AUD Notes (Midterm) PDF

**[1-I. GOVERNANCE]** **What is Governance?** - Generally, governance **refers to a process** whereby elements in society wield power, authority and influence and enact policies and decisions concerning public life and social upliftment. - Governance, therefore, **means the process of...

**[1-I. GOVERNANCE]** **What is Governance?** - Generally, governance **refers to a process** whereby elements in society wield power, authority and influence and enact policies and decisions concerning public life and social upliftment. - Governance, therefore, **means the process of decision-making and the process by which decisions are implemented (or not implemented)** through the exercise of power or authority by leaders of the country and/or organizations. - **Ensures that policies and strategies are actually implemented** and that requires processes are actually followed - **Includes defining roles and responsibilities,** measuring and reporting and taking actions to resolve any issues identified. **GOVERNANCE VS. MANAGEMENT** - Governance is the process of making and enforcing rules, regulations, and policies. Management is the application of those rules, regulations, and policies. - In the simplest terms, boards are responsible for oversight and planning, while management takes care of the daily operations. The board is also responsible to define the what, and the management is responsible for the how. **GOVERNANCE VS. LEADERSHIP** - Governance is a system that enables oversight, monitoring, and accountability of the processes and people operating within it; leadership may be seen as a key component of a governance system, acting both to influence and facilitate that system (e.g. shaping strategic vision and objectives, and enabling engagement with system processes). - Effective leadership inspires, motivates, guides individuals and groups toward common goals. Governance, on the other hand, ensures that systems and institutions operate fairly, transparently, and in the best interest of people. **GOVERNANCE VS. GOVERNMENT** - **David Fasenfest (2010) opined that "Government is the office, authority or function of governing. Governing is having control or rule over oneself while Governance is the activity of governing". Governance is a set of decisions and processes made to reflect social expectations through the management or leadership of the government.** **GOVERNMENT VS. POLITICS** - **Governance is created in every society for the benefit of all who live in it. It is the only rational way people can coexist in harmony, where general rules and codes of conduct are obeyed because every one's interests are considered.** - **Politics, on the other hand, has to do with the method and choice people decide to administer governance. These "choices" and "methods" may not have far reaching consultations, and with the interests of a few mostly in view.** **Characteristics of Good Governance** - **Participation** - Participation by both men and women is a key cornerstone of good governance. - Participation could either direct or through legitimate institutions or representatives. - It is important to point out that representative democracy does not necessarily mean that the concern of the most vulnerable in society would not be taken into consideration in decision making. - Participation needs to be informed and organized. - This means freedom of association and expression on one hand and organized civil society on the other hand. - **Informed and Organized Participation** - Brings citizens/ stakeholders together to find solutions to complex issues, and to build trust and confidence. - **Freedom of Association and Expression** - **Freedom of Association-** is the right of a person coming together with other individuals, to collectively express, promote, pursue/ defend common interests - **Freedom of Expression-** the freedom for us all to express ourselves. The right to speak, to be heard, and to participate in political, artistic, and social life. - **Organized Civil Society-** are organized voluntary non-state institutions which mostly operate on non-profit basis. Formed and led by the citizens to champion their collective or common interests and concerns. - **Rule of Law** - Good governance requires **fair legal frameworks** that are **enforced impartially**. - It also requires **full protection of human rights,** particularly those of minorities. - **Impartial enforcement of laws** requires an **independent judiciary** and an **impartial and incorruptible police force.** - **Transparency** - Means that decisions taken, and their enforcement are done in a manner that **follows rules and regulations.** - It means that **information is freely available** and **directly accessible to those who will be affected** by such decisions and their enforcement. - It also means that **enough information is provided** and that it is provided in **easily understandable** forms and media. - **Responsiveness** - Good governance requires that institutions and processes try to **serve the needs of all stakeholders [within a reasonable timeframe].