Module 6

1. Amity School of BusinessBBA (All Programs), Semester 1stBusiness Accountancy Ms. Geetika Batra

2. Module 6 Ethics in Accounting and Business

3. Outline Concept: • Ethics. • Importance. • Fundamental principles. • Ethical conflicts. • Ethical Dilemmas. • Role of regulatory bodies in the accountancy profession. • Corporate codes of ethics. Lessons We Are Learning

4. Why are ethics so important? Business operations require trust. • Consider the millions of business transactions that take place daily that require mutual trust. • Would you go to a job if you didn’t trust your employer to compensate you? • How many people would shop on the Web if they didn’t trust that their financial information would be secure?

5. The classical economists such as Adam Smith considered economics a branch of ethics. Business activity would grind to a halt without trust, fair dealings, and honest communication. In his 1995 book, Trust: The Social Virtues and the Creation of Prosperity, Francis Fukuyama writes: "One of the most important lessons we can learn from an examination of economic life is that a nation’s well being as well as its ability to compete, is conditioned by a single, pervasive cultural characteristic: the level of trust inherent in the society."

6. Ethics is the branch of philosophy that focuses on morality and the way in which moral principles are applied to everyday life. Ethics has to do with fundamental questions such as “What is fair?” “What is just?” “What is the right thing to do in this situation?” Ethics involves an active process of applying values, which may range from religious principles to customs and traditions. What is ethics?

7. Concept: Ethics A branch of philosophy which is the systematic study of reflective choice (decision problems), of the standards of right and wrong (moral principles) by which it is to be guided, and of the good or bad (consequences) toward which it may ultimately be directed. An ethical problem occurs when you must make a choice among alternative actions and the right choice is not absolutely clear. Often that choice affects the well-being of other persons.

8. Fundamental principle in Ethics The principle of integrity: It calls upon accounting and finance professionals to adhere to honesty and straightforwardness to discharge their professional duties. The principle of objectivity: this principle requires accounting and finance professionals to stick to their professional and financial judgement. The principle of confidentiality: this requires practioners of accounting and financial management to refrain from disclosing confidential information related to their work. The principle of professional competence and due care: Finance and accounting professional need to update their knowledge from time to time in order to provide competent services to their clients. The principle of professional behaviour: this principle requires accounting and finance professional to comply to rule and regulations in order to avoid any future discredit with profession. 8

9. Ethics codes: Accounting and Business • Accounting and business organizations have established ethics codes. The code of ethics of the Institute of Internal Auditors includes the following principles: • 1. Integrity • The integrity of internal auditors establishes trust and thus provides the basis for reliance on their judgment. • 2. Objectivity • Internal auditors exhibit the highest level of professional objectivity in gathering, evaluating, and communicating information about the activity or process being examined. Internal auditors make a balanced assessment of all the relevant circumstances and are not unduly influenced by their own interests or by others in forming judgments • 3. Confidentiality • Internal auditors respect the value and ownership of information they receive and do not disclose information without appropriate authority unless there is a legal or professional obligation to do so. • 4. Competency • Internal auditors apply the knowledge, skills, and experience needed in the performance of internal audit services.

10. Business ethics focuses on what constitutes right or wrong behavior in the world of business. Corporate business executives have a responsibility to their shareholders and employees to make decisions that will help their business make a profit. But in doing so, businesspeople also have a responsibility to the public and themselves to maintain ethical principles. What is business ethics?

11. Concept Business ethics is the behavior that a business adheres to in its daily dealings with the world. The ethics of a particular business can be diverse. They apply not only to how the business interacts with the world at large, but also to their one-on-one dealings with a single customer.

12. Sources of Ethical Norms Fellow Workers Fellow Workers Regions of Country Family Profession The Individual Conscience Friends Employer The Law Religious Beliefs Society at Large 12

13. 1. Codes of ethics are formal standards and rules that managers can use to help themselves make appropriate decisions. 2. An organization’s code of ethics derives from three sources in the organizational environment. a. Societal ethics are standards that govern how members of a society deal with each other in matters involving issues such as fairness, justice, poverty, and the rights of individuals. b. Professional ethics are standards that govern how members of a profession, managers, or workers, make decisions when the decision is not clear-cut. c. Individual ethics are personal standards and values that govern how individuals interact with other people. Codes of Ethics.

