the affirmative moral obligations of the employer
towards employees to maintain equality and equity justice.
 Areas of HRM ethics
 Basic human rights, civil and employment rights (e.g job security, feedback from tests)
 Safety at the workplace
 Privacy
 Justifiable treatment to employees (e,g equity and equal opportunity)
 Ethics in human resource management Contd.

 The role of HR in promoting Ethics:

1. Improve recruitment and selection tests:
 Follow the recruitment policy that is identification of the recruitment needs, monetary

aspects, criteria of selection and preference.

 Follow the situational factors such as economic factors, social factors, technological factors

 Selection must be in planned manner

 Avoid illegal questions

2. Conduct ethics training

 It is a short term process of training given to the HR of the organization to do their work in

adherence to the ethical code of conduct. The main advantages are increased productivity,
Higher employee morale, less supervision, less wastage e.tc.
3. Ensure that there are no pitfalls in performance appraisal.
 Ethics in human resource management Contd.

 Unethical practices in HRM

Employers:
 Exploiting cheap labour market

 Creating split in union

 Child labour

 Physical violence

 Longer and inflexible working hours

 Coercion

 Putting more stress on employees for increased productivity.

Employees:
False claims of personal details like age, qualification e.tc.
Producing false certificate
Taking decisions as per their convenience
Government:
 Announcing the vacancies and not taking any actions further

 Functioning of Government offices not transparent and reliable

 Ethics in governance and leadership

 Ethics is very critical in governance and leadership in any organizational setting.

 Leadership demands ethics because of the responsibilities it shoulders. Bowman (2008) noted that ethics is the key to the
flourishing of democracy and its administration.
 Those in leadership positions in a democratic government and, in fact, in all forms of government need to be ethical as
they pilot the affairs of their organizations or societies.
 Those in a leadership role, to a greater extent, play a part in determining the moral quality of their followers. Their
behavior influence can positively or negatively impact the moral fiber of the society (Kanungo & Mendonca, 1996, p. 6).
 He noted that such influence has a great ethical burden and responsibility.
 They noted that leaders do more than physical harm any time their actions and behavior fail to be in congruence with the
shared moral values.
 Effective organizational leaders need ethics as fish need water and human beings need air”.
 Good governance in third world countries, as in other corners of the world, hinges “on many factors such as sound
leadership, encouraging grassroots participation in the governing process, accountability and transparency of
government, among others”.
 Such sound leadership could only be guaranteed by men and women of moral integrity who understand the importance
and the role of ethics and practice in the leadership process toward achievement of the common good.
 Ethics in Global Business Environment

 Business is about making goods and services that people are willing and able to buy. It achieves
this by combining natural resources, financial, social and physical capital, and people’s
competencies, insights, and energies.
 Businesses, or the people that run, work in, buy from, and own them, find themselves making
ethical decisions every day.
 How to treat a job applicant who is disabled or pregnant, how to pay their suppliers quickly,
and where to invest in new facilities or close down financially unattractive bits of the business.
 More often the ethics of business concern the daily millions of decisions and actions that every
business stakeholder makes. Ethics is an integral part of day-to-day business; the question is
how it is played out in practice.
 Certainly most businesses do indeed seek to earn a financial return on their investments. In
finding General Electric to be the world’s most respected company, a Financial Times survey
concluded:
 Ethics in Global Business Environment Contd.

 It is not hard to see why General Electric is so widely respected...few companies

have ever created so much wealth for their shareholders in so short a period...The
company had a market capitalization of less than $20 bn when Jack Welch took
over as chairman in 1981: last month, as share prices recovered from their early
autumn swoon, it topped $300 bn. “A phenomenal return to shareholders,” as
another respondent put it.
 Financial returns to capital are, however, by no means the sole or even necessarily
the most central aim of business owners and leaders.
 First, is the large number of “business vehicles” designed specifically to deliver
social and environmental “goods.” Cooperatives, for example, do business on
behalf of over 150 million members worldwide. Many of these were initiated to
provide affordable and high quality goods and services to their, largely lower
income, members.
 Ethics in Global Business Environment Contd.

 Second, is the burgeoning nonprofit sector comprising an extraordinary assortment of

organizations designed to deliver social and environmental benefits. Increasingly this sector
includes many enterprises providing goods and services. The measured financial income
flows through this sector in most developed countries amount to anything up to 3–5% of
gross domestic product (GDP). The voluntary sector is one of the most rapidly growing parts
of many economies as we enter the new millennium.
 Third, are the millions of small businesses that are vehicles for securing the independent
livelihood of the families that initiate, own, and run them. Financial rewards are of course
important to these families, but a traditional cost–benefit analysis that factors in their
enormous and often poorly-paid “sweat equity” would quickly reveal that there must be other
“returns” for the enterprises to be worthwhile.
 Fourth, are the growing number of “new social partnerships” that combine the resources of
businesses, not-for-profit organizations, and governments. Here we find that businesses are in
part seeking financial returns from their involvement in partnerships that have at their core
social and environmental aims.
 Ethics in Global Business Environment Contd.

 Business ethics needs to be understood in this broader context. Business ethics is too often taken to be
about the unusual company, the visionary leader, the organization that is somehow “more than” a business.
 The realm of ethics is where people have some degree of choice in how they are to handle dilemmas and
take actions that will affect both themselves and others. The question therefore is should businesses have
ethics” since it frames the matter of ethics as somehow a deviation from “normal” business behavior.
 Certainly inspired leadership plays a role in those enterprises that are notable in their social and
environmental responsibility.
 Today’s businesses are faced with the particular pressures that arise from the current pattern of
globalization. Deeply rooted social and cultural norms that have for generations, or centuries, guided
business in defining what practices are or are not acceptable are being eroded. This is as true for
companies in Jakarta as it is for those in London, large and small.
 For larger companies, particularly those with publicly traded shares, the pressure to constantly enhance
shareholder value creates downward pressure on costs and ever-sharper marketing that penetrates what
were previously the private areas of, for example, family and child and youth development.
 Ethics in Global Business Environment Contd.

 Smaller companies find themselves swept along in increasingly globalized markets,

constantly in danger of being absorbed by larger players (like hostile take-overs,
merger and acquisitions), or of being stripped of and ousted from their markets by
these larger players.
 This creates pressure to cut costs and can lead to a “race for the floor” in social and
environmental standards practices.
 Bribery, corruption, worker abuse, and damage to the environment are not merely the
playing out of bad habits and tradition, as some would claim. These traits of business
practice are in part the inappropriate but understandable responses to market pressures.
 Yet the pressures of globalization should not be caricatured as necessarily making
business less ethical. Indeed, many do argue that “open markets” raise the ethical
playing field when it comes to some aspects of business behavior and outcomes.