** - **Consensus Oriented** - Good governance requires mediation of the different interests in society to reach a broad consensus on what is in the best interest of the whole community and how this can be achieved. - It also requires a broad and long-term perspective on what is needed for sustainable human development and how to achieve the goals of such development. - This can only result from an understanding of the historical, cultural and social contexts of a given society or community. - **Equity & Inclusiveness** - Ensures that all its members feel that they have a stake in it and do not feel excluded from the mainstream of society. - This requires all groups, but particularly the most vulnerable, have opportunities to improve or maintain their well being. - **Effectiveness and Efficiency** - Good governance means that processes and institutions produce results that meet the needs of society while making the best use of resources at their disposal. - The concept of efficiency in the context of good governance also covers the sustainable use of natural resources and the protection of the environment. - **Accountability** - Accountability is a key requirement of good governance. - Not only the governmental institutions but also the private sector and civil society organizations must be accountable to the public and to their institutional stakeholders. - Who is accountable to whom varies depending on whether decisions or actions taken are internal or external to an organization or institution. - In general, an organization or an institution is accountable to those who will be affected by its decisions or actions. - Accountability cannot be enforced without transparency and the rule of law. **[1-II. CORPORATE GOVERNANCE]** **What is Corporate Governance?** - Is defined as the system of rules, practices and processes by which business corporations are directed and controlled. - It basically involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. - Good corporate governance helps economy to achieve financial market stability and economic growth. - Good corporate governance is relevant and vital for all organizations, whatever size or structure. - Corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. - It also provides the structure through which the objectives are set and the means of attaining those objectives and monitoring performance. **Purpose of Corporate Governance** - Is to facilitate effective, entrepreneurial and prudent management that can deliver long-term success of the company. - The fundamental aim is to enhance shareholders' value and protect the interests of other stakeholders by improving the corporate performance and accountability. **Objectives of Corporate Governance** 1. Fair and Equitable Treatment of Shareholders 2. Self-assessment 3. Increase Shareholders' worth 4. Transparency and Full Disclosure **BASIC PRINCIPLES OF EFFECTIVE CORPO-GOV.** 1. **TRANSPARENCY AND FULL DISCLOSURE** - Does the board meet the information needs of investment communities? - Does it safeguard integrity in financial reporting? - Does the board have sound disclosure policies and practices? 2. **ACCOUNTABILITY** - Does the board clarify its role and that of management? - Does it promote objective, ethical, and responsible decision-making - Does the composition mix of board membership ensure an appropriate range and mix of expertise, diversity, knowledge, and added value? - Is the organization's senior official committed to widely accepted standards of correct and proper behavior? 3. **CORPORATE CONTROL** - Has the board built long-term sustainable growth in shareholder's value for the corporation? - Does it create an environment to take risk? - Does it encourage enhanced performance? - Does it recognize and manage risk? - Does it remunerate fairly and responsibly? - Are conflicts of interests being avoided such that the organization's best interests prevail at all times? **Parties Involved in Corporate Governance** ----------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ **PARTY** **OVERVIEWS OF RESPONSIBILITIES** Shareholders Provide effective oversight through election of board members, approval of major initiatives such as buying or selling stock, annual reports on management compensation, from the board. Board of Directors Ensure that the organization is run according to the organization's charter and that there is proper accountability Management Operations and accountability. Manage the organization effectively; provide accurate and timely reports to shareholders and other stakeholders. Audit Committee Provide oversight of the internal and external audit function and provide the process of preparing the annual financial statements as well as public reports on internal control. Regulators. (a.) Board of Accountancy Set accounting and auditing standards dictating underlying financial reporting and auditing concepts; set the expectations of audit quality and accounting quality. Regulators. (b.) Securities and Exchange Commission Ensure the accuracy, timeliness and fairness of public reporting of financial and other information for public companies. External Auditors Perform audits of company financial statements to ensure that the statements are free of material misstatements including misstatements that may be due to fraud. Internal Auditors Perform audits of companies for compliance with company policies and laws, audits to evaluate the efficiency of operations and periodic evaluation and tests of controls. ----------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ **Key Principles of Effective Corporate Governance** - The board's fundamental objective should be to build long-term sustainable growth in shareholder value for the corporation. - Successful corporate governance depends upon successful management, as the management has the primary responsibility for creating a culture of performance with integrity and ethical behavior. - Effective corporate governance should be integrated with the company's business strategy and not viewed as simply a compliance obligation. - Transparency is a critical element of effective corporate governance, and companies should make regular efforts to ensure that they have sound disclosure policies and practices. - Independence and objectivity are necessary attributes of board members. Companies must also strike the right balance in the appointment of