Business Ethics for Financial Professionals

• Ethical conduct is discussed for financial management professionals.
• Ethical conduct is outlined for financial management professionals.

Business Ethics Defined

• Business ethics applies general ethical principles to business decisions, actions, and personnel conduct.
• Business ethics is judged against society's standards of right and wrong.
• Ethics includes principles of right and wrong conduct.
• Business ethics applies general ethical principles to business actions, decisions, and personnel conduct.

Sources of Ethical Standards

• Ethical standards originate from:
  • Ethical universalism
  • Ethical relativism.
  • Integrative social contracts theory

Ethical Universalism

• Ethical universalism posits that shared understandings across cultures lead to universal ethical standards.
• These standards apply to all societies, firms, and business people.
• A business action's ethicality is judged by universal standards.
• Ethical universalism maintains that fundamental right and wrong conceptions are universal.

Ethical Relativism

• Ethical relativism suggests beliefs, customs, and norms vary across cultures, leading to varied ethical standards.
• The ethicality of business actions is dependent on local ethical standards.
• Differing standards leads to the right or wrong depending on the prevailing local ethical standards.
• Ethical relativism prohibits creating a universal set of authentic ethical norms.
• Codes based on ethical relativism can be problematic for multinational companies by creating conflicting ethical standards.

Examples of Ethical Relativism Issues

• Ethical standards differ. Examples include:
  • Use of underage labor
  • Payment of bribes and kickbacks
• Relativism can cause multiple standards
• Local morality can guide ethical behavior.
• Uber had ethical lapses causing damage to brand repetition with ridesharing customers.
• Uber needs to regain its momentum in the ridesharing market.

Integrative Social Contracts Theory

• Integrative social contracts theory balances universalism and relativism.
• Multiple societies' collective views form universal ethical principles, persons have a contractual duty to observe.
• Cultures or groups can then define second-order actions in a contract.

Application of Integrated Social Contracts Theory to Multinational Business

• Adherence to universal ethical norms take priority over local norms.
• Local customs aren't ethical if they violate universal ethical norms.
• First, the application of codes of ethics should follow universal standards, while the codes should allow for local ethical diversity and influence.

Ethical Standards Impact on Crafting and Executing Strategy

• The ethics code litmus test includes these questions:
  • Is our proposal compliant with our code of ethics?
  • Is this action in harmony with our core values?
  • Will stakeholders, competitors, SEC, or news view this as ethically objectionable?

Consequences of Ethically Questionable Strategies

• Strategies that fail the ethical litmus test may cause:
  • Civil fines and stockholder lawsuits
  • Image and public relations hits
  • Stock price drops, investors lose confidence
  • Criminal indictments and convictions

Drivers of Unethical Business Strategies & Behavior

• They usually include:
  • Faulty oversight
  • Heavy pressure to meet short-term performance targets
  • Putting profitability and business performance ahead of ethics

Importance of Ethical Company Strategies

• An unethical strategy is morally wrong and reflects poorly on the firm's personnel.
• An ethical strategy is good business and aligns with shareholders.
• PepsiCo has standards for employee conduct.
• PepsiCo is successful due to ethical practices in the marketplace.

Costs of Ethical Wrongdoing

• Companies incur costs of ethical wrongdoing when it is discovered.

Visible Costs

• Government fines and penalties
• Civil penalties arising from class-action lawsuits
• Costs to shareholders in the form of a lower stock price

Internal Administrative Costs

• Legal and investigative costs that are paid by the company
• The costs of remedial education and ethics training to company personnel
• Costs of corrective actions
• Administrative costs to ensure future compliance

Intangible Costs

• Customer defections
• Loss of reputation
• Lost employee morale and higher employee cynicism
• Higher employee turnover
• Higher recruiting costs and attracting talented employees
• Adverse effects on employee productivity
• Costs of complying with harsher government regulations

IMA's Ethical Code of Conduct

• The Institute of Management Accountants (IMA) focuses on advancing the management accounting profession.
• The IMA has over 85,000 members in 140 countries and 300 professional and student chapters.

Principles of the IMA Ethical Code

• Honesty
• Fairness
• Objectivity
• Responsibility

Standards of the IMA Ethical Code

• Competence
• Confidentiality
• Integrity
• Credibility

Competence

• Maintain your professional level and expertise by enhancing knowledge and skills.
• Perform duties according to laws, regulations, and standards.
• Information and recommendations need to be accurate, clear, concise, and timely when providing decision support.

Confidentiality

• Keep information confidential, unless disclosure is authorized or legally required.
• Inform relevant parties regarding use of confidential information and monitor it to ensure compliance.
• Refrain from using confidential information for unethical or illegal advantage.

Integrity

• Mitigate actual conflicts of interest and advise all parties of potential conflicts of interest.
• Refrain from any conduct, to carry out duties ethically.
• Abstain from any activity that might discredit the profession.
• Contribute to an ethical culture and place integrity above personal interests.

Credibility

• Communicate information fairly and objectively.
• Provide all relevant information possible to influence the user's understanding of the reports, analyses, or recommendations.
• Report any delays or deficiencies in information, processing, or internal controls in conformance with law.
• Communicate professional limitations, that affect successful or responsible judgment.

Resolving Ethical Issues

• Members must seek resolution and not ignore the unethical issue in professional practice.
• To determine the correct steps, the members need to consider the risks involved
• Following the organization's established policies is best when facing unethical issues.
• Following the organization's established policies, members must use an anonymous reporting system if available.
• If established policies are not available, the following courses of action should be considered:
  • Discussion on the resolution with the immediate supervisor.
  • Present the issue to the next level of management if the supervisor is involved.
  • Consult your own attorney for legal obligations, rights, or risks.
  • IMA can call and request key elements to use for ethical issues.

The Fraud Diamond

• The Fraud Diamond contains incentive, capability, rationalization, and opportunity elements.

The Fraud Triangle

• The Fraud Triangle contains opportunity, rationalization and motive/pressure.