14. Short Cases: Enron • Enron Corporation is considered by many to be the most infamous financial scandal in U.S. history. The Enron scandal caused people to question the reliability of the financial reporting practices of publicly traded corporations. Enron was a key event leading the U.S. Congress to pass a new federal securities law, the Sarbanes-Oxley Act of 2002, often referred to as SOX. • Before its collapse in late 2001, Enron was a highly regarded energy company located in Houston, Texas. The company’s bankruptcy, which was the largest in U.S. history at the time, resulted in 20,000 employees losing their jobs. Many of them also lost their life savings, which were tied up in Enron stock. As explained in the 2005 documentary film Enron: The Smartest Guys in the Room, a great number of the company’s assets and profits were overstated or in some cases completely fraudulent and nonexistent.

15. Short Cases: WorldCom • WorldCom began in 1983 as Long Distance Discount Services, Inc. (LDDS). It was located in the U.S. in a middle-sized town, Hattiesburg, Mississippi. Bernard Ebbers became the company’s CEO in 1985. In subsequent years, the company name was changed to LDDS WorldCom and later just WorldCom. From 1999 to 2002, the company manipulated earnings by using fraudulent accounting methods, thereby presenting a false image of economic growth and prosperity. As a result, the company’s stock price continued to climb, when in reality it should have been falling. • Two techniques were used to cook the books. The first was underreporting “line costs” by recording them as assets on the balance sheet instead of correctly expensing them on the income statement. The second technique was overstating revenues through recording fraudulent transactions regarding “corporate unallocated revenue accounts.” During 2002, a small group of internal auditors at WorldCom worked together, frequently in the evening and in secret, to explore and reveal $3.8 billion in fraud.

16. Benefits of managing ethics in organization

17. “An Ethical issue is a problem, situation or opportunity requiring an individual or organization to choose among several actions that must be evaluated as right or wrong, ethical or unethical.“ Managers experience ethical issues at the personal, organizational, professional, societal and global levels. Ethical Issues/Conflicts

18. Ethical issues which were categorized as follows: Equity: Executive salaries, comparable worth, product pricing Rights: Corporate due process, employee health screening, privacy, sexual harassment, affirmative action/equal employment opportunity. Honesty: Employee conflicts of interest, security of employee records, inappropriate gifts, unauthorized payments to foreign officials, advertising content. Exercise of corporate power: Political action committees, workplace/product safety, environmental issues, disinvestment, corporate contributions, closures.

19. Abusive or Intimidating Behavior One of the most common ethical problems Can mean anything from physical threats, false accusations, profanity, insults, harshness, ignoring someone, or even unreasonableness Bullying (harassment) is a growing legal problem in the workplace

20. Lying Three types of lies: • Joking without malice • Commission lying • Omission lying

21. Bribery • Bribery is the practice of offering something in order to gain an illicit advantage • Different types of bribery • Active bribery • Passive bribery

22. Discrimination • A company in the U.S. can be sued for discrimination if it: • Refuses to hire an individual for discriminatory reasons • Unreasonably excludes an individual from employment • Unreasonably discharges an individual • Discriminates against an individual with respect to hiring, employment terms, promotion, or privileges

23. Sexual Harassment • A repeated, unwanted behavior of a sexual nature perpetrated upon one individual by another • Hostile Work Environment • The conduct was unwelcome • The conduct was severe, pervasive, and regarded by the claimant as so hostile or offensive as to alter his or her conditions of employment • The conduct was such that a reasonable person would find it hostile or offensive

24. Environmental Issues The environment is a significant and growing issue in business The Kyoto Protocol:An international treaty on climate change that commits nations to reducing greenhouse gas emissions Water pollution: Results from dumping sewage and toxic chemicals in places where they can filter into water supplies Green energy sourcesare perceived to have lower emissions or waste than traditional ones

25. Fraud • Any purposeful communication that deceives, manipulates, or conceals facts in order to create a false impression is fraud • Accounting fraud • Misrepresentation of company’s financial reports • Sarbanes-Oxley Act sought to improve this • 2008-2009 Wall Street financial meltdown and recession revealed continuing problems • Marketing fraud • Consumer fraud

26. Financial Misconduct • The failure to understand manage ethical risks played a key part in the financial meltdown and recession of 2008-2009

27. Intellectual Property Rights and Privacy • Intellectual Property Rights involve the legal protection of intellectual properties, such as music, books, and movies • Many privacy issues in the business world • Employee use of technology • Consumer privacy • It can be a challenge for businesses today to meet the needs of consumers while protecting their privacy

28. The Challenge of Determining Ethical Issues in Business Most ethical issues will become visible through stakeholder concerns about an event, activity, or the results of a business decision Determining ethical issues is a challenge The ethical decision making process starts when ethical issue awareness occurs and individuals begin discussion

29. Steps in Ethical Decision-Making • Define all the facts and circumstances: e.g. Who, what, where, when, and how? • Identify the people (stakeholders) affected by the situation; What are the stakeholders rights and obligations? • Identify the alternative decisions and consequences. • Make the decision.