independent and non-independent directors to ensure an appropriate range and mix of expertise, diversity and knowledge on the board. **Corporate Governance and Its Relationship to External Audit** - Effective governance is important to the conduct of an audit; companies with effective corporate governance are less likely to experience fraud. - Most audit firms are not willing to accept potential audit client unless the clients demonstrate a strong commitment to effective corporate governance. - Ineffective corporate government increases fraud risk that at some point the client is not auditable from a risk-mitigation standpoint. - While the possibility of fraud and the associated need for effective corporate governance are of utmost importance to the external auditor, management also seeks to provide reasonable assurance that the financial statements are free from material misstatements from either fraud or errors. **[I. INTRODUCTION TO ETHICS]** **Ethics** - Can be defined as a set of moral principles or values that govern the actions and decisions of an individual or group. - Examples of prescribed set of moral principles or values at the implementation level include laws and regulations, church doctrine, code of business ethics for professional groups such as CPAs, and the codes of conduct within individual organizations. - Parents, teachers, friends and employers are known to influence our values, but so do television, team sports, life successes and failures, and thousand of experiences. **Characteristics and Values Associated with Ethical Behavior** 1. **Integrity** -- be principled, honorable, upright, courageous and act on convictions; do not be two-faced or unscrupulous or adopt an end-justifies-the-means philosophy that ignores principle. 2. **Honesty** -- be truthful, sincere, forthright, straightforward, frank, candid, do not cheat, steal, lie, deceive or act deviously. 3. **Trustworthiness and Promise Keeping** -- be worthy of trust, keep promises, full commitments, abide by the spirit as well as the letter of an agreement; do not interpret agreements in an unreasonably technical or legalistic manner in order to rationalize noncompliance or create excuses and justification for breaking commitment. 4. **Loyalty (Fidelity) and Confidentiality** -- be faithful and loyal to family, friends, employers, client and country; do not use or disclose information learned in confidence; in a professional context, safeguard the influences and conflict of interest. 5. **Fairness and Openness** -- be fair and open-minded, be willing to admit error and where appropriate, change positions and beliefs, demonstrate a commitment to justice, the equal treatment of individuals, and tolerance for acceptance of diversity; do not overreact or take advantage of another's mistakes or diversities. 6. **Caring for Others** -- be caring, kind and compassionate; share, be giving, be of service to others; help those in need and avoid harming others. 7. **Respect for Others** -- demonstrate respect for human dignity, privacy, and the right to self-determination of all people, be courteous, prompt, and decent; provide others with the information they need to make informed decisions about their own lives; do not patronize, embarrass or demean. 8. **Responsible Citizenship** -- Obey just laws; if all law is unjust, openly protest it; exercise all democratic rights and privileged responsibly by participants (voting and expressing informed views), social consciousness, and public service; when in a position of leadership or authority, openly respect and honor democratic processes of decision making, avoid unnecessary secrecy or concealment of information, and assure that others have all the information they need to make intelligent choices and exercise their rights. 9. **Pursuit of Excellence** -- pursue excellence in all matters; in meeting your personal and professional responsibilities, be diligent, reliable, industrious and committed; perform all tasks to the best of your ability, develop and maintain a high degree of competence, be well informed and well prepared; do not be content with mediocrity; do not "win at any cost". 10. **Accountability** -- be accountable, accept responsibility for decisions, for the foreseeable consequences of actions and inactions, and for setting an example of others. Parents, teachers, employees, many professionals and public officials have special obligations to lead by example, to safeguard and advance the integrity and reputation of their families, companies, professions and the government itself; an ethically sensitive individual avoids even the appearance of impropriety, and takes whatever actions are necessary to correct or prevent inappropriate conduct of others. **Professional Ethics includes among others**: 1. Integrity, impartiality, objectivity 2. Professional competence 3. Confidentiality 4. Professional behavior 5. Avoidance of potential or apparent conflict of interest. **Code of Good Governance for the Profession in the Philippines (E.O. No.220, June 23, 2003)** - This code which covers the common principles underlying the codes of various professions, could be used by all professionals who face critical ethical questions in their work. **General Principle of Professional Conduct** - Professionals are required not only to have ethical commitment, a personal resolve to act ethically, but also have both ethical awareness and ethical competency. Ethical awareness refers to the ability to discern between right and wrong, while ethical competency pertains to the ability to engage in sound moral reasoning and consider carefully the implications of alternative actions. **Specific Principles of Professional Conduct** 1. **Service to Others** -- professionals are committed to a life of service to others. They protect life, property, and public welfare. To serve others, they shall be for heroic sacrifice and genuine selflessness in carrying out their professional duties even at the expense of personal gain. 2. **Integrity and Objectivity** -- to maintain and broaden public confidence, professionals shall perform their responsibilities with the highest sense of integrity and imbued with nationalism and spiritual values. In the performance of any professional service, they shall at all times, main objectives, be free of conflicts of interest, and refrain from engaging in any activity that would prejudice their abilities to carry out their duties ethically. They shall avoid making any representation that would likely cause a reasonable person to misunderstood or to be deceived. 3. **Professional Competence** -- in providing professional service, a certain level of competence is necessary (knowledge, technical skills, attitudes and experience). Professionals shall, therefore, undertake only those professional service that they can reasonably deliver with professional competence. Corollary to this, it is their express obligation to keep up with new knowledge and techniques in their field, continually improve their skills and upgrade their level of competence and take part in a lifelong continuing education program. 4. **Solidarity and Teamwork** -- each profession shall nurture and support one organization for all its members. Though a deep spirit of solidarity, each member should put the broader interest of the profession above one's personal ambition and preference. Through teamwork within a cohesive professional organization, each member shall effectively observe ethical practices and pursue continuing professional development as well as deepen one's social and civic responsibility. 5. **Social and Civic Responsibility** -- professionals shall always carry out their professional duties with due consideration of the broader interest of the public. They shall, therefor, serve their clients/employees and the publics with professional concern and in a manner consistent with their responsibilities to society. As responsible Filipino citizens, they shall actively contribute to the attainment of the country's national objective. 6. **Global Competitiveness** -- every professional shall remain open to challenges of a more dynamic interconnected world. He or she shall rise up to global standards and maintain levels of professional practice fully aligned with global best practice. 7. **Equality of all Professions** -- all professionals shall treat their colleagues with respect and shall strive to be fair in their dealings with one another. No one group of professionals is superior or above others. All professionals perform an equally important, yet distinct, service to society. In the eyes of the PRC, all professionals are equal, and therefore, everyone shall treat one other professionals with respect and fairness. **[2-II. BUSINESS ETHICS]** **What is Business Ethics?** - refers to standards of moral conduct, behavior and judgment in business. - It involves making the moral and right decisions while engaging in business activities such as manufacturing and selling a product and providing a service to customers. - Business ethics is an area of corporate responsibility where businesses are legally bound and socially obligated to conduct business in an ethical manner. **Main Purpose of Business Ethics** - The main purpose of business ethics is to help business and would-be business to determine what business practices are right and what are wrong. **Special Purpose of Business Ethics** 1. To make businessmen realize that they cannot employ double standards to the actions of other people and to their own actions. 2. To show businessmen that common practices which they have thought to be right because they see other businessmen doing it, are wrong. 3. To serve as a standard or ideal upon which business conduct could be based. **Scope of Business Ethics** - Business ethics covers all conduct, behavior and judgment in business. - This includes the slightest deviation from what is right to illegal and dishonest acts that are punishable by law. - Business ethics also covers even acts that may be legal, but which are wrong because they violate ethical principles. **Business Ethics includes among others**: 1. Fair competition 2. Global as well as domestic justice 3. Social Responsibility 4. Concern for environment **Impact of Business Ethics** 1. **Economic Impact** -- A business has an economic impact on society through the wages it pays to its employees, the materials that it buys from their suppliers and the prices it charges its customers. 2. **Social Impact** -- The social impact of corporate governance contributes to the ethical climate of society. (ex. bribery, accounting fraud, breach regulatory and legal limitations, corruption) 3. **Environmental Impact** -- Environmental protection is a key area of business influence on society. Business that implements good environmental policies to use energy more efficiently, reduce waste and in general lighten their environmental footprint can reduce their internal costs and promote positive image of their company. 