30. 1. Is it legal? Will I be violating either civil law or company policy? 2. Is it balanced? Is it fair to all concerned in the short term as well as the long term? Does it promote win-win relationships? 3. How will it make me feel about myself? Will it make me proud? Would I feel good if my decision was published in the newspaper? Would I feel good if my family knew about it? Obviously, the "wrong" answers to the above questions should move the manager into reconsidering his or her decision. Managers ask these questionsbefore making a decision, and they call these three questions the "ethics check."

31. An ethical dilemma is a complex situation that often involves an apparent mental conflict between moral imperatives, in which to obey one would result in transgressing another. This is also called an ethical paradox since in moral philosophy, paradox often plays a central role in ethics debates.

32. Ethical Dilemmas It arises due to the conflict between moral imperatives in which obeying one would result in transgressing another. We are not only faced between question right and wrong but also between right and right. 32

33. On-the-Job Ethical Dilemmas Telling the truth and adhering to deeply felt ethical principles in business decisions. Situation in which a business decision may be influenced for personal gain. Businesspeople expect employees to be loyal and truthful, but ethical conflicts may arise. Employee’s disclosure of illegal, immoral, or unethical practices in the organization.

34. 1. Identify who's involved, …so that you've got a clear picture of who's got a stake in how the dilemma emerged and how it might be resolved. 2. Make sure you're clear about all the facts, …by checking what you've been told and asking for clarification of any grey areas.    3. Set out the dilemma in clear terms, …so that it fairly represents the interests of the key people involved. 4. View the dilemma through the lens of your firm's values and your profession's ethics, ...because they're there to help resolve questions of principle like this. 5. Identify the options for how the dilemma could be resolved …so that you have alternatives that you can weigh up and then estimate the impacts of. 6. choose the option that fits best with those values and ethics, …because if they're to mean anything, it's in situations like these. 7. Ask a work colleague for a second opinion on your preferred option, …because receiving feedback from a critical friend will test the robustness of your case, as well as allow the meaning and intent of those values and ethics to be exchanged and shared . 8. Make your final decision and implement it clearly and concisely, …by communicating it to those involved, so that they have a clear understanding of what's to happen and why. 9. Take steps to minimise the impacts of your decision, …where that's possible, while still upholding your decision and how you arrived at it. 7. Review company policies and processes to avoid a repetition, ….because ethical dilemmas are experiences that most people have something to learn from.  Managing Ethical Dilemmas

35. 1. Discuss the various kinds of ethical dilemmas that hospital employees—doctors, nurses, or pharmacists—may encounter in their dealing with stakeholders such as patients or suppliers. Doctors, especially in emergency rooms are constantly faced with critically injured patients on the verge of death. They are faced with the ethical dilemma of attempting to save the life of these patients when the patient’s potential quality of life is dramatically decreased if they survive. The patient might remain on life support indefinitely or require constant care, left without the ability to take care of themselves. Nurses are faced with ethical dilemmas when they have knowledge that leads them to believe that the doctor’s instructions are not in the best interest of the patient. They are instructed to always follow the doctor’s orders, but what if this is detrimental to the patient? Do they follow their orders or not? An example of an ethical dilemma faced by a physician is when a customer enters the pharmacy in a two day span with prescriptions from five different physicians for narcotics. The pharmacists knows that this is an excessive amount, do they fill the prescriptions? What is Ethical Behaviour?

36. Employee Ethical Behaviour / Unethical Behaviour: Doctor Knowing a patients complete medical history before performing any procedures. Not treating a patient in need because they do not have health insurance. Nurse Ensuring that patients receive all medicine prescribed by their doctor at the appropriate times. Treating a patient disrespectfully because they get on their nerves. Pharmacist Making sure that critical supplies and medications are always stocked to appropriate levels. Filling a prescription with the generic substitute even though the prescribing physician designated that brand is medically necessary. Identify a specific behaviour that the three kinds of hospital employees mentioned in item 1 might exhibit, and characterize the behaviour as ethical or unethical

37. 3. Based on this discussion, identify three standards or values that you will incorporate into your personal ethical code to help yourself determine whether a behaviour is ethical or unethical. By asking ourselves the following questions we can determine if the practices of our hospital are ethical or unethical: Is the patients best interest always the top priority? Is the patients safety being compromised? Are we providing the highest quality of care to the patient?