4. **Impact on Business Managers** - Managers are expected to act in the best interest of the business, he cannot be expected to act in a manner that is contrary to the law or to his conscience. - Acknowledge that his role is to serve the business enterprise and the community. - Avoid all abuse of executive power for personal gain, advantage or prestige. - Reveal the fact to his superior whenever his personal business of financial interest conflict with those of the company. - Be actively concerned with the difficulties and problems of subordinates, treat them fairly, and by example, lead them effectively, assuring to all the right of reasonable access and appeal to superior. - Recognize that his subordinates have a right to information on matter affecting them and make provision for its prompt communication unless such communication is likely to undermine the security and efficiency of the business. - Fully evaluate the likely effects on employees and the community of the business plans before taking a final decision, and - Cooperate with his colleagues and not attempt to secure personal advantage at [their expense ] **[2-III. COMMON UNETHICAL PRACTICES]** **Common Unethical Practices of Business Establishment** 1. Misrepresentation 2. Over-persuasion **Direct Misrepresentation** - is characterized by actively misrepresenting about the product to customers. This includes: 1. **Deceptive Packaging** -- ex. exaggerated sizes, misleading shapes. 2. **Misbranding or Mislabeling** -- is the practice of making false statements on the label of a product or making its container similar to a well-known product for the purpose of deceiving the customer. 3. **False or Misleading Advertising** -- advertising serves a useful purpose if it conveys the right information. However, advertising does not always tell the "whole truth". 4. **Adulteration** -- Adulteration is the unethical practice of debasing a pure or genuine commodity by imitating or counterfeiting it, by adding something to increase its bulk or volume, or by substituting an inferior product for a superior one for the purpose of profit or gain. It is unethical because an inferior product is passed off as a superior one. **The action of making something [poorer] in quality by the addition of another substance.** 5. **Weight Understatement or Short Weighing** -- Short weighing is practiced in selling products where prices depend on the weight such as sugar, meat, fish, vegetables, fruits, nails, etc. 6. **Measurement understatement or short measurement** -- the measuring stick or standard is shorter than the real length or smaller in volume than the standard. This practice is found in selling cloth or textiles, electric cords or wires or on its volume such as selling rice by the sack. **Indirect Misrepresentation** - is characterized by omitting adverse or unfavorable information about the product or service. 1. **Caveat emptor** -- translated as "let the buyer beware". The seller is not obligated to reveal any defect in the product or service he is selling. It is the responsibility of the customer to determine for himself the defects of the product. 2. **Deliberate Withholding of Information** -- Following the argument that caveat emptor is unethical, the deliberate withholding of significant information in a business transaction is also unethical. 3. **Passive Deception** -- Business ignorance is passive deception because the businessman is unable to provide the customer with the complete information that the latter needs to make a fair decision. **Over-Persuasion** - Persuasion is the process of appealing to the emotions of a prospective customer and urging them to buy an item. Persuasion is a legitimate and necessary in selling of goods if it is done in the interest of a buyer. However, persuasion used for the sole benefit of selling a product without considering the interest of the buyer is not ethical. 1. Urging a customer to satisfy a low priority need for merchandise. 2. Playing upon intense emotional agitation to convince a person to buy. 3. Convincing a person to buy what he does not need just because he has the capacity or money to do so. **[2-III-2. CORPORATE ETHICS]** - classified into two: 1. Practices of the Board of Directors 2. Practices of executive officers **Some Unethical Practices of the Board of Directors** 1. **Plain Graft** -- some of the BOD help themselves to the earnings that otherwise would go to other stockholders. This is done by voting for themselves and the executive officers huge per diems, large salaries, big bonuses that do not commensurate to the value of their services. **R.A. 3019** ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- **GRAFT-** is the acquisition of gain or advantage through abuse or misuse of one's position or influence (or in a dishonest or questionable manner), whether in politics, business or any other undertaking. It is an act performed by a civil servant or a group of civil servants, acting alone by himself or by themselves, without involving any person outside the bureaucracy or jeopardizing the performance of duties by another bureaucrat. **CORRUPTION-** has been defined as the misuse or abuse of public office for private gain both in government and the private sector. It comes in several illicit forms, including bribery, extortion, fraud, nepotism, graft, speed money, pilferage, theft, embezzlement, falsification of records, kickbacks influence peddling and campaign contributions. 2. **Interlocking Directorship** -- Interlocking directorship is often practice by a person who holds directorial positions in two or more corporation that do business with each other. This practice may involve conflict of interest and can result to disloyal selling. Disloyal selling happens when this person is compelled to decide which of the two corporations' interest should be protected or upheld. 3. **Negligence of Duty** -- a more common failure of the BOD members that breach of trust is neglect of duties when they fail to attend board meetings regularly. It is only in regular attendance that they can protect the rights and interests of shareholders and their non-attendance of the meetings could result to betrayal of trust of the parties who elected them to their positions. 4. **Insider Trading** -- Insider trading can be either illegal or legal depending on when the insider makes the trade. It is illegal when the material information is still non-public, and this sort of insider trading comes with harsh consequences. Illegal insider trading includes tipping others when you have any sort of material non-public information. Material non-public information is any information that could substantially impact on investor's decision to buy or sell the security that has not been made available to the public. **Some Unethical Practices of Executive Officers and Lower Level Managers** 1. Claiming a vacation trip to be a business trip. 2. Having employees do work unrelated to the business. 3. Loose or ineffective controls -- Managers do not provide adequate controls to remove temptation and to prevent or discourage employees from engaging in unethical practices. 4. Unfair labor practices - the labor code lists unfair labor practices committed by an employer on employees or a group of employees who have organized themselves into a union. 5. Making false claims about losses to free themselves from paying the compensation and benefits to employees as provided by law. 6. Making employees sign documents showing that they are receiving fully what they are entitled to under the law when in fact they are only receiving a fraction of what they are supposed to get. 7. Sexual Harassment **Some Unethical Practices of Employees** 1. **Conflict of Interest** a. An employee who holds a significant interest or shares of stock of competitor, supplier, customer or dealer favors this party to the prejudice of his employer. b. The employee accepts cash, a gift, lavish entertainment, or a load from a supplier, customer, competitor or contractor. The decision or action of the employee is influenced by his being indebted for a favor or loan from a party with whom the company is doing business. c. The employee uses or discloses confidential company information for his or someone else\'s personal gain. (ex. revealing the company\'s trade secrets, formula or menu to a competitor.) d. The employee engages in the same type of business as his employer. e. The employee uses for his own benefit a business opportunity in which his employer has or might be expected to have an interest. 2. **Dishonesty** a. Taking office supplies home for personal use b. Padding an expense account through the use of fake receipts when claiming reimbursements. c. Taking credit for another employee\'s data **[2-IV. ETHICAL DILEMMA]** - It is a situation a person faces in which a decision must be made about the appropriate behavior. \"What would you do?\". **Resolving Ethical Dilemmas** 1. Obtain relevant facts. 2. Identify the ethical issues from the facts. 3. Determine who is affected by the outcome of the dilemma and how each person or group is affected 4. Identify the alternatives available to the person who must resolve the dilemma. 5. Identify the likely consequences of each alternative. 6. Decide the appropriate action. **[2-V. ADVOCACY AGAINST CORRUPTION ]** **Corruption** - is the abuse of private and public office for personal gain. - It includes acts of bribery, embezzlement, nepotism, kickbacks and state capture. - It is associated with illegal practices such as bid rigging, fraud, or money laundering, extortion. - It is simply defined as receiving, asking for or giving any gratification to induce a person to do a favor for private gain. **Why and How does a Person Become Corrupt** - Corruption spread when there are opportunities, when risk is minimal in comparison to benefits obtained or when one is confronted with issues like: - Career advancement - Earning of more income - Financial problems caused by illness, loss of property, etc. - Those engaged in corruption learn how to be dishonest. The next corrupt actions become easier to do unless one is firmly on solid principles and has been nurtured in an upright manner. **Characteristics of Corruption** a. **Recipients and payers** -- Corruption is the abuse of entrusted power and elected authority for private profit. Aside of the recipients (politicians and public officials) who accept bribes and enrich themselves privately, there are also payers who benefit from the abuse of power and authority, profitable preferential treatment in return of their "gift". b. **Extortion** -- Unlawful demand or receipt of property or money using force or threat. Synonyms include blackmail, bloodsucking and extraction. c. **Lubricant of society** -- many think that paying bribes is required to ensure smoother operation of society. They think that without occasional gift (Christmas gift) or incidentally (gift on anniversary, birthday), for instance into a contract for supply of product or service, such contracts might be lost to them. These gifts are a cost item which they account in their product/service prices. Consequently, products or services cost more than is needed. d. **Unethical dilemma** -- the mere fact that both the payer and the recipient of bribes want to keep their behavior secret, shows that such behavior is generally considered to be improper. e. **Poverty alleviation** -- low pay does not automatically imply that the person concerned is corrupt. Timely payment of salaries is an important pre-condition to prevent corrupt behavior. What is of much importance is the clearness and transparency of rules and of the decision-making process and the control exercised on the application of the rules. f. **Culture** -- gifts are inherent to human relations and therefore present in all cultures. On the next occasion, you will show your gratitude by reciprocating the gift, exchanging gifts. g. **"Kindness among friends"** -- "Is it a friendly turn or is it an investment?". To give presents reciprocally is a sign of friendship, it should not get lost in a misuse of power for private gains. **Prevention of Corruption** 1. **Clear Business Processes** - having defined workflows, clear directives on financial reporting authorities, and standard procurement instructions can help prevent irregularities in a business or organization. - These processes should be reviewed on regular basis to ensure they are updated to the shifting business environment. - Diligent record-keeping and regular audits are also good practices to deter corrupt activities. 