38. Responses to this set of questions will differ, based upon the varying experiences: Ethics will vary based on individual and cultural characteristics as well as in different situations. Sometimes the goals and targets are very difficult to reach, and managers feel pressured to resort to unethical behaviour to meet them. Dishonesty is unacceptable regardless of the circumstance. Employees should be careful to avoid conflicts of interest that may cause others to question their integrity. Although those involved in such unethical situations may perhaps benefit in the short run, in the long run they harm not only their customers and their companies, but also themselves. Training in ethics raises awareness of issues and helps others to look at different aspects of an issue. Establishing an organizational code of ethics and making all employees aware of it can encourage ethical behaviour. It is also important that managers always engage in ethical conduct, so that they can lead by example Managing Ethically

39. Establishing Ethical Control Systems. 1.The most important step to encourage ethical behaviour is to develop a code of ethics that is given to every employee and published regularly. 2.Next, provide a visible means of support for ethical behaviour. a. Organizations are increasingly creating the role of ethics officer, or ethical ombudsman, to monitor their ethical practices. i. The ombudsman is responsible for communicating, designing, monitoring and training ethics. ii. Because the ombudsman has organization-wide authority, members in any department can discuss unethical behaviour without fear of retribution. b. Guidance on the ethics of an action can be provided by an ombudsman or ethics committee. 3.Developing an Ethical Culture.

40. a. An organization can also make ethical values and norms a central part of its organizational culture. i. When organizational members abide by the organization’s values and norms, these become part of each individual’s personality. ii. High standards and strong values and norms help individuals resist self-interested actions. b.The managers’ role in developing ethical values and standards in other employees is very important. i. Managers become ethical role models. ii. If top managers are not ethical, their subordinates are not likely to be either. c. Codes of ethics and regular training help employees learn ethical values. i. In 2000, KPMG reported that 16% of Canadian companies gave no ethics training and one-third third gave less than one hour per year. ii. If top managers are not ethical, their subordinates are not likely to be either.

41. Accounting standard-setting bodies • Accounting standard setting bodies are national or international organisations that have been delegated responsibility for setting Generally Accepted Accounting Principles (GAAP) by statute in a country or jurisdiction. International • The International Accounting Standards Board issues IFRS. • The International Federation of Accountants (with its International Public Sector Accounting Standards Board - IPSASB) issues IPSAS for Government/Public entities accounting. 41

42. Australia: Australian Accounting Standards Board • Canada: CICA's Accounting Standards Board "AcSB“ • France: Autorité des Normes Comptables (ANC) (formerly the Conseil National de la Comptabilité) • Germany: Accounting Standards Committee of Germany (ASCG, in German: DRSC) • India: National Advisory Committee on Accounting Standards (NACAS) with the aide and advice of Institute of Chartered Accountants of India. Getting replaced soon by NFRA in the Company Bill 2012. • Iran: Accounting Standards Board • Malaysia: Malaysian Accounting Standards Board • Malta: Maltese Accountancy Board 42

43. Role of regulatory bodies in Accounting Profession The Institute of Chartered Accountants of India (ICAI) is a national professional accounting body of India. Established on 1 July 1949 as a body corporate under the Chartered Accountants Act, 1949 enacted by the Constituent Assembly of India (acting as the provisional Parliament of India) to regulate the profession of Chartered Accountancy in India. ICAI is the second largest professional accounting body in the world in terms of membership second only to American Institute of Certified Public Accountants. The only licensing cum regulating body of the financial audit and accountancy profession in India. ICAI is solely responsible for setting the auditing and assurance standards to be followed in the audit of financial statements in India. 43

44. Role of regulatory bodies in Accounting Profession ICAI is one of the founder members of the International Federation of Accountants (IFAC), South Asian Federation of Accountants (SAFA), and Confederation of Asian and Pacific Accountants (CAPA). ICAI was formerly the provisional jurisdiction for XBRL International in India. It also helps various government agencies like RBI, SEBI, MCA, CAG, IRDA, etc. in policy formulation. ICAI presented an approach paper on issues in implementing Goods and Service Tax in India to the Ministry of Finance. In response to this, Ministry of Finance has suggested that ICAI take a lead and help the government in implementing Goods and Services Tax (GST). 44

45. International Federation of Accountants Serves the Public Interest. Establish and promotes adherence to high quality professional standards and furthers their adoption and implementation of such standards. Support the global development of the accountancy profession, professional accountants in business and small & medium practices. Speak out on public interest issues where the professional voice is most relevant. 45

46. PAOs are membership organizations are membership organizations of professional accountant which Act in public interest. Develop and produce capable and competent accountancy professionals. Act as a resource to govt. regulates and other stakeholders. Professional Accountancy Organization

47. Attracts FDI Promotes growth and development of small & medium enterprises (SMEs) Sector. Power of PAO’s in Economy