2. **Policy on Gifts and Entertainment** - the risk of corruption can be reduced by setting a policy on when gifts and entertainment may be given and accepted and what records need to be kept. Your business partners should be aware of your organization\'s gift and entertainment policy too. 3. **Declaration of Conflict of Interest** - Conflict of interest occur when a personal interest or relationships is placed before the business interest and can lead to corrupt activities such as giving or accepting bribes. - To safeguard the business interest, the company may provide a declaration form for conflict of interest for employees and then use the information to take the most appropriate course of action. This could include excluding the employee from engaging in the work or transferring the employee to another department or post. 4. **Convenient Corruption Reporting System** - The corruption reporting system is a key function to control corruption and bribery risks and can comprise a whistle-blowing policy or feedback channel where staff can conveniently raise concerns and feel protected from being identified or retaliated against. - example is allowing reports to be filed anonymously through publicized email or phone number. **Efforts to Curb Corruption through Legislation** 1. **Anti-Graft and Corrupt Practices Act** - criminalizes active and passive bribery, embezzlement, extortion, abuse of office and conflict of interest in the public sector. 2. **Anti-Red Tape Act** - the act forbids officeholders from accepting gifts or material benefits in exchange for any government permit or license. 3. **Revised Penal Code** - Under this code, public officials are required to file a statement of assets and liabilities. In case of discrepancy between the declaration and the amount of assets actually possessed, the official is subject to immediate dismissal. 4. **Anti-Money Laundering Act** - Money laundering is a crime whereby the proceeds of an unlawful activity are transacted, thereby making them appear to have originated from legitimate sources. 5. **Act Establishing a Code of Conduct and Ethical Standards for Public Officials and Employees** - formulates standards for the personal integrity and accountability of civil servants. 6. **Government Procurement Reform Act** - requires competitive and transparent bidding. **Vigilance of Civil Society** - Philippine civil society is active and is represented by a wide variety of different organizations. - Civil Society Organizations (CSO) play a large role in initiating legislation and steering debate in congress. - They are the watchdog organizations monitoring implementation of policy. **[2-VI. INITIATIVES TO IMPROVE BUSINESS ETHICS AND REDUCE CORRUPTION.]** - Improvements of business ethics is common concern of everybody. It is imperative that all parties involved, manufacturers, sellers, consumers, government and relevant organizations, must participate in improving business ethics. - Unless there is a concerted effort on the part of everybody, we cannot effectively remind businessmen and professional of their responsibility to each other, to their customers and clients. **The Integrity Initiatives Campaign** - this is a multisectoral campaign that seeks to institutionalize integrity standards among various sectors of society -- business, government, judiciary, academe, youth, civil society, church and media. - the initiative aims to help in diminishing, if not fully eradicating, the cruel cycle of corruption in the Philippines. - the Integrity Initiative hopes to build trust in government, a more equitable society and fair market conditions. **Corporate Values** - It is important that the organization's values and its code of conduct address the legal and other obligations owed to important stakeholders, including, for example, trade practices laws, privacy laws, employment laws, occupational health and safety, equal opportunity in the workplace, superannuation (retirement fund of employees) and environmental regulations. - the values and ethics of the organization need to be well-managed **Need for a Code of Conduct** - A code of conduct is a formal expression of the organization's values and ethics. A code of conduct should: - guide directors and senior executives to the practices necessary to maintain confidence in the organization's integrity. (Other members of staff should also have a code of conduct relevant to them.) - promote responsibility and accountability of individuals for reporting and investigating reports of unethical practices; and - Ensure compliance with legal and other obligations to legitimate stakeholders. - An organization's code of conduct recognizes the important role that business ethics play in the success of today's business, encouraging the board to actively develop an organizational culture that is established on transparency, accountability and integrity. **Some Principles for the Conduct of Business** 1. **Towards the Employees** - Business shall recognize the unique positions of employees as individuals with a vital stake in their work and at the same time with inherent obligations to their own families, and to provide: - for recognition that although rates of pay often be determined by union, economic and legal pressures, wages and salary policy should be based on the right of the employees to a fair and improving standard of living, irrespective of race, sex, age and creed. - for fair recruitment practice that affords equal opportunity to all qualified jobseekers. - for job security, adequate compensation for employees in cases of separation and retirement and opportunities for fringe benefits. - for a safe and healthy atmosphere in the work environment conducive to the physical and moral well-being and growth of the employees - for conditions in which human potentials and relationships can be developed at all levels of the work force, with a view to providing therein a sense of purpose and achievement; and - for participative elements so that the knowledge, experience and creativity of all who work in the enterprise may contribute to the decision-making process. 2. **Towards the Customers** - Business shall, in the production of goods and services: - strive after a quality that will enable them to serve their purpose efficiently and effectively; - avoid anything that would be detrimental to the health, safety or growth of the proper user and beneficiary of such goods and services; and - seek to apply or make use of the discoveries and inventions of science with adaptations that will improve their products and services, thereby benefitting customers/ users and increasing their number. - In their marketing arrangement, business shall: - deliver the product or service in the quality, quantity and time agreed upon, and at a reasonable price, and avoid the creation of artificial shortages, price manipulations and like practices. - establish an after-sales and complaints service commensurate with the kind of product or service supplied and the price paid. - ensure that all mass media, promotional and packaging communications be informative and true and take into account the precepts of morality and the sound cultural values of the community, and manifest for human dignity 3. **Towards the Suppliers** - Business shall ensure: - that the terms of all contracts be clearly stated and unambiguous and honored in full unless terminated or modified by mutual consent. - that abuse of economic power in dealing with a smaller concern be avoided and that, in all cases, terms of payment be strictly and fully observed. In general, payment should always be made promptly at the agreed time, or, if no specific time is agreed upon, as quickly as maybe reasonable given the circumstances; and - that no supplier be encouraged to commit his resources for apparently long-term purposes, unless there are reasonable guarantees that the orders, he receives from the business enterprise will not be terminated arbitrarily 4. **Towards the Owners** - In the interest of the Owners and other Providers of capital, business shall: - Provide an adequate rate of return to those contributing capital to the enterprise and ensure the security of their investment. - Use their financial resources to provide goods and services responsibly and efficiently. - Furnish the Owners and other Providers of capital with such information as they maybe reasonably require, provided that it does not adversely affect the security or efficiency of the business; and - Pursue the specific objectives of the owners and other providers of capital, provided these do not run contrary to any of the principles stated herein. 5. **Towards the Local and National Government** - Although it is the responsibility of government to enact legislation and formulates implementing policies and programs, it is the duty of the business: - To participate in the discussion of proposed legislation and/or its implementation affecting sectoral, regional, national and international interests; and - To propose sound policies in the use of human and material resources. 6. **Towards Society in General** - Businessmen shall recognize in their decision-making the interest of the general public and realizing that they are utilizing to an important degree the nation's resources, shall: - Take regular stock of their response to the basic needs of society and thus ensure that these needs are taken into account in all policymaking decisions; - Do their best to ensure that the way they deploy their resources benefits society in general and does not conflict with the needs and reasonable aspirations of the communities in the area where they operate; - Pay proper regard to the environment and social consequences of their business activity, with special attention to the duty of renewing resources where possible and minimizing waste and pollution and not sacrifice safety or efficiency in the interest of short-term profitability; - As corporation, citizen make such contributions as their resources will allow, to research, development and application of indigenous technology, and to the financing of social development projects; - Consider the human and social costs of mechanization and technology; - Establish a policy allowing employees, with reasonable limits, to contribute to the public and community services during the work time; - Establish a policy regarding conflicts of interest based on the principle that decisions should be made in the best interest of the business enterprise, and decision makers should be on their guard against allowing personal consideration to distort their judgment; and - Not tolerate any form of illegal data-gathering or any form of inducement, that tends to distort normal commercial judgment. **Laws Advocating Business Ethics** - RA 7394 "The Consumer Act of the Philippines" - RA 3720 "The Food, Drug and Cosmetics" - RA8293 "The Intellectual Property Code of the Philippines